Trican Well Service Ltd

TSX:TCW

Earnings Call Transcript 2019-Q1

[Operator]

Good morning, ladies and gentlemen. Welcome to the Trican Well Service First Quarter 2019 Earnings Results Conference Call and Webcast. As a reminder, this conference call is being recorded. I would now like to turn the meeting over to Mr. Dale Dusterhoft, President and Chief Executive Officer of Trican Well Service Ltd. Please go ahead, Mr. Dusterhoft.

[Dale M. Dusterhoft, President, CEO & Director]

Thank you very much. Good morning, ladies and gentlemen. I'd like to thank you for attending the Trican Well Service First Quarter 2019 Conference Call. Here is a brief outline of how we intend to conduct the call. First, Robert Skilnick, our CFO, will give an overview of the annual and quarterly results. I will then address issues pertaining to current operating conditions and near-term outlook. We will then open the call for questions. Mike Baldwin, our Executive Vice President, is also available to answer questions. I'd now like to turn the call over to Rob to discuss the overview of the financial results.

[Robert Skilnick, Chief Financial Officer]

Thanks, Dale. Before we begin, I'd like to point out that this conference call may contain forward-looking statements and other information based on current expectations or results for the company. Certain material factors or assumptions were applied in drawing a conclusion or making a projection as reflected in the Forward-Looking Information section of our first quarter 2019 MD&A. A number of business risks and uncertainties could cause the actual results to differ materially from those forward-looking statements and financial outlook. Please refer to our 2018 Annual Information Form and the Business Risks section of our annual MD&A for a more complete description of business risks and uncertainties facing Trican. Our first quarter results were released this morning and are available on SEDAR. Canadian industry activity increased relative to the fourth quarter of 2018. Improved activity and aggressive cost-cutting measures contributed to improved sequential financial results. We continue to focus on further cost-saving opportunities beyond the more than $23 million of annualized savings realized to date. We will continue to review all opportunities to reduce cost and improve business operations. We also continue to work on ways to reduce our idle assets. During the first quarter of 2019, we monetized approximately $4.5 million worth of idle assets that were no longer relevant or required in Canada. We also will be reactivating 2 previously idled coil units that were not being utilized, which will help our coil division improve returns. Optimizing our businesses and deploying or reducing idle equipment that is not generating returns remain an area of focus in 2019. I will now review our first quarter financial results. Q1 2019 adjusted EBITDA of $26.3 million was net of severance costs of $1.7 million and $1.9 million for fluid end costs. Adjusted EBITDA did benefit by $0.7 million for the adoption of IFRS 16 leases. Factoring these items in would have resulted in first quarter adjusted EBITDA of $29.3 million. The significant sequential improvement in adjusted EBITDA was a result of steady activity, the previously mentioned cost reduction measures and a much improved job mix, which resulted in lower repairs and maintenance expenditures. Reduced R&M expenditures is evidenced by an approximate 35% drop in fracturing R&M per tonne of proppant pumped in Q1 2019 as compared to the average in 2018. This was primarily a result of performing less high-pressure work as compared to 2018, which lowered both our operating expenses and our maintenance capital. Q1 results also benefited from customer work programs that remained steady through the entire first quarter as well as our operations team doing an excellent job performing safe, high-quality work during the extreme cold weather that we experienced in February. At the time of our last conference call, we were uncertain how long activity would carry into March, but most of our fracturing operations were not slowed for road bans until the last week of March. Overall, our sequential activity increase was significant, with total proppant pumped increasing to 332,000 tonnes in the first quarter of 2019 compared to 205,000 tonnes in the fourth quarter of 2018.Pricing for our fracturing services remained relatively consistent with the pricing experienced in Q4 2018 as we did not give up significant pricing concessions in that quarter. Trican continued to work with loyal customers who support our company through this current industry slowdown.Cement operations maintained its typical share of the drilling rig count with the job count increasing by 13% relative to the fourth quarter of 2018. The overall rig count in the basin was down 30% compared to last year, which had an effect on the profitability of our cementing business. Coil activity also increased, with operating days up 9% sequentially and revenue up 64% year-over-year, which positively affected profitability of this service line. Margins in both service lines increased relative to the fourth quarter, and we saw significant demand for certain higher-priced jobs in our coil services division.First quarter net loss narrowed significantly to $6.2 million. Fourth quarter 2018 net loss was significantly affected by a goodwill impairment charge. Financial results in the first quarter of 2019 relative to Q1 2018 were negatively affected by reductions in industry activity. First quarter 2019 adjusted EBITDA of $26.3 million compares to first quarter 2018 adjusted EBITDA of $54 million. The reduction in industry activity resulted in reduced frac activity as evidenced by a 31% decline in the volume of proppant pumped in Q1 2019 compared to Q1 2018. By reducing the number of operating crews and therefore operating costs, the company was able to maintain strong utilization levels of 83%, which compares to 90% in Q1 2018. Q1 2019 was also affected by lower average pricing levels for fracturing services relative to the prior year first quarter. Despite the significant reduction in fracturing activity, lower average pricing and the high fixed cost nature of fracturing operations, aggressive cost containment efforts helped mitigate the reduction in our operating margins. Our operating margin per tonne of proppant pumped was approximately $90 which was down about 20% from a year earlier. There is a more pronounced drop in our fracturing operating margin percentage. 100% of the proppant pumped in Q1 2019 was supplied by Trican compared to Q1 2018, where 46% of the proppant was supplied by our customers. Trican earns revenue and incurs expenses when proppant is supplied by us which, therefore, would affect the operating margin percentages by approximately 4% on a year-over-year basis. Our first quarter 2019 capital program spent primarily reflected activity and necessary maintenance capital. As we previously noted, we expect our 2019 capital program to track activity levels for maintenance requirements. The company's balance sheet remained flexible, with credit facility borrowings net of cash at $46 million and a positive noncash working capital balance of $138 million. Liquidity remains strong with more than $215 million of unused credit facility capacity. We view maintaining our strong balance sheet as important during this current uncertain market.In spite of a difficult industry environment, the company generated approximately $11 million of free cash above our capital expenditures and interest payments, which was primarily used to make additional share repurchases at prices below tangible book value. Since January 1, 2019, the company has purchased approximately 3% of its outstanding shares. Our current program continues to track the time expiry of our renewed NCIB program, which expires this September.We will continue to allocate funds to buying back shares going forward as we monitor cash flow from operations and believe that this is the best use of cash at the current share price. However, our approach to share repurchases will be measured given the uncertainty in the current operating condition. And as always, we will weigh share repurchases against other investment opportunities. I'll now turn the call over to Dale, who will be providing comments on the operating conditions and strategic outlook.

