U.S. Markets closed

Edited Transcript of PES earnings conference call or presentation 2-Nov-17 3:00pm GMT

Thomson Reuters StreetEvents

Q3 2017 Pioneer Energy Services Corp Earnings Call

SAN ANTONIO Dec 5, 2017 (Thomson StreetEvents) -- Edited Transcript of Pioneer Energy Services Corp earnings conference call or presentation Thursday, November 2, 2017 at 3:00:00pm GMT

TEXT version of Transcript

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

Corporate Participants

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

* Anne Pearson

Dennard-Lascar Associates - IR

* 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

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

* Kenneth Blake Hancock

Scotia Howard Weil, Research Division - Analyst

* Sam McAllister

Raymond James - Analyst

* William Roussel Alpaugh

Simmons & Company International, Research Division - Research Analyst

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

Presentation

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

Operator [1]

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

Greetings and welcome to the Pioneer Energy Services third 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. Please go ahead.

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

Anne Pearson, Dennard-Lascar Associates - IR [2]

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

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

First of all, a replay of today's call will be available by webcast and also by telephone replay. You can find the replay information in this morning's news release.

Just as a reminder, information reported on this call speaks only as of today, November 2, 2017, so any time-sensitive information may not be accurate at the time of a replay.

Management may make forward-looking statements are based on beliefs and 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 and uncertainties and assumptions that are described in today's news release and in recent public filings with the SEC. So if one or more these risks materialize or should any underlying assumptions prove to be incorrect, actual results may differ materially.

Also, please note that this conference call may contain 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 turn the call over to Stacy Locke, Pioneer President and CEO.

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

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

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

Thank you, Anne, and good morning, everyone. Joining me here in San Antonio is Lorne Phillips, the Chief Financial Officer.

First, I wanted to address our potential financing. We've been exploring an alternative to the bank revolving facility for quite a long time and we've been trying to avoid double-digit type pricing, and fortunately, the credit markets improved in late summer and in the fall and we saw that window as an opportunity, and so we rushed forward.

And what's great about this facility, once we get it closed, is when you combine the term loan and the ABL it will give us over $100 million of additional liquidity and net debt will be roughly the same. So we'll also alleviate the tight covenants that we had in our bank facility not that we saw that as a risk in the future, but it's just nice to eliminate when you have the opportunity. So we're excited to, hopefully, be closing this soon.

Turning now to the third quarter, we had a very solid quarter. Revenue and EBITDA both were up about 9%, despite the fairly material impact from Hurricane Harvey on our Texas operations. It's been a steady progression of revenue and EBITDA growth for the last 4 quarters.

Looking at our U.S. drilling segment, we generated about $35 million of revenue in the quarter, that's up 15% or so from the prior quarter. U.S. Drilling operations have been doing extremely well. Average margin per day in the U.S. was just shy of $9,100 per day, which is outstanding. I believe that's the highest of any of the U.S. publicly traded companies that we're aware of.

We made a concerted effort in addition to pushing margin on adding longer term. Now we have 5 rigs extended into the fourth quarter of 2018 under term, 3 more into the third quarter and we're still negotiating for additional term extensions, which we view to be attractive at this time. Lorne will go into a little more detail on that in a minute. And we're still seeing some day rate upside in these negotiations. So we're anticipating a very solid and stable 2018 in our U.S. drilling operation.

Turning now to Colombia, that's been a huge bright spot for us. We've got 2 rigs contracted into 2019. Two more rigs contracted into 2018 and it looks like long-term work for the other 2 rigs with a prospect of putting a seventh rig out of our totaled 8 in country to work in late first quarter or early second quarter of 2018, with one of the existing clients we have today. We have a total of 4 clients utilizing 6 of the rigs.

In Colombia, we generated $7 million of revenue, that was actually down a little over 10% from the prior quarter and that was just really due to long mobes as we redeployed assets around the country to different areas.

So the outlook there is very, very bright. We should easily double that revenue as we look forward, and even more so into next year on a quarterly basis. So with the improvements we've now had in the U.S. drilling margin, our Colombia and U.S. margins are kind of merging together in the high $8,000s to $9,000 a day range.

Turning now to our Production Services Segment. Production Service has showed a very steady ramp throughout the year and Q3, of course, was the best quarter of the year. Most of the improvement in Production Services has been driven by increased completion activity in our wireline services and coiled tubing businesses. Looking specifically at wireline. Wireline generated about $46 million in revenue in the third quarter, and that's on with approximately 80 of the 117 rigs being marketed.

And as we look forward, we hope to activate another 5 to 10 throughout 2018, and, then in addition, we'll be taking delivery on 2 more rigs in the fourth quarter towards the end of the year.

