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Edited Transcript of SNS.V earnings conference call or presentation 27-Aug-19 3:00pm GMT

Q2 2019 Select Sands Corp Earnings Call

VANCOUVER Oct 1, 2019 (Thomson StreetEvents) -- Edited Transcript of Select Sands Corp earnings conference call or presentation Tuesday, August 27, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Darren Charles Urquhart

Select Sands Corp. - CFO

* Zigurds R. Vitols

Select Sands Corp. - President, CEO & Director

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Presentation

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Operator [1]

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Good morning, and welcome to the Select Sands Corp. Second Quarter 2019 Earnings Conference Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Zig Vitols, President and Chief Executive Officer. Please go ahead.

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [2]

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Thanks, Chad, and good morning, everyone. We appreciate everybody joining today's call. With me today is our Chief Financial Officer, Darren Urquhart. Yesterday afternoon, we released our earnings results press release for the period ending June 30, 2019, which is available on our website, selectsands.com.

Please note that any comments we make in today's call regarding projections or our expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our SEDAR filings.

In addition, in today's call, we will reference certain non-IFRS financial measures. Reconciliation of these non-IFRS measures to the most directly comparable IFRS measures are included in our earnings release. Finally, after our prepared remarks, we'll answer any questions you may have.

As we discussed over the past few calls, the last year has been difficult for sand producers across the industry, including ourselves. A significant amount of new in-basin brown sand supply has come online over the past 18 months or so in the West -- in West Texas and to a lesser extent in other basins across onshore U.S. This has upset the supply-demand balance for frac sand, which has resulted in a substantial decrease in pricing across the industry, especially in our major consuming regions we've primarily served, including the Permian Basin, Eagle Ford and MidCon.

We generally anticipate similar weak results through the end of 2019. We are talking to our customers and they are telling us that the substantial portion of the 2019 capital budgets available for drilling and completion of wells has been spent. We're also trying to be conservative in our projections. So we haven't included certain possible spot contracts over the next few months that we have been working on.

While in-basin brown sand has been in recent favor, we're also seeing that given the superior characteristics of Northern White Sand consistent with what we produce, Northern White Sand will retain an important niche share of the market. We also see that oil and gas wells are being drilled to even deeper depths, including the Permian's Lower Delaware in which E&Ps are clearly seeing the benefits of 40-70 mesh Northern White Sand.

I would note that demand for our 100 mesh sand in South Texas is also seeing renewed interest as local sand is continuing to be clearly recognized as lower quality.

Starting in late Q3, continuing into Q4, we'll be in the bidding cycle for longer-term contracts with oilfield service companies that provide fracking services as well as E&Ps. These contracts are expected to start in early 2020. Based on feedback received to date, we remain cautiously optimistic.

We are seeing niche market and returning demand by some operators for Northern White Sand, which will continue re-adoption as E&Ps recognize its superior performance in driving optimal hydrocarbon recovery over the life of the well. We've continued to closely monitor oil and gas demand and production in Southern U.S. The general consensus is that drilling of wells will continue in a growth mode for 2020. The pipeline bottleneck, which has interfered with the transportation of produced supply out of the market in the Permian should be lessened by next year when a reported additional 2.6 million barrels per day of pipeline capacity will come online.

Looking at the sales mix for Q2 versus Q1, our 100 mesh product sales balance increased from 29% to 51% of total frac and industrial sand sales. We'll likely sell more 100 mesh Northern White Sand in Q3 through the remainder of the year along with the 40-70 sales.

During the second quarter, we continue with our aggressive cost containment and working capital preservation efforts that began during fourth quarter of 2018. This includes remaining at single shift operations at our facilities in Arkansas to control overhead, adding workers to core production team only as required and handling any specific demand surges with overtime. I want to thank our operations team for their continued hard work and dedication during this challenging period.

Our weekly cash burn rate was reduced significantly since the furlough of approximately half the hourly workforce in late 2018. The burn rate that includes debt repayments has been reduced significantly.

Based on the current trajectory, we expect cash flow to be approximately -- cash to be approximately $1.5 million at September 30. We're targeting additional cost savings in Q4 that will result in a positive cash balance as we move into next year.

I would also note that construction on our Independence Property expansion project remains on hold, given the strong return on capital on total investment of no more than $4.5 million we'll quickly evaluate and resume to complete this important project once frac sand demand returns to appropriate levels.

Finally, the company is continuing to work on various M&A opportunities, some of which are in advanced stages of discussions. Most of the opportunities we are considering can be accomplished without equity dilution. Of course, there is no assurance that any of these opportunities will be finalized. We look forward to keeping you appraised of our progress.

I'll now hand it off to Darren to discuss our second quarter financial results. Darren?