[Dale M. Dusterhoft, President, CEO & Director]

Thanks, Rob. The first quarter largely unfolded as we expected. It was a slow quarter with industry activity measured by the rig count being down approximately 33% compared to last year. However, we were able to generate modest free cash flow out of our operations in spite of the significant drop in activity. We did work a little bit longer into March, which helped our results. But more importantly, the financial benefits of our cost-cutting measures helped mitigate a generally slow Western Canadian oil field services market. We recognize the market is difficult to predict and therefore, must remain nimble and focused on incremental areas for cost reductions and business optimization efforts that will not risk our service quality. Fracturing utilization was high from mid-January to almost the end of March and averaged 83% during the quarter. As we saw in Q3 of last year, we operated smaller crews and had more movement and rig updates between jobs. We mitigated our down days, however, with sufficient coordination between our clients to keep utilization high. Our cementing service line activity was down about 30%, which is consistent with the drop in rig count. Even though margins in this business were lower than typical in the first quarter, we still realized a positive return on assets within this service line.We continue to see demand for our coiled tubing business which is carried into the second quarter. Trican expects to increase the number of crews to 10 from the current levels of 8. The company has strong interest for these incremental coil units and expects to have these 2 additional units operating by the end of the second quarter. We will continue to look at ways to increase utilization of currently idled equipment that can provide a return to the company. Despite a relatively slow activity environment, we're providing returns to shareholders through our share buyback program. We continue to focus on repurchasing our shares without stressing our balance sheet. We also continue to maintain our equipment in excellent shape to ensure that we do not impair our ability to generate significantly improved operating results should market conditions improve. Therefore, our asset sales remain focused on items that are older and now expected to be competitive in the basin going forward. I'm pleased that our strong balance sheet, sale of idled assets and anticipated modest positive operating cash flow should allow us to continue our share repurchase program going forward into 2019. We remain committed to returning funds to shareholders and believe utilization of our NCIB program gives us the best method of providing returns at the current share price while adapting this environment -- investment to changing industry conditions. The competitive industry dynamics we saw in the second half of 2018 largely disappeared through the first quarter. Although the industry was modestly oversupplied in Q1 '19, we believe our approach to disciplined pricing and parking one fracturing crew compared to last year has helped stabilize the market and ultimately should allow us to have better financial results. Since earlier in Q4, we have reduced our manned equipment levels by nearly 100,000 horsepower. We have approximately 210,000 horsepower that is unstaffed -- hot-staffed and readily available to put into service and approximately 90,000 horsepower that is cold-staffed. All of our equipment is kept in good working order and is not cannibalized. We do not anticipate adding any fracturing equipment into Canada until market conditions significantly improve. However, we are maintaining our ability to add capacity with little cost to the company in the future if full-cycle returns were compelling. We believe our approach to pricing discipline, not staffing equipment and aggressively reducing our costs has allowed us to generate positive cash flow. Had we looked to only grow or maintain market share, we believe the stability of our business would be much worse. We are very focused on generating free cash from our operations. As we look into the second half of 2019, we will remain disciplined in our approach to pricing. Pricing on our fracturing jobs has not dropped from Q1 levels. As usual, there are some spot market opportunities to add lower-priced work to the second quarter. However, we will remain disciplined in our pricing approach during this seasonally slower period. Our cementing service line very closely tracks the rig count, and we anticipate activity will be down 25% to 30% year-over-year in this business during the second quarter. Pricing has been stable and we have rightsized this business to current demand. Our coiled tubing service line has remained