So the outlook there continues to be very positive and we've experienced extremely good utilization on the units that we have in our marketed fleet.

Turning now to the well servicing segment, we had generated $19 million in revenue in the third quarter, and that's on approximately 82 marketed units. The utilization was a little off at 43%, that was down from the prior quarter. That was solely as a result of the Harvey impact. As we look forward, with this improved oil price and mid 50 range oil price, we'd hope the utilization would gradually improve for the remainder of the year into next year, maybe into the mid-upper 50%.

Average hourly rate, as you saw in the press release, was up again quarter-over-quarter. And the one missing piece out of the well servicing recovery has been completion work in our 2 primary markets, Eagle Ford and the Bakken has just still not really come back. We think oil prices could help that recovery and we're seeing much stronger prices today and oil price is a big determinant of well service improved activity.

So we're feeling very optimistic. We feel like there's tremendous upside in the well servicing segment, as we look forward. If you remember back to 2014, we had a number of quarters where we were close to 100% utilization, sometimes above 100%, and we were doing quite a bit more completion work, 24-hour work during those periods. So we see great upside as we look forward with improving commodity prices.

Lastly, our coiled tubing operation has shown a great deal of improvement. We hit about $10 million of revenues in the quarter, which was up from the prior quarter. Utilization has steadily improved through the year. And as we talked about previously, we've had a continued mix shift to the larger pipe, and so we're seeing great promise there and we expect continued revenue and margin improvement as we go forward. With that, I'll turn it over to Lorne to get into some of the financial details.

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

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

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

Thanks, Stacy. Good morning, everyone. This morning, we reported revenues of $117.3 million and adjusted EBITDA of $14 million. Reported net loss was $17.2 million or $0.22 per share. Excluding the impact of valuation allowance adjustments on deferred tax assets, our adjusted net loss was $11.3 million or $0.15 per share.

As Stacy mentioned, we also announced this morning, we expect to close shortly on a proposed $175 million 5-year senior secured term loan as well as a $75 million, 5-year asset-based lending facility. Upon closing that transaction, the proceeds will be used, among other things, to pay off the $101.6 million outstanding on the revolver and to retire the current $150 million revolving credit facility.

This refinancing will provide us -- provide the company additional flexibility and liquidity to fully participate in this ongoing market recovery.

In terms of revenues for the -- and margins for the businesses, I think Stacy went through that. So I'm just going to the -- discussing some of the term contract coverage. We have 24 rigs in the fleet today. Currently, all 16 of our AC rigs in the U.S. are earning revenues and 5 in Colombia are earning revenues. We have one additional rig in Colombia that's under term contract and that will begin work in December.

So of the 21 rigs earning revenues, 13 of those are under term contracts in the U.S. for which the roll off is as follows: 2 are up for renewal in the fourth quarter of 2017, 1 in the first quarter of 2018; 2 in the second quarter of 2018; 3 in the third quarter of 2018; and 5 in the fourth quarter of 2018.

Turning now to companywide expense items. Our G&A expense was $17.5 million, it was up 9% from the prior quarter, driven primarily by increased incentive-based compensation cost. For the fourth quarter, we expect G&A expense to be flat with the prior quarter.

Depreciation and amortization was $24.6 million in the third quarter and is expected to be approximately $24 million this quarter. Interest expense was $6.6 million in the third quarter and is expected to be approximately $7.5 million to $8 million in the fourth quarter, depending on the timing of the closing on the term loan.

The effective tax rate in the third quarter was close to 0, due again, to valuation allowance taken against deferred tax assets, primarily related to domestic and foreign net operating losses. We currently have $101.6 million outstanding and $11.8 million in committed letters of credit under our revolving credit facility.

Cash capital expenditures in the third quarter were $12.8 million. We estimate 2017 capital expenditures to be approximately $60 million, which includes approximately $22 million for drilling rig upgrades and 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. 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. Looking into our Q4 guidance, we're essentially guiding everything up a little bit in the fourth quarter, despite typical seasonality, Thanksgiving, Christmas, holiday-type situation and shorter days. On the Drilling side, we are forecasting about 86% to 87% utilization, that's largely due to Colombia, versus the 80% we achieved in the third quarter.

On the drilling margin per day, we achieved $8,100 in third quarter; we're guiding that up to $8,700 to $9,000 a day. And that, too, will be impacted positively from the activation in Colombia. And then on the Production Service side, we are estimating about a 5% increase in overall Production Service revenue and an improvement in margin, up a little to 22% to 24% of revenue. So with that, that concludes our prepared remarks and we'll be happy to entertain any questions.

