U.S. Markets open in 8 hrs 51 mins

Edited Transcript of PES earnings conference call or presentation 1-Aug-17 3:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 Pioneer Energy Services Corp Earnings Call

SAN ANTONIO Aug 12, 2017 (Thomson StreetEvents) -- Edited Transcript of Pioneer Energy Services Corp earnings conference call or presentation Tuesday, August 1, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Anne Pearson

* Carlos R. Peña

Pioneer Energy Services Corp. - EVP, Compliance Officer, General Counsel, Corporate Secretary & President of Production Svcs Segment

* Lorne E. Phillips

Pioneer Energy Services Corp. - CFO and EVP

* William Stacy Locke

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

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

Conference Call Participants

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

* Daniel J. Burke

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

* John Matthew Daniel

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

* Praveen Narra

Raymond James & Associates, Inc., Research Division - Analyst

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

Presentation

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

Operator [1]

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

Good morning, and welcome to the Pioneer Energy Services Second Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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

Anne Pearson, [2]

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

Thank you, Melissa, and good morning, everyone. Before I turn the call over to Pioneer's CEO, Stacy Locke and CFO, Lorne Phillips, for their formal remarks, I have a few of the usual items we need to cover.

First of all, a replay of today's call will be available by webcast and also by telephone replay, and you can find those replay instructions for both in this morning's news release. Just as a reminder, information reported on this call speaks only as of today, August 1, 2017, so any time-sensitive information may not be accurate at the time of the replay.

Management may make forward-looking statements that are based on beliefs and assumptions and information currently available to them. While they believe these expectations are reasonable, they can't give any assurances they'll prove to be correct. They're subject to certain risks and uncertainties and assumptions that are described in today's news release and also in recent public filings with the SEC. So if one or more of these risks should materialize or underlying assumptions proves to be incorrect, actual results may differ materially.

Also, please note that management may be making references to certain non-GAAP measures. You'll find a reconciliation to the GAAP measures in this morning's release.

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

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

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

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

Thank you, Anne, and good morning, everybody. Joining me here in San Antonio is Carlos Peña, President of our Production Services segment, and Lorne Phillips, our Chief Financial Officer.

Overall, we had a very solid second quarter. Revenues were up about 12%. EBITDA more than doubled from the first quarter to just shy of $13 million. All 4 core businesses contributed to this improvement in the second quarter. So we're very pleased with the quarter in general.

Production Services revenue grew greater than expected by 20%, and margin improved at 23%, up from 20% in the first quarter. Wireline services has led the revenue and revenue growth this year and had the greatest margin improvement and EBITDA contribution so far this year in the second quarter.

Most of that improvement is due to increased completion activity, doing the perforations on the multistage lateral wells, and also the improvement included stage-pricing increases. So it's a great, great contribution by our entire wireline team.

We're marketing about 71 units today, that's up a couple from 2 new units we've added to the field. We do see some positive mix change coming with some pricing that should lead to further wireline improvement in the third quarter.

Looking at our well servicing, also experienced a nice revenue and margin improvement in the second quarter. Utilization was up to 46.5% from 43% in the first quarter. There, again, most of the kind of improving -- -- gradually improving utilization for well servicing has been due to more completion activity. As an example, 24-hour work on pads, running the tubing and well after well after well, or taking wells that already have had the tubing and putting down whole pumps in and running rods, and just general activity to help complete and allow the production from the well.

There tends to be a pretty good lag from the time that a well is drilled from when the well servicing rig actually shows up on location, anywhere from 3 to 6 months. So we believe that there's quite a bit of continued demand coming for the well servicing fleet as we move through the year.

Average hourly rate was also up again this quarter, about 3% to $514 an hour. That's the first time it's been over $500 so far this year. We have seen a very modest pullback in some activity with certain operators, probably as a result of the lower oil prices that we saw 30, 45 days ago. I think we're hopeful now that prices have firmed back up in the $48 to $50 range, that maybe that will cause activity to kind of strengthen again late August or in September. But it's good, steady flow of work, it's just off for a few clients.

The marketed fleet is 97 rigs, and that's up about 4 rigs from the first quarter.

Turning to coiled tubing, that continues to be our -- by far, our smallest business. But they've experienced nice revenue growth and still struggling a little bit on margin improvement. Some months have been good, some bad. It's small, so minor adjustments can have an impact on the margin. But what is clear is a steady improvement in the completion side of that business. We've been very active in the larger pipe work, the 2 3/8 -- 2 5/8 in the Eagle Ford. But overall activity has been a little bit volatile, including offshore.

We have downsized the fleet from 17 units to 14, and we've moved 3 of the units -- 2 small pipe and 1 offshore unit -- in the held-for-sale category.

