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Edited Transcript of SAEX earnings conference call or presentation 9-Aug-18 2:00pm GMT

Q2 2018 SAExploration Holdings Inc Earnings Call

HOUSTON Aug 28, 2018 (Thomson StreetEvents) -- Edited Transcript of SAExploration Holdings Inc earnings conference call or presentation Thursday, August 9, 2018 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Brent Whiteley

SAExploration Holdings, Inc. - CFO, General Counsel & Secretary

* Jeff Hastings

SAExploration Holdings, Inc. - Chairman & CEO

* Ryan Abney

SAExploration Holdings, Inc. - VP of Finance

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to SAExploration Second Quarter 2018 Earning and Investor Update Conference Call (Operator Instructions) As a reminder, this conference may be recorded.

I would now like to introduce your host for today's conference, Ryan Abney, Vice President of Finance. Sir, please begin.

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Ryan Abney, SAExploration Holdings, Inc. - VP of Finance [2]

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Thank you, Norma, and good morning, everyone. Thank you for joining us today.

Our speakers today will be Jeff Hastings, Chairman and Chief Executive Officer of SAExploration; and Brent Whiteley, Chief Financial Officer and General Counsel of SAE. Also with us today is Brian Beatty, Chief Operating Officer of SAE.

Before we begin, I would like to remind everyone that some statements made during the course of today's call may be forward-looking within the meaning of the federal securities laws.

These statements can be identified by the use of words or phrases such as believes, estimates, expects, intends, anticipates, projects, plans to, will, should and variations of these words or similar words.

These forward-looking statements may include statements regarding SAE's financial condition, results of operations in general business, and SAE's expectations or beliefs concerning future periods, and are subject to risks and uncertainties, which may cause actual results to differ materially. These risks and uncertainties include developments with respect to the Alaskan oil and natural gas exploration tax credit system that continues to affect our ability to timely monetize tax credits that have been assigned to us by our customer, including litigation over the constitutionality of the litigation allowing Alaska to sell bonds, retires, liabilities relating to tax credit certificates; changes in Alaska oil and natural gas exploration tax credit system that may significantly affect the level of Alaskan exploration spending; fluctuations in the level of exploration and development activity in the oil and gas industry; intense industry competition; a limited number of customers; credit and delayed payment risks related to our customers; the availability of liquidity in capital resources, including our need to obtain additional working capital and refinance or replace our credit facility and our senior loan facility; the limited ability to make capital expenditures due to our current liquidity and cash flow situation, and the potential impact this has on our business and competitiveness; the need to manage rapid growth and contraction of our business; delays, reductions or cancellation of service contracts; operational disruptions due to seasonality, weather and other external factors; crew availability and productivity; whether we enter into turnkey or term contracts, high fixed costs of operations; substantial international business exposing us to currency fluctuations; and global factors, including economic, political and military uncertainty; the ability to retain key executives; the need to comply with diverse and complex laws and regulations; and other risks incorporated by referenced SEC's filings with the Securities and Exchange Commission.

Certain risks and uncertainties related to SAE's business are or will be described in greater detail in SAE's filings with the Securities and Exchange Commission. In particular, risks and uncertainties that could cause the actual results to vary materially from SAE's expectations are described under Risk Factors, and Cautionary Note Regarding Forward-Looking Statements in SAE's Form 10-K filed for the period ended December 31, 2017, and as updated in SAE's Form 10-Q file for the period ended June 30, 2018.

The information discussed today should be taken in light of such risks. Except as required by applicable law, SAE is not under any obligation to and expressly disclaims any obligation to update or alter its forward-looking statements, whether as a result of new information, future events, changes in assumptions or otherwise.

With that said, I would now like to turn the call over to Jeff Hastings, Chairman and Chief Executive Officer of SAE. Jeff, please go ahead.

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Jeff Hastings, SAExploration Holdings, Inc. - Chairman & CEO [3]

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Thank you, Ryan. Thanks to each of you for participating in today's call.

