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Edited Transcript of SNS.V earnings conference call or presentation 21-Nov-19 4:00pm GMT

Q3 2019 Select Sands Corp Earnings Call

VANCOUVER Nov 23, 2019 (Thomson StreetEvents) -- Edited Transcript of Select Sands Corp earnings conference call or presentation Thursday, November 21, 2019 at 4:00:00pm 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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Conference Call Participants

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* Arnold Tenney

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Presentation

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Operator [1]

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Greetings, and welcome to the Select Sands Corp.'s Third Quarter 2019 Results Conference Call. (Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Zig Vitols, President and Chief Executive Officer for Select Sands. Thank you, sir. You may begin.

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

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Thanks, Sean, and good morning, everyone. We appreciate everybody is joining today's call. With me today, who will be speaking is Chief Financial Officer, Darren Urquhart. Yesterday afternoon, we released our earnings results press release for the period ended September 30, 2019, which is available on our website, www.selectsands.com.

Please note that any comments we make on 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, during today's call, we'll 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 that you may have.

Consistent with what other oilfield service providers with operations focused on the U.S. onshore have said during this earnings season, the third quarter represents another challenging period as drilling and completions or D&C activities further decreased from the levels seen earlier this year. An additional factor this year has been the continued focus of exploration and production companies to live within their cash flow targets and generate immediate attractive return. The results have been an intense effort by E&P companies to reduce their drilling and well development costs, including the cost of frac sand.

While Select Sands currently produces high-quality Northern White sands, another one of our challenges this year is that the demand for Northern White sand has become more of a niche product, while at the same time, a significant amount of new in-basin brown sand supply has come online in West Texas, and to a lesser extent, other basins across onshore.

Given this environment of increased supply and decreased demand, pricing has come down across the industry for both Northern White sand and in-basin sand. Most notably in the major consuming regions that being served, including the Permian Basin, Eagle Ford, Haynesville and MidCon. The effect can be seen in our -- each quarter of our 2019 results.

While we grew frac and industrial sand sales volumes by 32% from a modest 30,000 ton range in the second quarter to almost 40,000 tons in the third quarter, our gross sales price per ton, including transportation, revenue decreased 36%.

I would note that we saw the most pricing pressure on Northern White 100 Mesh, while 40/70 pricing remained at a more reasonable level. Given these top line challenges, during the third quarter, we continued with our aggressive cost containment and working capital preservation efforts that began more than a year ago. As evidenced, we saw almost a 12% decrease in SG&A from the second quarter and more than 23% decrease from our average level of quarterly SNG&A (sic) [SG&A] spending for 2018.

If we adjust for a collection of bad debt in 2018, our SG&A based on comparing to the average quarter last year would have gone down 31%. These reductions have been reflected across our organization at all levels and recently included a wage reduction for all salaried employees, both operational and corporate at the beginning of August, and individual Board member base monthly compensation cuts of 50% October -- effective October 1st for a total reduction of 80% since the first of the year.

My own salary has been halved from 2018 levels, and now includes a $5,000 per month salary deferment, effective at the beginning of November. With the potential opportunity of reimbursement at the discretion of the Board based on certain performance improvement.

Bottom line, everybody across the organization is clearly focused on financial performance, and I want to thank all of our employees and Board members for their continued hard work, contribution and support as we navigate the current environment.

Complementing our cost reduction initiatives, we also continue to look for opportunities to monetize non-core assets and increase the efficiency of our core sand town operations. Last month, we announced the sale of our 440 -- 457-acre Bell Farm property for $700,000.

Bell Farm was not being currently developed or mined by the company and was considered noncore and nonessential asset. The sale included a 20-year deed restriction to any sand mining on the property, with Select Sands retaining the exclusive right to lift that deed restriction within the 20-year restricted period.

The sales proceeds were used to pay down $252,000 in current debt, with the remainder being used to strengthen our balance sheet and fund the operations.

We're also evaluating the reconfiguration and consolidation of our current footprint of operations. An idled wet plant has been decommissioned and the equipment moved to the Sandtown quarry. The primary wet plant continues in full operational status.

Further, we are analyzing the cost benefit associated with moving other processing equipment to consolidate operations directly between the Sandtown quarry and the rail transload facility. The resulting efficiencies would significantly reduce interplant transportation costs.

At the current time, we are focused on ongoing M&A opportunities as well as quoting for new contracts for our Northern White sand. We should have a better idea during the coming weeks, but there is no guarantee that any deal will be concluded. If appropriate in the circumstances, we will continue consolidation of assets as opportunities allow us to make Select Sands more efficient and a competitive operation.

At the current time, we are focused on the RFP season, and we'll continue to do consolidation of assets as opportunity permits.