Turning now to the Drilling segment, our U.S. operations had a great quarter, both revenue and EBITDA up meaningfully quarter-over-quarter. U.S. margin per day appear to be the highest of any of the publicly traded companies that we've seen reported. And we think these rates will rise further in 2017 and into 2018.

As mentioned in the press release, we've been successful in raising dayrates and increasing term length. 7 rigs in the second and third quarter had dayrate increases of a minimum of $2000 per day or greater, and 3 of those 7 increased the term fairly meaningfully: 2, 18 months out; 1, a year out. And we continued to roll term out a little bit longer and increase dayrates through the year. This success in our drilling is 100% due to the performance that's both rig design performance, which is spectacular, and our people in the service and the safety that they provide. It's a very impressive operation all across the board.

Down in the country, Colombia, the outlook there has turned a lot more positive. It was a little over a year ago we had 8 stack rigs and very little conversations about putting rigs back to work. Later, as we moved into the 4th quarter, we saw opportunity to put rigs back to work. And the dialogues have continued and strengthened. And I think the outlook looks very promising as we really look more into 2018.

We do have 3 rigs under contract today, and we feel like we're close to signing a contract on our fourth rig. This is -- I'd say the earlier decline in oil, like we referenced previously, it put the near-term outlook more in the 4- to 5-rig activity as opposed to the 5 to 6 like we had anticipated before. But now that oil price has strengthened, maybe we can regain some of that pipeline of activity.

We have had some short-term delays here just recently, mostly related to locations not being ready. But 2 of the rigs are earning, and 1 has about another week or so before the location -- it will be ready to start moving to that location. We're with excellent operators in Colombia and where margins are good and remain accretive to our overall drilling operation margins. So we're excited about that future, excited to get some of these rigs back to work with good margins and really the best operators.

I'd like to turn it over to Lorne to go into the financials in a little more detail.

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

Lorne E. Phillips, Pioneer Energy Services Corp. - CFO and EVP [4]

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

Thanks, Stacy. Good morning, everyone. This morning, we reported revenues of $107.1 million in adjusted EBITDA of $12.9 million. Our reported net loss was $20.2 million or $0.26 per share. Excluding the impact of impairment charges and valuation allowance adjustments on deferred tax assets, our adjusted net loss was $16.2 million or $0.21 per share.

As Stacy mentioned, the Production Services revenues in the quarter were $68.4 million, up 20%, and gross margin was 23%, up from 20% in the prior quarter. All Production Service businesses saw increased revenue and gross margin improvement, with the most significant contribution coming from our wireline business.

Drilling Services revenues were $38.8 million, essentially flat with the prior quarter, and utilization was 74%. The revenues in our domestic drilling operations increased during the quarter as we completed the mast and substructure upgrade on a rig, which subsequently went to work in West Texas, and we also reactivated our remaining idle rig in the Bakken. The domestic increase in revenue was offset by the temporary reduction in drilling activity in Colombia due to the operator well-site delays just mentioned.

Drilling margin per day was $7,735, up sequentially from $7,659 in the prior quarter and was also up for the third consecutive quarter. We have 24 rigs marketed in our fleet today, and 16 of those are AC rigs in the U.S., which are all earning revenues, and 2 of the rigs in Colombia are earning revenues.

Stacy already discussed the 7 rigs that we renewed for -- in the second quarter or to start a new contract in the third quarter, so I'll go through the new roll-off on the rigs. We have 13 in the U.S. under term contracts and 5 of those are up for renewal in the fourth quarter of 2017; 1 in the first quarter of 2018; 1 in the second quarter of 2018; 3 in the 3rd quarter of 2018; and 3 in the fourth quarter of 2018.

Turning to company-wide expense items, G&A expense was $16.1 million, down 9% from the prior quarter. That was driven primarily by reduced incentive-based compensation costs. For Q3, we expect G&A expense to be approximately $17 million to $17.5 million.

Depreciation and amortization was $24.7 million, down from $25 million in the prior quarter. We expect D&A to be approximately $24.5 million in the third quarter.

Our interest expense was $6.4 million in the quarter, and we expect it to be approximately $6.5 million in the third quarter.

Our effective tax rate in the second quarter was close to 0 due to a valuation allowance taken against deferred tax assets primarily related to domestic and foreign net operating losses. Excluding the valuation allowance, the effect of foreign currency translation and other permanent differences, our tax rate would have been in the 35% to 37% range.

We currently have $88.5 million outstanding and $11.8 million in committed letters of credit under our $150 million Revolving Credit facility.