Because of the recent developments over the past month or so, we're going to change the order of how we usually conduct this call a bit. We know everybody is very busy, and we want to keep this call concise and focused on the information and developments we're sure everyone is eager to learn about.

So I'm going to turn -- I'm going to have Brent Whiteley, the CFO, quickly discuss the financial results for the second quarter of 2018. And then we'll move to the investor update presentation we posted early this morning.

Lastly, we'll wrap things up with an opportunity for questions and answers, which you might have.

With that said, I'll turn things over to Brent.

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Brent Whiteley, SAExploration Holdings, Inc. - CFO, General Counsel & Secretary [4]

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Thanks, Jeff, and good morning to everyone.

I'll take just a couple of minutes to highlight some of the second quarter financial results before we go through the presentation.

During the second quarter of 2018, we reported revenue of $16.9 million or 54.5% decrease from first quarter of 2018, but a 24.5% increase from the second quarter of 2017.

The decrease from the first quarter of 2018 was due to less projects in North America, offset by an increase in projects in Colombia. The increase in the second quarter of 2017 was due to more projects in North America and Colombia, offset by no projects in Bolivia and New Zealand.

We also reported adjusted gross loss of $2.8 million for the second quarter of 2018, compared with adjusted gross profit of $11.1 million for the first quarter of 2018, and adjusted gross profit of $1.9 million for the second quarter of 2017.

Adjusted EBITDA was negative $7.6 million for the second quarter of 2018 compared to positive $6 million for the first quarter of 2018, and negative $3.8 million for the second quarter of 2017.

Both adjusted gross loss and adjusted EBITDA in the second quarter of 2018 were negatively impacted by less favorable pricing when taking into account the fixed costs involved in our projects.

Adjusted gross loss or profit and adjusted EBITDA are non-GAAP financial measures and are described in our earnings release under non-GAAP measures.

For the second quarter of 2018, we reported net loss of $33.3 million or a negative $2.24 per basic share and diluted share, compared to a net loss of $1.5 million or negative $3.79 per basic and diluted share for the first quarter of 2018.

For the second quarter of 2017, we reported net loss of $17.8 million or a negative $1.91 per diluted share -- per basic and diluted share.

During the second quarter of 2018, we reported a provision for doubtful accounts in the amount of $19 million related to our long-term $78.1 million account receivable with a customer in Alaska. Based upon assumptions made regarding the State of Alaska's ability to issue bonds to repurchase outstanding tax credits, the length of time until the bonds could be issued, the data we expect we want to remain confidential and the likelihood of a discounted adjustment on our one remaining pending tax credit application.

We determined that it was reasonable to estimate that we would receive approximately $56.5 million in proceeds from the State of Alaska's issuance of bonds.

Additionally, we believe we will be successful in our ability to monetize approximately $2.7 million of existing tax credits in the secondary market at a small discount to face value.

Please refer to Note 3 in the unaudited consolidated financial statements, along with additional disclosures contained in our Form 10-Q filed for the period ending June 30, 2018, for additional details.

Lastly, as of June 30, 2018, our cash and cash equivalents totaled $4.5 million, working capital was $2 million, total debt at face value, excluding net unamortized premiums or discounts, was $57.8 million, and total stockholders' equity was $10.2 million.

Capital expenditures for the second quarter of 2018 were $0.6 million compared to $0.1 million for the second quarter of 2017.

The low-level of capital expenditures in both periods was primarily due to the continuation of unfavorable conditions in the oil and gas industry.

At this point, I'll turn the call back over to Jeff to walk through the Investor Update presentation.

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Jeff Hastings, SAExploration Holdings, Inc. - Chairman & CEO [5]

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Thanks, Brent. If you don't have access to the presentation, please visit the Investors section of our website to download a copy of it. If you're listening to the call through the webcast portal, you'll be able to see and follow the presentation real time.

Begin on the presentation on Slide 2, which is a snapshot of the corporate file and the forward-looking statements which were reviewed earlier by Ryan, and which we'll apply to this presentation as well.

SAE is a global -- vertically integrated global provider of logistics and geophysical services, which was founded in 2016. We are a full-service provider with the ability to facilitate projects from conception to data acquisition to data processing and interpretation.

