Ranger Energy Services Inc (RNGR) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Ranger Energy Fourth Quarter 2018 Conference Call. (Operator Instructions) Please note that this event is being recorded. I would now like to turn the conference over to Darron Anderson, President and CEO. Please, go ahead.

Thank you, operator. Good morning, and welcome to Ranger Energy Services Fourth Quarter 2018 Earnings Conference Call. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. On the last quarterly call, I characterized Q3 as improving metrics across all aspects of our business. This quarter's results not only demonstrate the improving metrics, but also the strength and diversity of our portfolio to deliver this performance during a seasonal low activity period and declining oil prices. I would like to start off the call this morning by bringing your attention to some of more significant events of the quarter.

First, modification to segment reporting. As you probably read in our press release last night, we modified our reporting by adding a third segment. Today, and going forward, our reporting segments are: High specification rigs; completion and other services; and processing solutions. This change was driven by the growth and material contribution of select service offerings focused on completion-related activity, which are now being captured with our new completions and other services segment.

Next, high-spec rig rates. Our service rig rates continued a modest rise, despite our 24-hour completion rig activity, which generally carries a -- produces a higher hourly revenue rate, experiencing a decline in hours across the second half of the quarter.

Another great event for the quarter is our completion and other services performance. Activity remains strong here, specifically within our Mallard wireline business where we continue to gain market share as validated through a 17% growth in stage count for the quarter.

Next, our Processing Solutions. This long-term production-related segment experienced higher rates, greater utilization and unit count addition, all leading to considerable revenue and gross profit growth.

SG&A reduction. Proactive management of our SG&A cost with a continued focus on back-office efficiency contributed to the overall success of the quarter. And finally, our Q4 results establishes a strong launching point for 2019 cash flow generation. We're pleased to have grown revenue and EBITDA during a challenging quarter for the market.

Our focus on continuance of this performance trend, the conclusion of our 2018 growth capital program, and expected minimum maintenance CapEx spend, considerably opens up our free cash flow generation in 2019.

Now to give you a little more detail on the quarter. Revenue for the quarter increased 44% to $85 million from $82 million in Q3. Within our high-spec rig segment, rates continued up with a 4% increase for the quarter.

However, those rate increases were offset by 13% sequential decrease in rig hours. A reduction in rig hours is typically expected in the fourth quarter due to shorter days, holidays and declining year-end customer budgets.

All of our geographical regions experienced a similar percentage reduction hours with the exception of 2 locations that produced slightly positive rig hour growth and the Permian, which had a reduction in rig hours created into the average. Our Permian reduction hours were driven by 2 factors.

First, we had a couple of fully utilized 24-hour rigs conclude their 2018 programs in mid-November; and second, our strategy of high grading our customer base in the Permian led to a higher decline in production rig hours versus our other locations. While our Permian fleet has not returned to its high-performance mark of October, it has rebounded from its December and January lows with the reactivation of select 24-hour rigs and redeployment of production rigs to higher rate customers.

We remain focused on aligning Ranger's high-quality rig asset base to customers that share similar operating values, have large sustainable work programs and is willing to pay a fair value for services delivered.

I look forward to reporting our progress on our next call.

Within our wireline and other services segment, our Mallard branded wireline completion business continues to produce market-leading results.

We entered the fourth quarter with 10 completion wireline units and exited with 12. All of our units continue to work on a dedicated basis across a diverse set of blue-chip Permian customers.

Our operational execution continues to facilitate market share gains without sacrificing price.

As I mentioned earlier, our stage count increased 17% sequentially against a backdrop of modest overall market decline.

Our pump down unit count increased as we took delivery of our third and fourth spreads during the quarter.

These units are paired with our wireline trucks and are exposed to the same customer base, resulting in high utilization and strong revenue. Our remaining services within this segment performed in line to the expected modest seasonal declines.

And finally, our Production Solutions segment performed extremely well this quarter. As a reminder, this business consists of our mechanical refrigeration units, or MRUs, and gas coolers utilized in longer-term production operations. These assets typically remain on a committed rental basis for several months up to a few years. On previous calls, I've highlighted the transition of expiring contracts to new higher priced contracts.

Our fourth quarter results demonstrate the impact of the higher price contracts, higher asset utilization levels, the addition of 2 MRUs, and higher mobilization and installation charges as a result of these asset movements.