Cash, capital expenditures in the second quarter were $15.3 million. We estimate 2017 capital expenditures to be approximately $56 million to $59 million, which includes approximately $22 million for drilling rig upgrades, the exchange of 20 well servicing rigs, both of which were completed in the first half of the year, as well as the purchase of 6 wireline units during the year. With the switch to primarily routine CapEx going forward, we expect to be cash flow neutral over the second half of 2017.

Beginning in the 3rd quarter of 2017, the credit facility will transition from a minimum bank EBITDA covenant to a senior secured leverage ratio and an interest coverage ratio. As of June 30, we have exceeded those covenant requirements for the third quarter.

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

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

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

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

Thank you, Lorne. As we look towards the third quarter, I think, we see potentially a continuation of what we saw in the second quarter. The decline in oil prices was a little -- caused a little uncertainty, but now that it has strengthened back up into the upper 40s, we're feeling better about that outlook.

I think we'll have a combination of things contributing to the Production Services side, some realization of some pricing improvement that we'll see in the third quarter. I think we have a little bit of a mixed shift towards some of our more profitable clients also occurring in the third quarter. And then as I've mentioned, I think, the $49 oil might renew some activity that may have declined a bit when the pricing was lower. So we'll guide revenues up 5% to 10% in the third quarter and a further improvement in margins in the 24% to 26% range.

Kind of the same outlook for our Drilling operations, the U.S. is 100% utilized. We don't see any change on those 16 rigs other than the higher dayrates continuing to roll through there. And then -- so the utilization forecast would be 74%, 77%, but that's 100% dependent on what happens in terms of rigs in Colombia.

So in our margins, we're showing a nice increase in the third quarter from -- up to 81% to 85%, 100 a day in terms of margin. And really, we see that $8,000 kind of floor margin per day all the way through into 2018. So we're anticipating, with our dayrate improvements coming in, that will offset the declines of some of the higher-margin contracts that we have that will be rolling off in 2018. But we should be able to maintain a floor of $8,000 a day. So I think that's a very positive outlook for us.

With that, I think we'll conclude our prepared remarks and be happy to answer any questions. Thank you.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from the line of Daniel Burke with Johnson Rice.

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

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

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

Thanks, as always, for kind of a detailed outlook on the forward quarter. Stacy, you want to -- you alluded to -- are you willing to talk about where your well service utilization settled out in July? Or, where it is kind of real-time?

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

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

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

I would say it's -- I don't think we've disclosed it, but it has pulled back a little bit, as I mentioned before, due to the softer oil prices, but not much. I think it's going to settle out probably pretty flattish to where we reported there for the third quarter.

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

Daniel J. Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [4]

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

Okay, that's helpful. And then you also alluded to a little bit more 24-hour completion pad work in the well services market. Can you -- I think it's been a couple of quarters. Can you talk about how many rigs you have involved in the completion market right now or the pad market?

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

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

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

Well, the 24-hour work ebbs and flows. But 1 year, 1.5 years ago, we probably had 0 to 1 doing 24-hour work. And of late, it ranges -- and Carlos, correct me if I'm wrong -- but 4, I think, we've been over 10. But it probably averages like 4 to 6 or 7 or 8, somewhere in that range.

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

Carlos R. Peña, Pioneer Energy Services Corp. - EVP, Compliance Officer, General Counsel, Corporate Secretary & President of Production Svcs Segment [6]

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

Lately, about 6.

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [7]

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

Yes. And so that's a marked improvement. And some of that is some big workover work, but a lot of it too is the completion-oriented work. We do completion work under daylight hours as well, but they'll move on to some of these multi-welled pads and just do a string of tubing jobs on -- one after another to get them on production.

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

Daniel J. Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [8]

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

Okay. And then I guess on the -- to stick with the Production Services side, on the wireline side -- I guess on the CapEx side, you guys are now adding 6 wireline units. Is that incremental? I know there was a few you were going to add earlier in the year. Did you add a couple more in that new-build list? It looked like the CapEx crept up just a little bit.

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [9]

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

Just 2, 2 more. We had 4 on order, and we ordered 2 more. They're a unique type of unit, but -- and they're for a specific client in a specific market to satisfy a specific situation.

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

Daniel J. Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [10]

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

Okay. Yes, it's encouraging to watch how that wireline business has continued to improve. I guess last one maybe on the U.S. rig side. In terms of the -- it was helpful to hear sort of that margin baseline level you expect to sustain into 2018. But I guess to add a little bit to that, the rollovers in Q4 that are coming, the 5 renewals, would you expect to be able to capture at least that kind of $2,000 per day type gain that you were able to capture on the more recent contract rolls and extensions?