relatively strong in the quarter and we should continue to see improved year-over-year financial results. Again, pricing in this service line has been relatively stable. We continue to have hard coiled assets that could be activated with little capital, and we'll look for opportunities to generate acceptable returns by adding this equipment into the market. Second quarter activity can be difficult to predict given the typical seasonal weather challenges that may arise and small shifts in work timing which could significantly affect Q2 results. Currently, we are anticipating 92,000 average active horsepower in the second quarter. This activity is heavily weighted to June with normal breakup conditions creating slow activity in April and May. we estimate our customers' cash flow is up about 20% to 25% this year over what they forecasted at the start of the year. However, many of them have not increased capital programs as they are demonstrating capital discipline to their investors. We do anticipate some customers to modestly increase their second half programs but expect most to remain disciplined in their spending until they have better visibility on commodity prices, pipeline issues, government policies and curtailment. In our fracturing business, third quarter visibility is starting to firm up and we are confident that we will have all 10 fracturing crews committed during the quarter. We believe the downward trend of overall industry fracturing equipment supply is supportive of pricing stability in the second half of 2019 and the second half pricing should remain stable to Q1 pricing. As we saw in Q1, we will continue to move -- continue to have move and rig-up days and customers' scheduling issues that affect utilization, and if we can keep these to a minimum, our Q3 fracturing activity could reach Q1 2019 levels. Pricing is not yet at a level where we would consider adding additional crews. Our cementing business will tap the rig count, which is anticipated to be lower in the third quarter relative to Q1, and our coil business will be better year-over-year due to the addition of units in this service line. Despite the ever-changing market, our primary goals for 2019 remain relatively unchanged. First, we'll continue to focus on ways to improve returns on our equipment through increased utilization that generates acceptable ROIC in this environment. Second, as I've already mentioned, we must continue to reduce our cost through all avenues, including our lean efficiency continuous improvement program. Part of helping our customers is finding ways to reduce the cost of providing our services to them and we have a number of lean initiatives underway, which we believe will further reduce our cost and make us more efficient. We will continue to look for innovative ways to optimize our business while also exercising tight cost control throughout all levels of the company. Last, we will look at ways to grow our revenue. In line with the modest investments we made in our coil business, which has improved profitability, we may look at similar opportunities in this service line and others, which will improve returns from these businesses. Our strong financial position affords us the flexibility to look at these opportunities, but any investment will require a quick financial return and a long-term improved return on invested capital for the company. I want to thank all of our staff for continuing to be safe and proactive in their jobs. Our safety statistics continue to trend in the right direction. It's a credit to our outstanding crews who persevere through the uncertainty to provide our customers with safe, efficient service despite the uncertainty in the Canadian oil field market. To all of our support staff, the extra effort that is being made by you is appreciated. We know improvements in our business don't often happen between the hours of 8 to 5 and we appreciate and see the benefits of our people going the extra mile. It's worth noting that this week is mental health awareness week, and all of Trican's locations are supporting this initiative through a number of awareness, fundraising and educational activities. Thank you to all of our people who actively supports this support initiative that affects many of our employees and their families. Lastly, I want to thank Murray Cobbe, as he is retiring as Chairman of the Board and will be carrying his last Annual General Meeting today. He was one of our founders and has been an inspirational leader for over 22 years within the company. We wish him all the best and we'll all acknowledge stories of his retirement. I thank you for your attention today and your interest in Trican, and I'd like to turn the call over to the operator for any questions.