These improved metrics drove a 58% quarter-over-quarter revenue growth. Moving onto our earnings. We were, once again, very pleased to continue our positive momentum through Q4. Adjusted EBITDA increased 9% to $13.7 million from $12.6 million in Q3, while margin increased from 15.3% to 16.1% during this same time period.

Brandon will walk you through the details by segment in a moment.

On our last call, I discussed G&A structure refinements implemented in early Q4 and our continuous improvement to -- on overall efficiencies. As demonstrated by our 5.4% reduction in G&A quarter-over-quarter, our efforts are materializing into results.

In summary, Q4 was another very solid quarter with continued positive momentum. And while we are pleased with our progress across 2018, additional work and opportunities lie ahead. I will now turn the call over to Brandon to discuss our financial results in detail.

Thanks, Darron, and good morning to everyone on the phone. It is again my pleasure to be running through the details of another solid quarter from the Ranger team. Let's say first off -- let's hit a housekeeping item before we get into the details. As Darron noted, we have added an incremental reporting segment. Historically, within our Single Well Services segment, we have disaggregated rig and other service revenue and operating costs in our prepared comments, but have not fully broken out those business lines into segments in our other disclosures.

Given the growth of our nonrig service businesses, it makes sense to formalize the separation of the rig and the nonrig service businesses into separate segments. So this quarter and going forward, we will break out the previous well-servicing segment results into 2 separate segments, high-spec rigs and completion in other services. The Processing Solutions segment will continue as we have historically reported it. Now moving on to the results. I'll reiterate the incremental segment-related information included in the press release, while adding some additional information and color along the way.

So back to the top of the queue. As mentioned earlier, on a consolidated basis, we saw another quarter of both revenue and EBITDA growth. Sequentially, revenue moved up 4% or $3 million from $82 million to $85 million, while EBITDA margins moved up from 15% to 16%. Combined, the revenue increase plus margin growth pushed adjusted EBITDA up 9% from 12.6% to $13.7 million. Now moving on to the segments, starting with revenue.

At the segment level, the sequential revenue increase was driven by increases in both our completion and other services segment and our Processing Solutions segment. That was partially offset by a decrease in high-spec rig revenue. Specifically, high-spec rig revenue was down 9% or $3.4 million on a 13% decrease in period revenue hours, which went from 74,200 to 64,900 hours. That was partially offset by a 4% increase in hourly rig rate, which went from $519 an hour to $538 an hour. The drop in period hours was driven by expected seasonal declines, along with the incremental Permian Basin impacts that Darron noted earlier.

For the quarter, our rig fleet was up an average of 2 rigs from 139 rigs in Q3 to an average of 141 rigs in Q4. The combined effect of the drop in hours and the increase in rig count moved our Q4 rig utilization metric down from 76% to 65%. In the completion and other services segment, revenue was up 11% or $4.3 million. The driver of this growth was our completions focused wireline fleet, which added another 2 units during Q4 to bring Q4's average up to 11 units and to end the quarter at 12 units.

As Darron noted, wireline stage count was up 17% quarter-over-quarter implying another quarter of market share gains against the backdrop of stagnant declining Permian completions count.

And finally, moving to Processing Solutions segment.

Here, revenues are up -- were up sequentially, a very strong 58% or $2.3 million. Multiple drivers contributed to this revenue increase. The addition of 2 MRU units, bringing the fleet count to 29, and a utilization increase from 85% to 92% both contributed to this growth. However, the majority of the increase was driven by the movement of existing MRUs to generally higher priced contracts at new locations, resulting in both a 9% increase in average MRU contracted price and a large uptick in mobilization and installation revenue, while that increased installation revenue will not consistently repeat going forward, as higher margin contracts will be with us for a while.

Now moving on to the bottom line details. Overall, consolidated segment adjusted EBITDA; that is, before corporate G&A, saw a growth in line with revenue expansion at 4% quarter-over-quarter. Here a sequential EBITDA growth in production services and a completion in other services segments were partially offset by the seasonal decline in high-spec rigs.

Turning to margins, consolidated segment margins, this is again before corporate G&A, were up slightly at 24%, despite the expected seasonality in the high-spec rigs segment.

Breaking down these margins into segments, high-spec rigs saw a slight decrease in margins from 15% to 14.5%. Completion and other services EBITDA margins were down from 29% to 26% with a Q4 seasonal impact of a modest downtick in revenue for the service lines outside of the Mallard branded wireline business that were not fully offset by decreases in cost.