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

Lorne E. Phillips, Pioneer Energy Services Corp. - CFO and EVP [11]

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

Yes, Daniel, of the 5, I think 3 we would expect to be in that range. One of them at towards the very end of the quarter. I think, it's at -- through November and then would renew in early December. That one is still at pre-downturn rates, so that one would come down, and then 3 will probably go up, and another one would be flat to up slightly.

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [12]

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

And one of them we just recently priced already at the high rate. So -- and just to understand those rates, I mean, I think we're -- just for the basic dayrates, these rates are kind of in that $19, $19.5 a day range. You can get over $20 with add-ons of various softwares or whatever. But that's kind of the going rate that we're seeing.

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

Operator [13]

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

Our next question comes from the line of John Daniel with Simmons & Company.

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

John Matthew Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [14]

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

I guess the first one, Stacy, just for the wireline units you're ordering right now, what's the lead time on new units?

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [15]

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

I'd say, I think the first ones were maybe 4 months range and the last 2 were maybe 6 months range.

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

John Matthew Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [16]

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

Okay, got it. And then, Lorne, one for you. If we just -- if you take the midpoint of your guidance -- and forgive me, I'm not by my computer desk to do this -- but if you hit the midpoint of your guidance for Q3, are you staying within compliance with the covenants when you do the calculation for Q3?

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

Lorne E. Phillips, Pioneer Energy Services Corp. - CFO and EVP [17]

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

Yes, we -- actually, we're already in compliance, based on a Q2. And so, yes. So yes, if that's your question, we're already in compliance. Yes.

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

John Matthew Daniel, Simmons & Company International, Research Division - MD and Senior Research Analyst, Oil Service [18]

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

Okay. All right. And then the last one would be -- and if you said this earlier on the call, I apologize -- but there had been some talk about some select asset divestitures in the past. I'm just curious if you've got anything that you're working on now and thoughts of any potential sales in the back -- in the second half of this year?

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

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

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

Yes, we are working on some. We've divested a couple of held-for-sale rigs and some other smaller dollar amount assets. And we continue to explore more significant asset sales as we kind of move through the year.

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

Operator [20]

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

(Operator Instructions) Our next question comes from the line of Praveen Narra with Raymond James.

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

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [21]

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

I guess going to the comment on the pullback from operations temporarily when oil prices were pulling back in June and July, I guess. Was that pullback largely related to completion work or production work? Or what kind of -- what were you seeing?

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [22]

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

It's probably a little bit of a mix. It would be -- an example would be an operator taking a couple of rigs and going from 24-hour work just to daylight, as an example. So it's just -- it's pretty modest. And I'm not sure it's a trend, but when the price of oil was low like that, it is going to affect some folks. And now that it's firmed back up, that could easily change right back to taking those same rigs and going back to 24-hour work.

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

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [23]

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

Right, it sounds like a lot of that dissipated. In terms of the drilling contracts, as these roll off, it certainly seems like you're earning a pretty healthy margin, I guess, how do you consider kind of going on a longer term contract? I know you guys have been avoiding that in the past but are you willing to go beyond that year term at this point?

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [24]

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

Yes. I've mentioned we've already rolled 2 rigs out for 18-month terms, so they're pushed out all the way through the end of 2018. And so I think our preference now would be to, where we can, try to roll 1 year, 1.5 years out just to lock in these margins. We're happy with the margins. As you see, they're amongst the highest in the industry. So we're happy locking them in. And that's really just for a little downside protection, if these oil price stays kind of in the $40 to $50 band. It just gives us a little downside security.

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

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [25]

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

Certainly, I think that makes a lot of sense. I guess just last one from me, just in terms of cost inflation, particularly, I guess, I'm thinking about the labor side. Have you seen anything significant as we move forward that would cause, I guess, a step-up or any significant step-change or just a normal gradual...

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [26]

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

In labor cost?

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

Praveen Narra, Raymond James & Associates, Inc., Research Division - Analyst [27]

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

In labor cost or, I guess, generically as well.

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [28]

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

Not really. We have -- with labor, it's tight, and we battle, but we've tried to keep strong discipline on our labor costs. Not everybody's doing that, but we've been able to do it for the most part. And it's -- to preserve your margins, you've got to hold that labor, and particularly in an oil environment like we have. So we've been very disciplined on that. I don't foresee and we haven't incurred much in the way of a significant labor change.

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

Operator [29]

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

(Operator Instructions) Ladies and gentlemen, we have come to the end of our time allowed for questions. I'll turn the floor back to Mr. Locke for any final remarks.

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [30]

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

Great. Well, thank you very much for participating in the second quarter call, and we look forward to visiting on the 3rd quarter. And that will conclude today's presentation. Thank you. Bye.

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

Operator [31]

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

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.