We offer a broad range of specialized geophysical solutions to the petroleum and mining industry, which include 2D, 3D, 4D and compressive sensing seismic data acquisition services in land, transition zone, shallow water and deep water marine environments.

We have extensive experience and expertise in working in operational complex areas with topographic cultural and environmental challenges.

Our data processing and interpretation services emphasize on quality and deliverability through a specialized suite of advanced technologies, including signal processing, depth imaging, multicomponent processing, AVO processing and quantitative interpretation.

The acquisition of the Geokinetics' assets will allow SAE to service additional complementary markets, improve cash flow on new projects, provide access to new and leading technologies and product lines, and, most importantly, provide incremental value to an expanded customer base.

In terms of new and enhanced markets in the lower 48, we will field up to 3 crews targeting multiple unconventional resource plays in the Permian, Eagle Ford, SCOOP STACK, Austin Chalk, Utica and Marcellus basins.

In Australia, we've increased our capability to offer 2 acquisition crews. We've enhanced the market in Canada, and we'll offer up to 4 crews in Canada. And we've enhanced our South East Asia in Malaysia offering by increasing our TZ and shallow water capabilities.

In terms of new capabilities, we have a full -- now have a full-scale data processing and interpretation services, a unique suite of patent-protected technologies, reservoir characterization and optimization imaging through time-lapse 4D micro-seismic, and enhanced shallow water and marine capabilities to complement our current TZ and deep water experience.

In terms of new equipment brought on by the transaction, we have increased our land inventory, our marine inventory and our processing inventory.

Our increases in land inventory include approximately 180,000 channels of seismic equipment and 90,000 geophones, of which 73,500 are Gen2 Fairfield Nodes. Our source complement has increased -- our land source complement has increased by 200 conventional vibrators, 30 mini vibrators, 20 impulsive [OnSource] units, and a complement of portable and mechanized drill -- of portable and mechanized drills.

In terms of the marine equipment, we've increased our channel count by 3,000, our hydrophone count by 22,000. We have increased the size of our marine airgun inventory and compressors, and we have added 35 shallow water TZ-specific vessels to the fleet.

From a geographical perspective, we now have assets and personnel strategically positioned to pursue, capture and perform projects across the globe, which will improve our ability to compete.

The green dots on this slide are the SAE legacy markets. The black dots are either in markets where we've enhanced markets, or new markets open to SAE, and our headquarters will remain in Houston.

As I mentioned before, data acquisition services will include 2D, 3D, 4D and compressive sensing acquisition techniques, and will include land, transition zone, the area between land and shallow water, shallow water 0 to 300 meters, and deepwater environments in 300 meters or greater.

Since 2016, SAE has operated an asset-light model, renting most of its equipment on a project-by-project basis as contracts are awarded to the company.

The owned inventory as a result of this transaction will improve service to customers across the globe. SAE will no longer be reliant on the availability of rental -- in the rental market, and customers will have an option to express their preferred equipment. SAE can now service a multitude of high channel count and high source count projects.

Excuse me, the acquired technology SAE will be offered will offer additional source options as well.

In terms of data processing, new imaging technologies, workflows and highly skilled teams will turn raw data into information customers can trust to support for critical exploration decisions.

New processing capabilities will complement SAE's recent implementation of compressive sensing methodologies and will include integrated reservoir geosciences, time and signal processing, depth imaging and quantitative interpretation.

In terms of the new technology that we currently have access to, which will complement the current SAE offering, this slide reviews several of the new technologies, and I'll run through these quickly.

The AquaVib is the only existing fully tested shallow water marine vibrator, is -- and is an alternative to airguns in geographies and during seasons when airguns are otherwise restricted, I believe many areas in -- along the coastal areas of South -- of Malaysia and Brazil, and in areas where airguns cannot -- where we cannot take our airguns, that this will be an advantage to us.

Symphony is a proprietary seismic acquisition method developed to reduce the costs associated with acquiring high-fidelity broadband seismic. It will improve imaging and can improve imaging without a meaningful increase in the pricing relative to our competitors.