The Processing Solutions segment margins moved down slightly from 55% to 54%. Offsetting the aggregate decline in operating segment EBITDA margin was a nice sequential decline in G&A expense. G&A expense was down 5.4% sequentially to an adjusted $6.4 million, which took G&A as a percentage of revenue down from 8.2% to 7.5% in Q4. Importantly, we anticipate this downtick in G&A expense to be sustainable as we move forward through 2019.

On a consolidated basis, this $700,000 bridge from the $13 million of EBITDA to our reported adjusted EBITDA print of $13.7 million includes just 2 items; $500,000 of stock-based comp; and $200,000 of severance costs taken in the fourth quarter and associated with our early fourth quarter G&A efficiency efforts.

And finally, on the net income line for Q4, we reported net income of $1.7 million, a decrease from Q3's $4 million of net income. The sequential decrease was primarily driven by $1 million of increase in interest expense and $2.3 million increase in depreciation, largely driven by year up true-ups and adjustments.

Now moving onto balance sheet items. First, CapEx. Total CapEx recorded for the quarter was approximately $10 million. That breaks down into $4 million related to our completion and other services segment, which includes 2 wireline units, 1 set of pump down pumps and associated ancillary equipment; $2 million related to the high-spec rigs segment, which includes ancillary equipment for a newly delivered rig and incremental ancillary equipment for existing rigs; $2 million associated with the addition of 2 incremental MRU processing units in our Processing Solutions segment; and maintenance CapEx for the fourth quarter of $700,000. This is an uptick from Q3's maintenance CapEx number, but in line with full year expectations of maintenance CapEx spend of just under $2 million. Also, the additions of new leased vehicles to support growth along with the replacement of some existing vehicles totaled less than a $1 million this quarter, if taken on a capitalized basis.

Next moving to liquidity. We ended Q4 with no change to the $18.5 million drawn on our existing revolving credit facility. A year-end capacity on that facility of $36 million left to us -- left us with availability here of approximately $18 million. Our cash position was down just slightly quarter-over-quarter, from Q3's $5 million to Q4 ending balance of $2.6 million. Those 2 items combined gave us just over $2 million -- sorry, just over $20 million of liquidity at the end of the year.

Now some comments around our debt. As we discussed on the Q3 call, we drew down the remaining $18 million of capacity on our $40 million secured financing agreement.

As planned, this cash inflow was used to pay the remaining balance of our outstanding high-spec rig purchase obligation.

And I'd like to pause here. I think it's a good place to comment on a couple of items on our balance sheet: the payables associated with that new rig -- new-build rig program and our debt structure itself. First, our new big -- our new build high-spec rig program payables. As we roll into 2019, all of our new-build rigs have been delivered and all related payables have been satisfied.

Finalizing the payments on the new build program removes a complexity that has been with us since our IPO. As a reminder, the new build rig program kicked off nearly 2 years ago and had a series of deferred payments recorded as payables on our balance sheet, and those deferred payments had created some confusion from time to time. That payable liability is now gone, fully replaced with the $40 million secured financing facility, removing any residual issues that, that might have caused.

Secondly, I'd like to highlight that the $40 million secured financing facility itself was neither intended nor designed to be a permanent part of our capital structure, only a stopgap to bridge our new build program to the first years of cash flow generation from those assets. As a reminder, the $40 million facility fully amortizes over a 4-year period. By year-end 2018, the balance was already down $2.5 million to $37.5 million and will be reduced an additional $10 million by the end of this year.

We also have the option to prepay that debt as early as 12 months after each of the draws were made, at a modest 2% premium. Now while we are not implying a free cash flow forecast, we are pointing out that between $18.5 million of available revolver pay down, $10 million of amortization and the ability to prepay the balance of our secured facility by year-end 2019, we have plenty of opportunities to further pay down our already modest debt balance as we move through the year. That's it for my prepared comments, and now I'll turn it back to Darron.