[Operator]

[Operator Instructions] The first question will come from Taylor Zurcher with Tudor, Pickering, Holt.

[Taylor Zurcher, Director of Oil Service Research]

Dale, I just wanted to start on the Q3 outlook. And I know you're still a couple months away, but some of the comments you made about Q3 potentially being flattish at least relative to Q1. For the 10 active man crews that you have today, how much visibility on the frac counter do you have with those 10 crews? And then maybe just from a timing perspective, is it later this month or probably later next month where you think you'll start to gain more visibility as it relates to the full quarter utilization levels?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. So right now, we would have all -- commitments in all 10 fracturing crews during the third quarter so they've been -- we kind of have them allocated to customers. We still have to firm those commitments up into actual job dates, and that's kind of the next step we always have in our business. So you actually book them into your calendar and reduce all the white space in your calendar. That still has to happen, but I'd say we're working with our clients on that right now. So we're comfortable that the clients that we're committed to are going to go through with their programs. There may be some tweaking as they come out of their May Board meetings as to what their programs actually are, but we'll firm that up. And then the last piece, it's a pretty big piece, is we work for a lot of different clients and it'll be minimizing the number of move and rig-up days and the customer scheduling issues in the quarter to minimize the white space just from regular operations associated with that. If -- and as long as we can keep those move, rig-up days and weather days and everything to a minimum, then we'll be on target to be utilized about the same level with the 10 crews as we were in Q1. Cementing, we anticipate, will probably be down a little bit from Q1 levels. We don't think -- we don't have a good visibility on the rig count yet. We don't think the rig count is going to hit Q1 levels, so we -- and we basically track the rig counts in that service line. Don't know for sure where it's going to be, but I think it'll be down a bit. And then coiled tubing, as we mentioned, it's probably going to be up a little bit as we've added a couple crews into the market for Q3.

[Taylor Zurcher, Director of Oil Service Research]

Okay. And just a follow-up, is it fair to assume, at least on the fracturing side, that the mix of sort of lower pressure and smaller pad work and also the mix of almost all internally sourced proppant is going to stay relatively constant in the back half relative to Q1?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. I think it'll be lot of the same customers and lot of the same type of work, so it'll be very similar. We haven't really changed the mix too much.

[Taylor Zurcher, Director of Oil Service Research]

Okay. I'll try to sneak one more in. And it sounds like coiled tubing market -- because you guys aren't the only company deploying incremental assets into Canada on the coiled tubing side in 2019, I'm just curious at a high level, any color on what's driving that sort of fundamental demand uplift given what we're seeing from a broader Canadian oil field activity landscape at least through Q1?

[Dale M. Dusterhoft, President, CEO & Director]

Yes. It's a little bit the competitive nature of the business. We had a lot of private competitors go away for various reasons in 2018, and so you got less capacity out there. I also think it's -- we refurbished some units. We brought them up to really good standards. We have good crews. I think we've had a little bit of a market share increase just from the good work we're doing as well. So it's kind of a combination of those 2 things.

[Operator]

The next question comes from Sean Meakim with JPMorgan.