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

Questions and Answers

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

Operator [1]

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

(Operator Instructions) Our first question comes from the line of William Alpaugh with Simmons and Company.

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

William Roussel Alpaugh, Simmons & Company International, Research Division - Research Analyst [2]

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

I had a quick question. Little while, asking about the trajectory of well service utilization in the prospects for higher pricing in Q1 '18, if oil prices hold at current levels?

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

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

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

In terms of higher pricing for Q1 '18, I just want to make sure I understood the question. You're asking about well service pricing in Q1 '18?

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

William Roussel Alpaugh, Simmons & Company International, Research Division - Research Analyst [4]

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

Yes, or just next year, but, yes...

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

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

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

Well, I think that it's -- we feel like we can continue to push it, but it is a competitive space right now. We have been at the high-end of the pricing leader, we believe. We have seen some competitors recently pushing their pricing, and we think that will allow us to continue to, certainly, hold firm and then push some. But it's going to be very gradual, as we see it today, absent some big shift in the market. It's not expected to be a -- aggressive growth, but we think there's gradual improvement we can get there.

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

Lorne E. Phillips, Pioneer Energy Services Corp. - CFO and EVP [6]

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

Pricing will be aided, considerably, with increased demand. Demand in the well servicing sector has been softer than our other businesses. As I mentioned, less completion activity than in '13 and '14, 2013 to 2014. So as pricing stabilizes and there's more completion activity, we think that will pick up demand, which will then start helping pricing. But when you're sub fitting for sync utilization, that makes it tough.

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

William Roussel Alpaugh, Simmons & Company International, Research Division - Research Analyst [7]

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

Okay. And regarding utilization, Will said next year possibly to the mid-50s. Did I hear that right and correct on the call?

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [8]

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

We think that with the pricing, oil pricing that we are seeing today that there is going to be a gradual improvement next year. And we would think we could -- that hopefully that utilization will pick up to the mid-50%.

Now you need to understand, also, the way we calculate our utilization, it's total rigs owned. It's not anything -- so we have 125 total rigs, so that's in our denominator. So we're including every rig that we own, whether it's marketed or not. And so we're hopeful that we will activate some additional rigs through the course of next year with improved oil pricing and that will help us pick up the utilization. And then if we get enough momentum there, it will aid in gaining some pricing leverage.

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

William Roussel Alpaugh, Simmons & Company International, Research Division - Research Analyst [9]

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

Okay. And how many are active right now? Did you just say 82?

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [10]

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

It's about that. We're marketing today about 82 of the 125 units.

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

William Roussel Alpaugh, Simmons & Company International, Research Division - Research Analyst [11]

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

Okay, perfect. And then also just another question about the general well maintenance-related activity in gas markets. What do you all view as the threshold natural gas price that would get well maintenance and work-over activity in the buyer there?

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

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

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

Yes, well, I think our gas kind of maintenance level has been fairly steady. We just -- I wouldn't call it robust, but probably over 82% of our revenues is maintenance-oriented. And we are in fairly prolific gas areas as well as the Eagle Ford and the Bakken. So it's been pretty steady. And I'm sure it would get better with improved gas prices. I'll be honest, that we're not kind of counting on that, but it would be great if it occurred.

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

Operator [13]

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

Our next question comes from the line of Blake Hancock with Howard Weil.

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

Kenneth Blake Hancock, Scotia Howard Weil, Research Division - Analyst [14]

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

Stacy, can you maybe talk about the drilling business on a couple of fronts here? A, as we think about the rigs that are rolling off, call it over 4Q through 2Q. I guess it's fair to say those all are going to likely reprice higher from when they were contracted, a.

And b, just as we think about this business. Lorne, you mentioned briefly taking advantage of the environment with the new term loan and ABL. Do we start growing that business? Are there plans to add new AC rigs since you're fully utilized in the U.S? Maybe just talk about the plan there?

And then I guess, lastly, with the CapEx, thoughts for 2018? Would you look to build new well service in coil tubing? Where could growth CapEx be applied for 2018?

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

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

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

Well, those are good questions. On the drilling side, as you saw there from our average U.S. margins, they are already the highest in the industry of the publicly traded companies that report. So we're -- our day rates are already pretty high. So as we roll contracts forward, we do expect to roll, I'd say, all of them forward in this environment, because the rigs are performing great.

We should get some modest pricing increases, but it isn't going to be in all cases across the fleet. And then beginning with the first rig in the latter part of this fourth quarter, one of our new build rigs will reprice and that'll come downward. So we have -- we've got some competing influences there.