ActiveFrac is a proprietary design to show which fractures remain open after a fracturing job has been completed. Existing methods indicate the volume of the rock fractured through stimulated rock volume but not the final productive volume, which we believe ActiveFrac will be able to image.

Through process -- acquisition of the processing technology, we'll will be able to offer the Diamond and Ethos platforms, each with their own suite of complementary processing flows and capabilities. The OnSEIS Version II is a proprietary impulsive onshore source. It is an alternative to dynamite and vibroseis.

In many areas where dynamite is -- can't be used or in cultural areas or sensitive areas where power levels of vibrators or charge size and dynamite needs to be reduced, the OnSEIS can produce a better quality product at a significantly lower price.

We will continue to advance our compressive sensing methodology and offering, which is a randomized sampling, which involves multiple sources shooting simultaneously, along with improving sampling efficiency for both source and receivers. Compared to conventional designs, a compressive sensing survey achieves an order of magnitude of improvement in field acquisition efficiency and step-function improvements in data quality.

In terms of quality, health, safety and environment, SAE continues setting the standard for responsible stewardship through industry-leading quality, health safety and environmental programs.

In the Arctic, in Alaska and Canada, SAE has never had an EPA recordable spill or significant tundra damage. All the vehicles are equipped with low -- all the low ground pressure vehicles are equipped with spill protection and are continually maintained to reduce the likelihood of spills occurring.

In the jungles of Latin America and South America, SAE prides itself on maintaining strong and positive relationships with the local communities in which it operates. We specialize in line cutting and under-canopy-avoidance techniques, and reforestation activities, all of which assist SAE in returning the environment to a natural standard.

In terms of our global health and safety performance, we continue to be an industry leader with a robust health and safety program along with an effective injury management program that continues to produce significantly lower injury frequency rates to that of our competitors or industry standards.

The combination of SAE and the Geokinetics assets and personnel continue to differentiate our business model. This slide, you can 7 of our competitors in the right-hand columns with the left-hand column with a dotted green line around it is the SAE services that we're offering, which include North American land acquisition, international land acquisition, transition zone, shallow water, deep water and data processing and interpretation services.

I'll now turn things over to Brent Whiteley, our CFO to touch on a few financial aspects of the asset acquisition. Brent, if you could go ahead, please.

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Brent Whiteley, SAExploration Holdings, Inc. - CFO, General Counsel & Secretary [6]

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Thanks, Jeff. Moving to slide 12, this provides an update to our current backlog with bids outstanding pro forma and acquisition.

As of June 30, 2018, and including the effects of the Geokinetics acquisition, our pro forma backlog was $80 million, which is, as you can see, a substantial improvement to our bid -- our backlog trend.

And our bids outstanding totaled $491.8 million. Approximately, 96% of our backlog is comprised of data acquisition projects, and the remainder is comprised of data processing projects.

Additionally, approximately 96% of the data acquisition projects are located in North America, split primarily between Alaska and the lower 48. We currently expect to complete approximately 40% of the projects in our pro forma backlog as of June 30, during the remainder of this year, with the balance scheduled to be performed in 2019.

Please note, however, that the estimations of realization from our backlog can be impacted by a number of factors, including deteriorating entry conditions, customer delays or cancellations, permitting and project delays and environmental conditions.

Moving to Slide 13. Slide 13 shows the changes that have been recently announced to our capital structure. Starting in the far left-hand part of this slide, you'll see our current capital structure and our current shares outstanding of 42.485 million. This includes the dilutive effects of the Series C and Series B warrants in the share count number that I've provided. You also see our debt structure on the top part of that section.

Moving to the right. We did have a preferred -- equitization of our preferred Series A shares. You see the effects of the equitization in the lower part of that section, which increases our shares outstanding to approximately 151.326 million.

The next part of that slide shows the purchase money facility that was brought into to acquire the Geokinetics assets. You see on the top part of that slide, the purchase money that was brought in and added to that part of our capital structure. No changes to the share count or the lower part of the capital structure.

