Trican Well Service Ltd

TSX:TCW

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen. Welcome to the Trican Well Service Second 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 Second 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 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 provide an 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 second quarter 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 AIF and the Business Risks section of our MD&A for the year ended December 31, 2018, for a more complete description of business risks and uncertainties facing Trican.This conference call also makes reference to a number of common industry terms and certain non-GAAP measures, which are more fully described in our second quarter 2019 MD&A.Our second quarter results were released this morning and are available on SEDAR. Canadian industry activity saw typical seasonal slowdowns in Q2, which were more pronounced than those observed in Q2 of the prior year, in large part due to industry activity being down approximately 25% when compared to Q2 2018.Trican was further affected by a few customers of ours deferring planned April and May work into Q3 and Q4. About 25% of our June work was also pushed into Q3 and Q4 due to wet weather. This had a significant impact on our results and in particular, the results from our fracturing service line. We are, however, encouraged that we did not lose any planned work to competitors, and the work has been deferred with only a small amount being canceled.In years past, we have been able to secure some spot market work to offset any changes in our schedule, but those opportunities did not present themselves at reasonable pricing levels.Our second quarter saw more asset dispositions. During the first 6 months of 2018, we received proceeds of approximately $17 million from asset sales and realized $4 million in gains on disposals. Included in asset sales was the disposition of approximately 79,000 horsepower of legacy 2,000 -- 250-horsepower pumps. Given increasing fracturing intensity and the current excess supply of equipment in Western Canada, we were able to realize reasonable monetization prices for equipment that range in age of 12 to 19 years old.Also, we have reactivated 2 previously idle small-diameter coiling units into an underserved market. Costs associated with the activation of these units affected our Q2 results. However, we expect these recently activated units to start positively contributing to the business during the third quarter. Optimizing our businesses and deploying our -- or reducing idle equipment that is not generating returns remain an area of focus in 2019.The company remains focused on reducing costs. Additional cost reduction measures have been implemented to improve our long-term cost structure, which will result an additional $2 million to $3 million in cost savings beyond the previously forecast $23 million of annualized savings. In addition to this, we have a number of lean initiatives that we are working on that will improve our efficiencies and reduce costs later in the year.We will continue to review all opportunities to reduce cost and improve business operations. Furthermore, we continue to review expected activity levels to try and align our average crew count. As a result, we have adjusted our fracturing crew countdown by one crew in the second quarter, and we'll continue to adjust our operational crew count to reflect changing industry activity levels.I will now review our second quarter financial results. Q2 2019 negative adjusted EBITDA of $14.3 million was net of severance costs of $0.8 million and $2.5 million for fluid end costs. Adjusted EBITDA did benefit by $0.7 million from the adoption of IFRS 16 leases. At the time of our first quarter conference call, we had expected Q2 fracturing operations to realize average active horsepower of 90,000 horsepower. However, actual second quarter average active horsepower was 72,000 with previously described customer adjustments.General industry activity declines and lower average fracturing activity both contributed to revenue declining by 35% when compared to Q2 2018. Second quarter gross profit and adjusted EBITDA declined more dramatically than revenue declined as a result of the fixed cost nature of certain operating expenditures of the company.Cement operations declined less than the industry activity decline with the year-over-year job count decreasing by 20%. However, profitability of cement operations was affected by these activity declines, which resulted in cement results being below Q2 last year.Coil activity continued to show resiliency relative to industry declines with revenue up approximately 30% year-over-year.Second quarter net loss of $28.4 million was lower than the loss of $34 million for Q2 2018 as the company's financial results were no longer affected by gains and losses from its investment in Keane. Our second quarter 2019 capital program spend primarily reflected activity and necessary maintenance capital. Our strong financial position will also allow us to make minor investments into infrastructure and other equipment that will permanently reduce our cost structure and/or offer an immediate payback. As we previously noted, we expect our 2019 capital program to primarily track activity levels for maintenance requirements.The company's balance sheet remained flexible with the company's credit facility borrowings net of cash being in a surplus position of $12 million as we paid down $44 million of debt in the quarter, which was funded by the normal second quarter release of working capital. Additionally, the company's positive noncash working capital position was $48 million. Liquidity remains strong with more than $200 million of unused capacity on our revolving credit facility. We maintain our belief in the importance of having a strong balance sheet during this current uncertain market.In spite of a difficult industry environment, the company generated approximately $11 million of operating cash flow during the first 6 months of 2019 before considering changes in working capital. This, combined with asset sales, has allowed the company to repurchase 4% of the company's outstanding shares this year for approximately $17 million.Since the commencement of our 2019 NCIB program, the company has purchased approximately 8% of the company's shares. The company continues to view an ability to sell old nonrevenue-generating equipment at prices approximating book value and repurchasing shares at below book value as a reasonable use of proceeds.We will continue to allocate funds for buying back shares going forward as we monitor cash flow from operations and believe that this is a good use of cash in the current market. However, our approach to share repurchases will be measured given the uncertainty in the current operating conditions. 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 our operating conditions and strategic outlook.