I'll now hand it off to Darren to discuss our third 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 third quarter press release. Third quarter revenue was $1.1 million versus $1.4 million in the second quarter. Cost of goods sold, excluding depreciation and depletion for the third quarter was $2 million as compared to $1.5 million in the second quarter. During the third quarter, the company determined to impair its 100 Mesh sand inventory by $215,000, which is included in cost of goods sold to reduce its carrying value to the lower of cost or market.

General and administrative expenses decreased from $541,000 in the second quarter to $478,000 in the third quarter as the company continues to trim costs. We reported a net loss of $2.0 million or $0.02 per basic and diluted share for the third quarter as compared to a net loss of $3.1 million or $0.03 per basic and diluted share for the second quarter.

Included in the third quarter loss is a $275,000 non-cash charge to impair the company's Bell Farm sand asset down to its sale price of $700,000. The Bell Farm was sold for cash proceeds of $700,000. The proceeds were used to pay down $252,000 in company debt, and the remaining balances were used for working capital purposes.

Turning to the consolidated interim statements of financial position. As of September 30, 2019, we had cash and cash equivalents of $1.3 million, inventory on hand of $2.1 million, accounts receivable of $580,000 and working capital of $1.6 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. As we look to the remainder of the fourth quarter, and consistent with consensus view, we expect U.S. onshore drilling and completion activities to be impacted by typical holiday seasonality and the continued effect of E&P budget exhaustion.

As such, we don't expect any notable recovery in operator spending until the new year, once operators' 2020 capital spending budgets are in place.

We're currently in the bidding cycle to supply our Northern White sand for longer-term contracts with both oilfield service companies that provide fracking services as well as to E&Ps.

If a Northern White sand contract has successfully concluded, we expect to start supplying early 2020. Based upon the feedback we have been receiving of late, we remain cautiously optimistic.

Our conversations with E&Ps and oilfield service providers confirm that there is -- continues to be a market for Northern White sand. As we have discussed on previous calls, certain E&Ps recognizes superior performance of Northern White sands given its higher crush strength and conductivity.

These are 2 key quality characteristics that are consistent with the quantity and the rate of hydrocarbon recovery over time. As such, we believe Northern White will retain an important share of the market.

How much of the share will be heavily dependent on the specific region or basin and targeted vertical depth of development.

We're also seeing increased -- increasing interest in our Northern White 100 Mesh sand in South Texas, Eagle Ford Basin as local sand in that region is continuing to be recognized as a relatively lower quality. We also see that oil and gas wells are being drilled to even deeper depths, including the Permian's lower Delaware or higher crush strength characteristics are favored.

With the greatest oversupply of in-basin sand being found in the Permian, it is also the fastest-growing basin in the U.S. and with additional oil and gas takeaway capacity continuing to come online through 2020, and a significant backlog of drilled but uncompleted wells, we expect the rebalancing of supply and demand to take shape over the next 12 months.

The Permian Brown sand will continue to be utilized in the Permian, but we see sufficient room for our Northern White sand niche following.

Complementing these increased drilling activities is the increased number of frac sand facilities that are being closed, particularly the closing of higher cost sand production plants in West Texas region.

This should also help bring the supply of frac sand into better balance with demand. To sum up, while these are currently challenging times, it does not change our view about the long-term value potential of our business. This remains a cyclical business, and we will continue to take the necessary steps to promote our financial health in this low part of the cycle.

More important, we fully expect that there will be a long-term demand for Northern White sand given its unique and preferable characteristics.

As such, we believe we are in or near the bottom of the cycle. While we are very upset with Select Sands' share price, we believe that we are positioning ourselves to benefit enormously as market conditions improve for Northern White sand due to our high quality and favorable location near many of the most prolific producing regions in onshore U.S. This results in a much lower delivered cost for our product offering -- offerings compared to traditional Northern White sand sources located in the upper Midwest of the U.S.

Finally, we continue to work on one or more M&A opportunities, one or more of which is advanced -- in advanced stages of discussions. These strategic discussions are primarily with in-basin sand producers that are opting to sell operations or see the synergistic benefits of combining with a high-quality Northern White sand producer that is favorably located in proximity to key basins in the southern U.S.

Of course, any potential M&A deal will be based upon what we believe provides the best risk-adjusted return for the company in the current circumstances. There is no assurance that any of these M&A opportunities will be finalized.

With that, I'll open the call up for questions. Sean?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today will come from Arnold Tenney.

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Arnold Tenney, [2]

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Zig, I have 2 questions. One is in reference to the balance sheet, the other question is in reference to cash flow and revenues.

So I'll start with the revenue question and cash flow first. If I look at the second quarter, it seems that we've burned about -- between $1.4 million and $1.5 million in cash. We now have about -- and this is as of September 30, I understand, we have about $1.3 million in cash.