Moving further over, we've recently announced a -- start of a convertible note financing. Once that financing is brought on, you'll see the effects of debt being taken down by that financing and how that moves into our capital structure on the top part. Once again, from that financing convertible note coming in place, no changes to the bottom part of the capital structure is reflecting on that slide.

We have shown, for illustrative purposes, since the note that is being brought on is convertible note, the effect of the conversion of that note. There are many conditions for the conversion of that note, but we have just provided this for illustrative purposes. And you'll see the effect of the conversion of that note and the equity on the top part of our capital structure. And you see there our share increase in the bottom part of capital structure upon conversion of that note.

All of these shared counts, of course, are estimates and are changed by fractional shares and other factors so these are just estimates that we're being provided, so that the market can get an understanding of our capital structure, and get a more illustrative look at what's happening in our capital structure and what can happen in the future.

And now, I'll turn it back over to Jeff for some closing remarks, and before we open for questions. Jeff, go ahead.

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Jeff Hastings, SAExploration Holdings, Inc. - Chairman & CEO [7]

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In closing, the second quarter was an exciting and a very transformative period for the company. While activity in many of our markets remained historically low, we chose this time to focus our position within the industry and bringing our capital structure to a level that will substantially improve our competitiveness as market conditions begin to improve.

Our rationale for this acquisition is centered around 3 objectives: captured equipment synergies through the reduction in rental expenses; gain immediate access to new and complementary markets; and add new service capabilities to increase the value to our customers.

In this prolonged market downturn and at current pricing levels, we can no longer afford to exchange cash generation for financial flexibility. Our potential cash generation in the future, when growth in activity returns, will be positively affected by eliminating the need to most often rent equipment. This strategic transaction also broadens our geographic reach, and positions us to efficiently pursue and capitalize new opportunities.

As illustrated by the immediate improvement in our contracted backlog, we expect having access to unconventional resource plays in the lower 48, will diversify our historically conventionally focused, internationally leveraged footprint, and open new markets to SAE.

We are also excited to gain the data processing and software capabilities that Geokinetics has spent years developing. In addition to data processing as a standalone service, we believe we have an advantage in being able to offer incremental value to our customers by extending our proven single-provider approach, offering a start-to-finish in-house logistics and data acquisition capabilities to include data processing and interpretation services, utilizing cutting-edge software and expertise. We also recently initiated certain interrelated transactions to simplify our capital structure, improve our liquidity and reduce our interest expense so that we are appropriately positioned to maximize stockholder value once we are able to fully realize the expected benefits from the Geokinetics transaction.

The conversion of our Series A preferred stock will simplify our equity structure and eliminate the dividend payable that was accruing at an 8% annual rate.

Additionally, the new convertible notes we hope to issue will allow us to repay certain credit facilities with new 6% paper with a longer-term maturity into 2023.

While currently subject to legal challenges, the State of Alaska has authorized issuing bonds to repurchase the outstanding tax credits. And as a result, over the next 18 months or possibly earlier, we hope to be in a position where our net debt is below $60 million.

Ultimately, we believe this strategic acquisition and the related capital structure transactions along with the continued support of our employees and key stakeholders will enable us to achieve our goal in leveraging SAE's best-in-class operational history to become a market leader in onshore, near-shore data acquisition and processing services worldwide.

With that said, I'll turn the call over to the operator for questions.

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Operator [8]

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(Operator Instructions) And at this time, I have no callers in the queue. I'll turn the call back over to our host, Mr. Jeff Hastings for closing remarks.

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Jeff Hastings, SAExploration Holdings, Inc. - Chairman & CEO [9]

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Well, that was easy. Thank you, Norma. If there's no further questions, I'd like thank you all again for joining us today. We appreciate your support and your patience and we -- as we continue to integrate and implement the changes we've disclosed recently and discussed this morning. Looking forward to speaking to you again next quarter. Have a great day.

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Operator [10]

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And ladies and gentlemen, thank you for your participation in today's conference. You may disconnect. Have a wonderful day.