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Darren Charles Urquhart, Select Sands Corp. - CFO [3]

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Thanks, Zig. Looking at the summarized consolidated interim statements of operations and comprehensive loss and income table included in our first quarter press release, second quarter revenue was $1.4 million versus $1.6 million in the first quarter.

Cost of goods sold, excluding depreciation and depletion, for the second quarter was $1.5 million as compared to $1.7 million in the first quarter. The decrease was substantially associated with lower sales volumes in the second quarter.

Excluding customer shipping costs that are a pass-through from revenue from both periods, our second quarter cash cost of goods per ton of frac and industrial sand sold increased approximately 2% from the first quarter. Contributing to this slight increase was the absorption of fixed and semi-variable costs over reduced number of tons sold.

General and administrative expenses decreased from $619,000 in the first quarter to $541,000 in the second quarter. Excluding noncash share-based compensation, second quarter general and administrative expenses decreased to $524,000 from $562,000 in the preceding period.

We reported a net loss of $3.1 million or $0.03 per basic and diluted share for the second quarter as compared to a net loss of $807,000 or $0.01 per basic and diluted share for the first quarter. Included in the second quarter loss is a $2.1 million noncash charge to derecognize the company's deferred income tax asset until sales improve. The company's net loss before income taxes for the second quarter was $1 million.

Turning to the consolidated interim statements of financial position. As of June 30, 2019, we had cash and cash equivalents of $1.9 million, inventory on hand of $2.7 million, accounts receivable of $897,000 and working capital of $3.3 million.

I will now turn it back to Zig for his closing comments.

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [4]

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Thanks, Darren. To date, in the third quarter, we have seen continued volatility for the U.S. onshore drilling and completions activities similar to what we've heard from other frac sand providers on their recent earnings calls. We expect this trend to continue for the remainder of 2019. More specifically, as it relates to the fourth quarter, we anticipate completion activity levels will be impacted by E&P budget exhaustion along with typical weather and holiday seasonality.

Looking beyond the fourth quarter, we're seeing a number of positive signs that indicate the environment we are currently operating in will improve. Consistent with the comments of other Northern White Sand producers, we are seeing growing customer interest for premium quality White Sands for use in multiple southern U.S. basins.

Considerable attention continues to focus on long-term utility of in-basin brown sands and Northern White sands. We fully expect Northern White sands will continue to play a critical role in the effective development of unconventional shale plays for many years to come, given its unique characteristics.

As compared to locally sourced brown sand, Northern White provides higher crush strength and conductivity. These are 2 key quality characteristics that are consistent with the quantity and rate of hydrocarbon recovery over time.

We believe Northern White will be preferred in certain E&Ps and the Eagle Ford and the MidCon with both in-basin brown sand and Northern White Sand being used. The same holds for the Lower Delaware basins in the Permian where 40-70 will retain a niche in these relatively deeper wells and will supplement in-basin brown sand. We expect in-basin brown sand will continue to be most effectively utilized in the shallower basin.

Looking more specifically at the Permian, over the remainder of 2019 and in 2020, we expect to see positive benefits as pipeline infrastructure continues to come online. This will allow for increased completions activities with the result being continued higher frac sand demand as E&Ps further address their significant inventory of drilled, but uncompleted wells. Combined with an expected slowing of new sand capacity coming online, the result should be a sizable decrease in the oversupply situation in West Texas basin sand.

This view is consistent with forecasters that believe the West Texas in-basin sand capacity additions will remain relatively flat, while drilling and completions activities absorbed recently added production, which will help bring supply and demand more into balance. Having said that, this process will take -- clearly take some time.

As drilling continues, wells are increasingly going deeper where Northern White sands have increased appeal compared to in-basin offerings in many oilfields. In the future, Northern White sands will benefit with deeper wells. Other actions are being contemplated to bring about future cost status that could put Select Sands clearly in a low-cost provider category.

A lower cost position combined with a transportation advantage will put the company in the forefront of preferred Northern White Sand that has typically been sourced from the upper Midwest.

In conclusion, we continue to expect there will be a long-term niche demand for Northern White Sand given its unique and preferable characteristics. More importantly, we are in a solid position for long-term success as market conditions improve given our favorable location in many of the most prolific producing regions in onshore U.S. This results in a much lower delivery cost for our product offerings as compared to traditional Northern White Sand sourced -- sources located in the Upper Midwest.

And with that, I'll open it up for questions. Chad?

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Operator [5]

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(Operator Instructions) All right. Showing no questions at this time, I'd like to turn the call back over to Zig Vitols for any closing remarks.

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [6]

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Thanks, Chad. We'd like to thank everyone for joining today's call and appreciate the support of our shareholders as we navigate through these challenging times. We look forward to speaking to everyone with any material updates and, in any event, about 3 months' time when we will report our third quarter 2019 results. Thanks again, and have a great day.

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Operator [7]

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Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.