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

Thanks, Rob. The second quarter saw a typical seasonal slowdown that were magnified by some of our customers deferring scheduled fracturing programs into Q3 and Q4. These deferrals were partially caused by the drop in oil prices in April and May, which resulted in certain of our customers to be cautious on spending until they saw commodity prices recover in June.We also had a large fracturing project pushed into Q3 where the customer had some well issues that needed to be repaired prior to commencing fracturing operations. Due to the short notice of some of these deferrals and cancellations and the low pricing of some of the spot market work in the quarter, we were unable to replace the majority of this work.We are seeing normal sequential Q3 activity increases, which will be substantially above Q2 levels. However, we do not see industry activity reaching Q1 levels in Q3 as we are forecasting an industry average rig count of about 140 to 150 rigs as compared to the 175 we saw in Q1.We continued to see demand for our coiled tubing business, which saw an increase in revenue on modestly lower activity levels relative to 2018. Trican added one coiled crew and is adding one more in Q3. The company has strong interest for these incremental coil units. We will continue to look at ways to increase utilization of currently idle equipment that could provide a return for the company.As Rob discussed, we decided to sell our oldest generation of fracturing equipment. We sold our legacy 2,250-horsepower pumps that were 12 to 19 years old into international markets as we did not see them returning to work in Canada in the near future. Despite the challenging North American fracturing market, we were able to realize proceeds in excess of book value of equipment and on average, received $160 per hydraulic horsepower for this older equipment.The fracturing industry remains competitive. For this reason, in addition to the previously mentioned asset sales, we reduced our active hydraulic fracturing crew count by one relative to exit Q1 2019 crew levels. Pricing for the most part stabilized this year, however, remains at low levels. Although the industry was modestly oversupplied in Q1 2019, we believe our approach to disciplined pricing and parking fracturing crews will maintain a more stable market and ultimately lead to better financial results as the industry rightsizes itself to the new well count.Since earlier in Q4, we have reduced our manned equipment levels by more than 120,000 horsepower, and we will continue to adjust our active crews to changing industry demand. We have 236,000 horsepower that is unstacked, hot stacked and readily available to put into service.All of this equipment is kept in good working order and is not cannibalized. We do not anticipate any fracturing equipment being activated in the near future. However, by stacking our equipment in good working order, we minimize future liabilities and expenses to the company from any possible future fleet requirements.Our cementing service line very closely tracks the rig count, and we anticipate activity will be down about 25% to 30% year-over-year in this business during the second half as our market share is holding with a lower rig count. 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 results. Again, pricing in this service line has been relatively stable. We continue to have parked coiled tubing assets that could be activated with little capital, and we will look for opportunities to generate acceptable returns from the addition of this equipment into the market.Third quarter activity, similar to last year, will be affected by more rig up and move days on smaller pads, which will lower utilization below Q1 levels. Currently, we are anticipating 135,000 average active hydraulic horsepower in Q3. This represents an 85% sequential increase from Q2 and is in line with anticipated industry rig count recoveries of below Q1 2019 levels.We estimate our customers' cash flows are 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 due to take rate capacity issues, commodity prices and a focus on disciplined capital spending.We have previously anticipated some customers to modestly increase their second half programs but no longer have this expectation. In our fracturing business, fourth quarter visibility is more clear, and we have soft commitments for 2/3 of our fracturing fleets at pricing consistent with Q1 levels for the fourth quarter with typical seasonal slowdowns in the second half of December. As commodity prices and differentials remain at current levels, we anticipate Q4 2019 to be stronger than Q4 2018 as very few of our clients this year appear to be exhausting their capital budgets early.Despite the ever-changing market, our primary goals for 2019 remain relatively unchanged. We will continue to focus on finding ways to improve returns on our active equipment through increased utilization and permanently lowering our costs, which will improve the ROIC we get from our equipment.We will continue to look for opportunities to generate revenue for parked equipment or sell idle assets that can no longer be used in Canada. We will continue to focus on maintaining a strong balance sheet and returning capital to our shareholders through our NCIB while monitoring cash flow from operations. Maintaining a healthy balance sheet is still our top priority.Lastly, our strong financial position allow -- affords us the flexibility to examining and investing in our current and new service lines that yield a quick financial return and long-term improved return on invested capital for the company.I want to thank all of our staff for continuing to provide exceptional safe service despite the volatile operating environment in the Canadian oil and gas market. This exceptional service is and has been apparent on a number of jobs in all service lines and continues to be evident in our pad operations where our fracturing team is safety executing 20 hours-plus of pumping time per day.Similar examples can be seen in our cement, coil and other service lines, and our crews have done this while improving our safety record throughout the year. This type of performance in all of our service lines has allowed us to retain our customers this year.I would like to thank all of our staff, including all the support staff, for going the extra mile to provide safe, efficient, outstanding customer service to our clients at challenging economic times. 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 comes from Taylor Zurcher of Tudor, Pickering and Holt.