Thank you, Brandon. So looking forward, on our last call in early Q4, the seasonal slowdown and Permian takeaway constraints had not impacted us as an organization. However, we were cautious to guide that the second half of the quarter did pose some risk. In our review of the quarter, we did see pockets of impact, but nothing so material to impede our improving performance. I'm pleased to report that we have moved past the trough of the late Q4, early Q1 '19 activity declines. While our optimism is high moving into this new year, we remain cautious and aware of the discipline our customers are implementing within their 2019 budgets and their focus on generating cash. While this may appear to be a restraint to a service organization's performance, we view this as a strategic opportunity. As you're aware, Ranger made significant capital investments across 2017 and '18. Our new purpose built asset base is a diverse offering that services completion through long-term production operations and designed for long lateral high-volume efficient operations. Prudent customers need maximum production and service efficiency out of their focused capital programs. Service companies who can bring these efficiencies with a high-quality asset base have the opportunity to garner market share without sacrificing price.

We believe we're in a great position to do this. Here is the focus for 2019. I will not go into the detail of our current operating strategies, but I will say we are highly focused on execution. This execution covers everything from a focus on customer alignment in longer-term contracts, to operational execution on location; continued real-time data analysis for quicker decision-making; select differentiating technologies; and process improvements. I look forward to providing you tangible results of these strategies across 2019. And finally, as Brandon hit on during his comments, strong cash flow generation is of highest focus in 2019. We are winding down our almost 2-year new build program, which will have a significant impact on our free cash flow going forward.

To further support cash generation, our new high-quality asset base requires minimum maintenance CapEx. Growth CapEx will be minimal as well and directed toward term contracts with quick payback and high cash flow generation.

Capital discipline, combined with continued improving results as demonstrated in the fourth quarter, has Ranger positioned very well in 2019.

And with that, operator, we would now open up the call for questions.

(Operator Instructions) The first question comes from Tom Curran from B. Riley FBR.

Operator, if he's talking we can't hear a question.

We are going to take John Daniels (sic) [Daniel] from Simmons & Company.

I am not muted. It happens to the best of us. A lot of what we've heard from your wireline peers has been a bit more turmoil, utilization pressure, pricing pressures. You guys have built a very strong business with Mallard. Can you just talk about opportunity sets there? Why the business is doing so much better relative to peers? And just how you see that business evolving over the next several quarters?

Yes. So first of all, I have to give accolades to our Mallard team. They're doing an absolutely wonderful job in the Permian. I think it's a combination of again, the job that they're doing, it's a combination of the tools, the technologies that we're using, and I think most importantly, it's the efficiency that we're bringing to our customers. So as we've talked about on previous call, John, stage count, how many can you get done in a 24-hour period. And I think we lead the market with select frac companies on producing some of the highest stage count numbers on a 24-hour basis. And it's strictly a performance issue. And as long as we're producing that performance, it's allowing us to stay fully utilized. And you're right. Most wireline companies aren't having that level of success in the Permian. We're not resting on our performance, [continuing] our focus every day, and execution every day. So we look at that business, we -- we're very optimistic on the business moving forward. Yes, we have opportunities to continue to grow within the base, [that's on] the basin. And we'll look at those opportunities on an ongoing basis. But as I mentioned in my comments, our primary focus is cash flow generation. We've put significant assets to work in that service line, and we want to enjoy the rewards of the assets we've put in service.

The next question comes from Derek Podhaizer from Barclays.

Just turning back to the high-spec rigs. Can you just talk about how many rigs you had on completions this quarter? I think last quarter, you had, had about 20. And where did that trend to this quarter?

Yes. I think probably saying the number of rigs as we realize is probably not the correct thing because if we have a rig that works for 2 weeks, is that counted as a number or not. I think I'd really like to talk about it more in terms of hours. Hours relative to Q3 were relatively flat.

Actually, slightly up relative to Q3. Now when you look at the Q4 results though, it was a tale of 2 results there. And what I mean by that is the first half of the quarter was very strong, and we saw softening in the second half of the quarter, but net-net, slightly up relative to Q3 on an hours basis.

Okay, fair enough. And then just turning over to free cash. I know it's going to be a main focus of yours as you kind of put the end on the growth CapEx and move more into a harvest mode, optimization mode. Can you maybe talk about the different levers that you can pull to really generate some meaningful free cash flow? Just specifically, think about working cap. I see you have an inventory balance on now. What type of contribution can you see from that throughout the year? And then if you can just go into what is embedded in your growth CapEx plan? I know you highlighted there's some modest asset additions. And just thinking about it, do you still have 1 rig left to be delivered or was that already delivered earlier in the year? And are there other assets that you plan on growing throughout the year?