[Sean Christopher Meakim, Senior Equity Research Analyst]

So Dale, can we talk a little bit about how you view the sustainability of the cost reduction measures that you've taken? Obviously, they were very effective in the quarter. What would you need to see to start to layer in more on the cost side? I think as we're trying to model the back half of the year, this has been important component. It sounds like it's obviously a big focus for you and for the company across the board. And are there any cash impacts from those cost reductions in the quarter that we should be thinking about modeling -- or I should say, not modeling in the future quarters?

[Robert Skilnick, Chief Financial Officer]

I think -- this is Rob here. And I think the cost reduction measures that you see, effectively, the pro rata portion hits the first quarter results. So it's partially reflected there. And I think as far as the outlook goes, we're always looking at ways to reduce our fixed costs. We view them as primarily permanent reductions, not one-timer reductions, just continuing to improve the business and we're looking for more. And as Dale outlined, one of our focuses is our lean initiative, and that covers more than just how we operate but areas of administrative and fixed costs that we can help reduce expenditures there.

[Sean Christopher Meakim, Senior Equity Research Analyst]

Okay. Fair enough. And then just thinking about cash flow, basically sources of cash and uses of cash, how do we think about working capital for the balance of the year? And in terms of capital allocation, as you're prioritizing, you've highlighted that share repurchase is a priority. Do we think about -- Dale mentioned that some of our competitors on the private side went away last year. Are there one-off asset sales that could be attractive as well? So should we think that basically incremental uses -- sources and uses of cash is good for the rest of '19?

[Robert Skilnick, Chief Financial Officer]

I think as we outlined, that we're looking at ways to monetize equipment that is -- I wouldn't call it one-off but just sort of a consistent approach as we review our oldest generation of equipment that's not really going to go back to work here. We'll -- I don't know if it's one-off or just sort of a continued trend that you've seen over the last several quarters of asset sales. So that would be a source of cash, I think, to look forward to in the next several quarters or few quarters anyways. And then, I guess, as we look at working capital, we'll have a typical reduction in our working capital through the second quarter. Our priority, though, will be to maintain our equipment at a good working standard from a maintenance capital perspective and we'll continue to allocate that way. And then as we look at comparing buyback versus any initiatives that will provide a quick return, we'll balance those 2 appropriately. We're always looking at opportunities to improve our margins. If it takes a small amount of capital to do it, we'll consider it.

[Operator]

The next question comes from Greg Colman with National Bank Financial.

[Greg R. Colman]

Just a couple of quick factual ones here. Rob, on the NCIB, can you just help us out, how much room do you have left on it between your last purchase, which, I think, was just before you went to blackout and when it comes up for re-up in September, how many shares could you still buy back?

[Robert Skilnick, Chief Financial Officer]

Well, we actually had a plan ongoing that we set before blackout. So we're at just under 70% utilization, at about 60% of the way through the program. So roughly tracking the program time frame.

[Greg R. Colman]

Could you quantify that just in the number of shares you could still buy back until you have to reapply?

[Robert Skilnick, Chief Financial Officer]

I think it's about 9 million shares, Greg.

[Greg R. Colman]

Okay. And then when -- you mentioned in your prepared remarks that you're -- and I'm paraphrasing here, but something along the lines of, we'll continue to buy back shares appropriate for cash flow at levels below your tangible book value. We think of your tangible book value per share is about $2.20. Not getting into $0.01, $0.02, but is that materially different from the way you guys think about your tangible book value per share?

[Robert Skilnick, Chief Financial Officer]

No. Just take your net equity less your goodwill and intangibles and that kind of thing.

[Greg R. Colman]

Okay. Got it. So very much in that range?

[Robert Skilnick, Chief Financial Officer]

Yes.

[Greg R. Colman]

Alrighty then. And then just thinking about the rest of the year, when do you anticipate you are going to be -- or when would you hope to have some visibility into Q4? I know you've already touched on Q3 in a lot of detail, but it's kind of still bit of a black box coming in the back part of the year, when would you anticipate having some clarity there?