And if the fourth quarter is no better than the third quarter, it would seem that we'd be out of cash by the end of the fourth quarter. I know that we did sell the Bell Farm during the quarter, so that increased our cash position from the September 30 statement. So can you just give us a feel for what the company will look like on a cash basis at the end of the fourth quarter?

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [3]

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Yes, absolutely. That's a great question. We're focused on that. We were pretty close on predicting where our cash position would be at the end of September 30. And I would say that management has been fairly good at projecting cash positions 90 days rather than our 120 days in advance and actually 6 months in advance.

We -- our projection currently is that on December 31, we will be somewhere between $900,000 and $1 million in cash on hand. We -- some of the effects of cost reductions have not been totally recognized yet, or they haven't taken full effect like some -- like wage reduction and so forth.

We're also taking more control over -- making sure that there's no overtime out there. Our folks are working somewhere around 40 to 44 hours a week, which in the old days, you saw over times that were reaching or, at least, total hours per week would be somewhere 50, 60 hours per week was not untypical.

So everybody is contributing with minimizing the outflow of cash. The whole idea is to get through to the end of the year, which the $1 million or $900,000 is going to be in a good position because we're very optimistic on what could happen with the annual contracts next year as we go through the RFPs and quote them. Is that okay?

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Arnold Tenney, [4]

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Yes, that gives me some comfort that we're operating into the first quarter of 2020, it's still hard to say 2020 for an old guy like me. But it's -- it does give me comfort, and I'm hoping it gives everybody else comfort because I know I was asked that question by numerous friends.

The other question that I had, had to do with the balance sheet. So at the beginning of the year on long-term debt, we had a little over $3.7 million of long-term debt.

That's been reduced to just under $2.3 million long-term debt, which is -- that's a nice sign, very nice sign paying down that long-term debt. However, the current portion of the long-term debt is now $1.8 million. Can you give us an idea of how you're going to address the payment of that $1.8 million? Or if maybe you're in negotiations with your bank to extend and get new terms?

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [5]

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Well, we're not announcing anything or we're not sharing that information, but that all has been factored in. But we feel very comfortable and be able to handle that. The reason it ended up being short-term debt was that it just kind of just flipped over that line, and got into short term from long term just in the recent month.

Currently, we're running -- just for your information, as of today, we have $1.3 million in cash. So we haven't depleted anything since September 30 to any degree.

And we actually -- we'll see and take into consideration the long-term debt or in a short-term debt, we actually see a positive cash flow at the end of the first quarter. We're looking at right now ways to reduce more debt. I think that it would be unfair to say that we will be able to retire some debt at some point in the near future, but we'd like to wait to announce that when we've actually secured the solution for that.

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Arnold Tenney, [6]

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Right. Okay. That's good. So based on that, it would seem, given our current market cap of about $1.5 million, we have almost as much cash on hand as we have market cap today, which certainly to me makes the stock look pretty cheap.

I would like to take this opportunity also, Zig, to thank you and all of the -- your staff for the reductions you're currently taking.

I know this is difficult for everyone to do. Having been involved in business my whole life, I've been there before, so I know how difficult this is. And I wish you all the luck and know we need some luck from the entire industry to come back and have sand become a favorable commodity again. Thank you.

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [7]

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Thanks, Arnold. And it gives me the opportunity too, to further thank our team. When you consider -- right down to the hourly worker, everybody has -- we have got a team now that is very focused on making sure that we're not overspending anywhere, that we're saving wherever we can. And like I said, every salaried person in the organization took a salary reduction.

And I consider that to be kind of a further dedication to the team. And when we turn this around, then those people should be recognized. But I can't believe the amount of work that they're putting in now is much more. We spent a lot of time working on the deals we're working on right now. There's a lot of extra hours being put in, and nobody is slacking off. So I appreciate you mentioning that, and I too thank the team.

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Operator [8]

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(Operator Instructions) At this time, there are no further questions in the question queue, and this will conclude our question-and-answer session. I would now like to turn the conference back over to Mr. Vitols for any closing remarks.

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Zigurds R. Vitols, Select Sands Corp. - President, CEO & Director [9]

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Thanks, Sean. Well, we'd like to thank everybody for joining today's call. I appreciate the support of our shareholders in these trying times. We look forward to speaking to you, everyone, with any material updates and -- when we report our fourth quarter results.

I wish everybody a safe and happy Thanksgiving and generally holiday season. And as usual, we are always open for phone calls, to arrange conference calls with investors, and I would encourage you to get a hold of Kin Communications so that we can arrange those calls so that you can get further color on what we're doing as we announce further movement in the company. Thank you.

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Operator [10]

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Thank you. This will conclude today's conference, and you may now disconnect.