Derek, this is Brandon. Working capital, in terms of what we are forecasting and thinking about, I would assume that, that would be largely flat as we move through 2019. There might be a little bit of incremental consumption in terms of revenue growth as we move through the year, but that would be it. We've done a good job of managing working capital through 2018, and we expect to kind of do a similar job through 2019. In terms of growth capital, I'll probably let Darron comment on the specifics. But generally speaking, we are wrapping up kind of late deliveries on our 2019 program. We have all our high-spec rigs delivered at this point, so not expecting any incremental rigs on that front. And there is very little in terms of new CapEx on a 2019 basis.

Yes, yes, I echo that. I think we're entering '19 and we'll operate very conservatively from a growth capital standpoint. Now that being said, there is contract opportunities that we're constantly going after. We have a high-quality asset base, some of those opportunities may require some additional ancillary equipment, but they will be targeted small investments that have very, very quick payback high cash flow opportunities. So when you think about our capital program, maintenance, growth CapEx, you need to think about it, in the low teens-type numbers for 2019, so very, very conservative relative to '17 and '18.

Okay. Great. And then just last one for me, going off of John's question in wireline, in your execution that you're experiencing there. Is it there a technology advantage? We've heard about quick lat systems and reducing time between wells and well pads. Can you maybe talk about the technology that's within your Mallard business? And what you can see throughout the year to enhance that technology?

Well, I won't give away all of our secrets, but I will say that our asset base is built around efficiency. So we are utilizing the latest technology to achieve those efficiencies whether it's our surface control systems or whether it's our downhole gun system. So again, the team is doing an outstanding job. The execution is there. The customers are recognizing execution by delivering utilization and keeping our pricing at nice sustainable levels.

(Operator Instructions) Our next question comes from Tom Curran from B. Riley FBR.

Can you hear me now?

We can hear you, Tom.

Oh, that's a relief. I don't know what the issue was. It wasn't with my phone hardware. Darron, I just hopped back on, would you please clarify -- it sounded as if for total CapEx you were saying that you would expect it to come in, in the low teens, would that mean $13 million, $14 million for total 2019 CapEx?

Yes. I mean, again, don't want to give specific numbers, but in that low teen that you described is a fair assessment. Again, that's maintenance CapEx and growth CapEx combined. So, again, our focus is free cash flow. We have a nice high-quality asset base. You see the performance we delivered on the wireline side, the Processing Solutions side. We still have some work to do on the high-spec rig side. We have some capacity there that we need to get consumed. Again, there is contract opportunities that we're working on every day that I'm hoping to be able to report on next quarter, the results of those opportunities. So again, our asset base is a nice asset base and free cash flow generation is the focus for '19.

Right, and thank you for explicating all of the uses for that growth CapEx. It would be behind that budget. If I just take 4Q adjusted EBITDA and annualize it that's $55 million or even current consensus of $50 million. Let's say the total CapEx budget comes in at $14 million. It doesn't sound as if you would need much more incremental working capital. But let's put $5 million aside for that and round up to $20 million. You're still looking at net cash flow then, free cash flow to work with, of $30 million to $35 million. Is there any reason why right now, if you haven't already, you wouldn't commit to being able to return at least some portion of that to shareholders? Or at a minimum, a preferred method for doing so?

Well, I'd say, your -- I follow your math, and I agree with your math. Your $55 million run rate for the fourth quarter is the right starting point. I would say that, that was in a very difficult market. And so our objective is to continue to improve performance outside a difficult fourth quarter market. So yes, your math is correct in cash flow generation, it should be achievable there. Use of that cash, at the Board level, we will figure out what is the right strategic thing to do with that cash. Return it to shareholders, growth opportunities from acquisition standpoint, there is nothing that's off the table right now. Like I said, our primary focus is to get the cash produced and then we will make the prudent decisions that increases the value for the organization.

This concludes our question-and-answer session. I would like to turn the conference back over to Darron Anderson, President and CEO for any closing remarks.

Thank you. In closing, I sincerely want to thank our 1,100 plus team members after doing a wonderful job that allowed us to produce these results in a difficult quarter for the market. So absolutely outstanding job by the team, and I want to thank all of our phone participants today for your interest and continued support of Ranger. So with that, we will conclude the call, and have a wonderful day, everyone.

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