[Dale M. Dusterhoft, President, CEO & Director]

We have some visibility already into Q4 with some of our clients. So there's obviously some clients that have given us full second half programs. If I was to kind of really high level it, I -- on the fracturing service line, you're probably sitting at 6 or 7 out of the 10 crews that you would have clients that say, "hey, we're going to run through Q4." We'll get some more visibility into -- after the May Board meetings. But just knowing how clients have managed their capital programs so far this year, they've been pretty cautious about stepping out past a quarter guidance and they're kind of monitoring the industry. So I suspect that we're not going to see Q4 programs be really defined until after the July or early August Board meetings, so somewhere in that time frame, before we get really good visibility.

[Greg R. Colman]

That's fair, and I appreciate the color on the 6 out of 10 that you already have sort of line of sight on right now. And then just lastly for me and then I'll hand it back. Would you be willing to quantify at all either in a dollar perspective or a margin percentage perspective? What we could still see from here on out from a cost reduction initiatives from the sort of lean initiatives you talked about?

[Dale M. Dusterhoft, President, CEO & Director]

Well, we have internal targets, for sure. I have said before that we're looking at least to another $4 million in fixed cost reductions from our business in addition to the $23 million we talked about. That's what our target is, and it'll -- it's heavy lifting now. And then we've got a number of lean initiatives in the company which is targeting more than that, which -- a lot of those won't come in play until later in '19. So we're still in the process of just working on them and there's a lot of data collection in that. So it's a little hard to give guidance exactly when they hit our numbers.

[Greg R. Colman]

No problem. But on that $4 million you mentioned, is that something that's underway now and could be enacted during Q2 and into Q3? Or is that a late '19 event as well?

[Dale M. Dusterhoft, President, CEO & Director]

It'll be kind of introduced every quarter. It's not an immediate thing. It'll just be kind of every quarter, we'll probably see some improvement.

[Operator]

[Operator Instructions] The next question comes from John Daniel with Simmons.

[John Matthew Daniel, MD & Senior Research Analyst of Oil Service]

I just have one for you right now, which is -- but several years ago, one of the Canyon fleets was outfitted with the QEM 3000 pump. And I'm just curious if you've done any analysis to see whether or not those -- the larger, continuous duty pumps have outperformed, well, I'll just call it, installed base, the legacy pumps?

[Dale M. Dusterhoft, President, CEO & Director]

I'd say the R&M indications are that the heavier-duty pumps certainly lower our average R&M expenditure relative to some of the older legacy pumps, definitely when you get to the oldest generation of pumps but even sort of the mid-generation of pumps. Fairly consistent with, I would say, the FMC high-spec pumps we have as well from just a pure dollars and cents perspective.

[John Matthew Daniel, MD & Senior Research Analyst of Oil Service]

So this sort of lowers the day-to-day R&M. Does -- have you seen an extended life in terms of timing?

[Dale M. Dusterhoft, President, CEO & Director]

I mean on certain components, if we looked at -- I mean fluid ends is still a tough point. But power end, we've seen pretty strong. When we pulled the power ends off and inspected them, they've been in pretty good shape is the indications our service line managers have provided back to us.

[John Matthew Daniel, MD & Senior Research Analyst of Oil Service]

Okay. Are you looking at any new fleet designs over the next 1 year or 2, either with respect to power ends or, as you guys well know, electrification?

[Dale M. Dusterhoft, President, CEO & Director]

Well, we're always looking at that and it's just a matter of whether you can get a capital raise done on things. But you're also in a pretty tough market right now. So I -- we have people in the company that are -- and we have ongoing R&D projects as well, looking at a few things that improve equipment, both on the iron side, on the pump side, which is a significant part of all equipment that we can put on even our existing pumps. And then we certainly look at electrical fleets as well. So we look at all these things. I don't think -- we don't have any conclusions on any of them just yet.

[Operator]

This concludes the question-and-answer session. I would like to turn the conference back over to Mr. Dale Dusterhoft for any closing remarks.

[Dale M. Dusterhoft, President, CEO & Director]

Yes. Thank you for your interest in Trican today. We certainly wish you a good afternoon and look forward to talk to you at our July Board Meeting and after we release our Q2 results. Thank you.

[Operator]

This concludes today's conference call. You may disconnect your lines. Thank you for participating and have a pleasant day.