[Taylor Zurcher, Director of Oil Service Research]

You talked about visibility for the 2/3 of your fleet that have soft commitments, at least in the Q4. And curious, is that sort of ratio typical for this part -- this time of year? And if you had any comments as it relates to the discussions ongoing for the other 1/3 of your fleet that isn't committed as of right now.

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

Yes. It would be a little ahead of last year where we saw probably some tenders outstanding that we're not committed to at that time. We had 3 of our fracture crews kind of in tenders that were being retendered in the September time frame. So we would be ahead of last year, but probably typical with previous years other than last year where would we normally have kind of that 2/3 commitment.On the remaining fleets, there's still some bids and tenders outstanding for some work for Q4, and it'll really depend on how we do on them as to whether we can keep all the crews working.

[Taylor Zurcher, Director of Oil Service Research]

Okay. That's helpful. And I realize 2020 is really a lifetime away at this point, but one of your peers this morning made a comment that they're participating in a large number of bids for 2020 work already. And so 2-part question. Is that dynamic something you're seeing as well today? And then is it too early to make a guess on where Q1 '20 might shake out on a year-over-year basis, whether up, down or flattish?

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

Yes. We're participating in bids for 2020 as well, which is pretty normal for a few of the clients. I wouldn't say that we can get a read at all on activity from those bids because these are just normal bids that some clients will do every time in this -- in a kind of August to September time frame for their upcoming work for next year.

[Taylor Zurcher, Director of Oil Service Research]

Okay. Okay. And Rob, this might be for you. The guidance for Q3 of 135,000 average active man horsepower is obviously up significantly versus Q2 but down significantly versus Q1. So just curious if you could provide thoughts on free cash flow over the back half of the year. I know in Q3, you'll probably build some working capital. But on a preworking capital basis, is it reasonable to assume you'll be cash flow positive over the back half of the year?

[Robert Skilnick, Chief Financial Officer]

I mean certainly, that's -- our expectation is to be cash flow positive based on the activity levels we've seen and the business structuring we've undertaken in the prior quarters.

[Taylor Zurcher, Director of Oil Service Research]

Okay. And in that environment, do you -- you said in prepared remarks that the share buybacks from [ ERB ] continue to be pretty measured. I think you've got around 6 million shares you could do on the existing NCIB. Is that -- do you expect to fulfill the whole NCIB authorization come October 1 or 2?

[Robert Skilnick, Chief Financial Officer]

Well, it's a really dynamic market, and our approach to that is we review it constantly in the context of the current operating conditions. And it's not a big chunk of shares, but we'll [indiscernible] that to monitor it week to week.

[Operator]

Our next question comes from Kurt Hallead of RBC.

[Kurt Kevin Hallead, Co]

So appreciate the color commentary here this morning on the market and everything else. In the context of the soft commitments that you have for the fourth quarter, what does a soft commitment generally mean, Dale? And does -- do you -- is it more typical than not that those soft commitments turn into actual hard activity levels?

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

Yes. So soft commitments for us means that the customer has spoken for the fracture crews and says, "Here's our Q4 program, and can you book us a crew?" So what changes on that is if there's a quality price change that kind of freaks them out or there's some macro change within their company cash flow spending. Will they make a decision that they're not going to spend as much cash flow or as much cash as they thought out of their capital budgets?So those are primarily what makes the difference. Sometimes it's -- there's some movement of wells as well as they find that they want to move their capital to another field or they may cancel some wells, depending on results from wells because there's still some geological aspect to this. So it's usually those things.I would say that the customers that we have soft commitments with are customers we've worked with for many years that are strong Trican clients that we have really good relationships with and lots of dialogue. And we do get some fluctuation, but for the most part, they're very honest with us and don't -- they don't soft commit to a crew and then pull it out for no reason as there's usually a good reason for it.

[Kurt Kevin Hallead, Co]

Okay. That's good, great color. Appreciate that. So in the context of the expectation for the seasonal increase in revenue and activity in the third quarter, do you think it's possible that the actual fourth quarter '19, given some of these soft commitments, given stabilization of pricing, is it possible that fourth quarter revenues could be higher than third quarter? Or are you just going to stick to fourth quarter '19 kind of being better than fourth quarter of '18?