And then later next year, we'll reprice some additional rigs that were still under the very high new build contracts. But we feel like that we're going to maintain a good strong high average margin through next year. It'll increase probably a little bit from where we are today in the short run. But -- so we'll be able to absorb those repricings of those other rigs, and those are high-end rigs, and so they'll reprice at the upper end of the market. The forward day rate environment is kind of in the $19 to $21 a day range, I'd say. So it's stepped up a little bit over what it was last call.

With perspective capital spending, I'd say, the overriding theme is, we're going to protect our cash. But having said that, we probably will -- if we can get a good term contract we have a rig that we've talked about in the past that's partially completed already and we could finish that rig out for well under $10 million, probably in the $8 million range.

And so we would consider putting that rig out over time. It would probably take 6 months to finish it, so it wouldn't be just an immediate spend. But it would be subject to getting a good strong contract for it, so we could get a cash return on the investment.

In terms of growth capital for other businesses, in well service, we really don't need it, we have 125 total units. And as we talked about we are only marketing about 82 of them, so those are good rigs, that would just be easy to reactivate. And really the same on the wireline front, we're marketing around 80 of our, what will be 100 -- 119 at the end of the year count there. And -- so we have a lot of capacity in wireline as well that we could reactivate. So for minimal dollars, we could reactivate equipment in both of those areas.

In coil, that's one area where there has been a real shift to the completion work that the bigger pipe market has become much, much more attractive. And there is an opportunity there for us to add some additional large pipe. We would, perhaps, look at one large pipe unit that we might add into the fleet sometime middle of next year or so, but we haven't made any decisions on that for the rig, we're still evaluating the market, but that's really about it.

It would be routine CapEx primarily next year, until we get greater clarification on the overall market and fundamentals and how the oil price outlook is in the first part of next year. We're pretty optimistic about it, what we see, and we're pretty optimistic that rig count is going to stay fairly firm, it might decline a little bit. But a lot of our operators are talking; about picking up more rigs next year. So not sure that it's going to be a big decline in rig count, which we think is positive for the businesses.

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

Lorne E. Phillips, Pioneer Energy Services Corp. - CFO and EVP [16]

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

Lorne, I'd just add that routine maintenance for '18 is kind of -- at these activity levels, we think that as in that $35 million to $40 million range right now. So that's how we're looking at the year, $40 million of routine, then evaluate from there. But like Stacy said, we're going to -- upon closing this deal, we're going to make sure we're very protective of our liquidity and cash and just evaluate unique opportunities.

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

Operator [17]

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

(Operator Instructions) In seeing that there are no further questions I would like to -- oh, I am sorry. We've just had one come through, I believe. Our next question comes from the line of [Sam McAllister] with Raymond James.

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

Sam McAllister, Raymond James - Analyst [18]

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

So I just wanted to hear from you guys your latest updates on the labor market and any tightness that you all may be seeing on a segment basis in terms of your well servicing or coiled tubing. So if you wouldn't mind just kind of addressing where you all are seeing that? And any sort of ceiling that may provide on your utilization going forward?

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

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

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

Well, that you are hitting on a very important point that I don't think is that well understood. Labor is, in this market, very different from the 2012 to '14 market. Labor is a major constraint. We could put more well servicing rigs, more wirelines and more coil out if we had labor to do it. We've got rigs that are waiting to go to work or equipment waiting to go to work if we could just get the labor.

And we've stuck to our stringent standards on hiring. We do hair follicle drug testing; we really are looking for people with the right attitude that would fit into our culture. As we feel like in a market like we're in, your overall service and safety performance is critical to keep your utilization. And so we just don't want to bring warm bodies into the company. There are a lot of warm bodies that you could bring in, but we want to hire the right people and it's very limited and competitive out there for those people. Lorne, if you want to add something?

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

Lorne E. Phillips, Pioneer Energy Services Corp. - CFO and EVP [20]

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

No, I think that's -- I think that covers it.

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

William Stacy Locke, Pioneer Energy Services Corp. - CEO, President and Executive Director [21]

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

But it is, undoubtedly, a very tight labor market in multiple businesses. Drilling, we've been able to crew up the drilling. We've been in the drilling business for so long that -- and we used to have so many more rigs, we just know people and so we crewed up our drilling rigs. We have turnover there but we've crewed them up and kept them crewed and had less trouble there but it's in the Production Service space that it's been harder.

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

Operator [22]

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

And it now seems we have no further questions. I'd like to turn the floor back to Mr. Locke for closing comments.

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

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

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

Okay. Well, thank you for participating on the call and we'll look forward to discussing our final quarter of the year. Thank you very much.

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

Operator [24]

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

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