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

Yes. I think it would be that. It would be -- I'd be quite surprised that activity levels will hit Q3 levels of '19. We still have December, and December -- and even with our soft commitments, our soft commitments are pretty strong through October, November, but they start falling off at December because most clients, unless commodity prices are at a really high level and they're wrapping up programs, but those clients seem to still be slowing down their activity in the December time frame. So that will have some impact on things, for sure.And then we're -- at the moment, we still have kind of 2/3 committed and 1/3 not committed. So unless we -- I wouldn't want to go out and say that we're going to be better until you had all the crews committed that you have in Q3.

[Kurt Kevin Hallead, Co]

Okay. And then I know there's some reference to 2020 and who knows on a full year basis, but is there any read at all even on first quarter dynamics? Do you have any soft commitments for first quarter '20?

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

I'd rather say that the only -- the read on Q1 is kind of similar to this year that I was -- I think customers' really high level view, without getting specific on any programs, is that they'll have their -- Q1 will be one of their stronger capital spending quarters, which we've seen in the industry for a number of years. So I would anticipate that once again, their -- we'll see a ramp-up in that Q1 time frame.

[Kurt Kevin Hallead, Co]

Okay. Then maybe just lastly. In the context of the Canadian frac business, what do you -- if you've got some perspective around kind of total net attrition on horsepower, what would you think that would be for the second half of '19? How much do you -- how much equipment do you think is going away and not coming back?

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

That's a good question. So we've committed to parking one crew and that's equipment that could come back. We'll just not staff it. We've already kind of gone through that. I don't know how much equipment is going to leave the basin for sure. It's actually -- the supply/demand balance in Canada isn't that far off with active crews in that if you looked at all the service companies, I'd say, in July and a lot of August, most people are working with most of their crews.It's more of what happens in the Q4 time frame as to whether there's an overbalance of capacity at that point in time and whether then at that point in time people start retracting some crews either to the U.S. market or permanently retiring them. So that will be the [ more ] question.I don't really expect to see too much in July, August, maybe even September. It would be more Q4 that people are going to start pulling back their crews potentially. But I -- you'd have to ask our competitors. I think our plans are right now, like we said, we're running one less, and we'll continue to kind of monitor it and adjust to where activity levels are.

[Operator]

[Operator Instructions] Our next question comes from Anthony Linton of National Bank.

[Anthony Linton, Associate]

A couple comments there in the opening remarks just about deferral of work and some activation costs for those coiled tubing units. I was just wondering if you guys are able to quantify that at all.

[Robert Skilnick, Chief Financial Officer]

The coil costs were sort of that $0.5 million range. And then the best quantification is that 25% or June number that we put in there on the revenue for the frac services. That would be the best way to characterize it with typically your June revenue being 2/3 of a Q2 scenario.

[Anthony Linton, Associate]

Okay. Great. Just a couple good disposals there in the last couple of quarters. Just kind of wondering, one, in terms of what you're actually seeing in terms of the market for that used equipment. It looks like it's pretty active. And then two, just wondering, are you looking -- is there kind of a plan to dispose all of that legacy equipment? Or what are you guys thinking in terms of that?

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

Yes. So we've -- as was stated, we've disposed our 2,250-horsepower pumps, which is our oldest equipment and really the lightest duty equipment that isn't really suited to the deeper, higher-intensity plays. So for the most part, that's been disposed of. We continue to look at -- we've got some -- still some older 2,500-horsepower pumps and we continue to look at some options there. And if we think that we can sell it for reasonable prices and put that capital to use so it'll generate better shareholder returns, then we will. But it's -- we also have a view to the long-term future and that we have -- we're not going to guesstimate our ability to participate in any kind of additional crews going forward. So there's a balancing act there.

[Anthony Linton, Associate]

Yes. Makes sense. And then maybe just one last one for me. I think back at Q1, you had talked a little bit about additional cost-cutting measures you're looking to through the end of the year. I think you kind of quantified it around $4 million. So I was just wondering, is that about the same? Or has that changed since we last talked?

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

Yes. On the fixed cost side, we -- that's what we had said along the way. And yes, and as Rob mentioned in his commentary, we're kind of -- we've already realized about $3 million of that. So there's some additional fixed costs that we continue to -- we're always working on. It's just the way our business is now. But then we also have some lean initiatives that would really probably affect '19 -- or sorry, 2020 more than '19, but we have a number of lean initiatives that have more significant savings that we're executing on as in the second half of the year.

[Operator]

This concludes the question-and-answer session. I would now 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 at Trican today. We certainly look forward to talking to you in the fall after we release our third quarter results. Have a great day.

[Operator]

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