Ranger Energy Services, Inc. (RNGR) Q3 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the Ranger Energy Third Quarter 2018 Conference Call. [Operator Instructions] Please note this event this being recorded. I would now like to turn the conference over to Darron Anderson, Chief Executive Officer. Please go ahead.

Thank you, Operator. Good morning, and welcome to Ranger Energy Services Third Quarter 2018 Earnings Conference Call. Joining me today with prepared remarks is Brandon Blossman, our CFO. On the last quarter call, I characterized Q2 as a continuation of the momentum we're building throughout the year. This quarter's results reflect more of the same, which is improving metrics across all aspects of our business. I would like to start out this morning by calling your attention to some of these areas of improvements and highlights for the quarter. First, our high-spec rig rates. Our service rig rates continued a modest rise, supported by incremental ancillary equipment deliveries, which was offset somewhat during the quarter by a modest decline in utilization. Next, our organic capital investment continues to drive performance. Specifically, our other rig services, led by wireline completions business, continues to see market share gains, which we're very proud of. On the activity front, no slowdown yet. We have yet to experience any year in slowdown or Permian takeaway constraint impacts, but we do expect some seasonality impacts across business lines as we move into the holiday season. On the labor front, labor pressure is taking a pause. While labor wage rates were up slightly quarter-over-quarter, we did see some easing in the latter part of Q3. And finally, free cash flow pivot in January 2019. Our new rig payment obligations will be satisfied by year-end. Looking forward, I expect that 2019 cash flow considerably opens up and go forth strategic options. Now I'd like to give a little more detail on the quarter. Revenue for the quarter increased 12% to $82 million from $73 million in Q2. This improvement in top line performance was the result of improved pricing and select asset additions. Within our Well Services segment, high-spec rig rates continued up with a modest 1% increase for the quarter. However, those increases were offset by a 3% sequential decrease in rig hours, mainly driven from 1 less workday and additional holiday as compared to Q2. As a result, quarter-over-quarter, revenue performance was flat. While this result is easy to look past, it's important to note that post a midsummer low in September, our high-spec rig performance established an all-time EBITDA high watermark for the business, with early October results looking very similar. Also within our Well Services segment, our Mallard-branded wireline completions business continued to produce market-leading results. We entered the quarter with 8 completion wireline units and exited with 10. All of our units continue to work on a dedicated basis across a diverse set of blue-chip Permian customers. Our operational execution is allowing us to pair with top-performing frac fleets within our customers' operations, resulting in some of the highest completion efficiency numbers in the basin. Additionally, our performance has kept us immune to some of the Q3 and early Q4 ongoing completion pauses in the Permian market. As a result, our wireline completions business delivered another substantial revenue increase for the quarter. Rounding our top line performance. Our Processing Solutions group has delivered another solid quarter as well. Although we experienced an increased MRU count and improved pricing, reduced utilization resulted in flat sequential revenue performance. We expect this dropped utilization to be a transitory issue as a portion of the fleet has been on the process of rolling off of older contracts and migrating to new homes at higher rates. Similar to my comment last quarter, while top line growth is good, our earnings growth continues to be the real achievement. For the quarter, our adjusted EBITDA increased 30% to $12.6 million from $9.7 million in Q2. Near term, we do see a risk that revenue and earnings growth could take a breather in the back half of Q4 during the holiday season. However, we continue to focus on opportunities to improve overall efficiencies, basically getting more than done while optimizing resources and costs. For example, we refined our G&A structure with several changes taking place in early Q4. Our business intelligence systems continues to evolve, allowing us realtime insight into our daily P&L, and we continue to refine our systems and processes and payables to HSC. Also, we continue to develop and align ourselves with a client base that require high-quality asset, share similar operating value and seek positive, long-term relationships. In summary, a very solid quarter with continued positive momentum. And while we are pleased by getting a progress, additional work continues to lie ahead. I will now turn the call to Brandon to discuss our financial results in detail.

Thank you, Darron, and good morning, everyone. It's my pleasure to be running through the details of another nice quarter from the Ranger team. As Darron noted, overall, on a consolidated basis, we saw material quarter-over-quarter growth on both the top and the bottom line. Sequentially, for Ranger as a whole, revenues moved up 12% or $9 million from $73 million to $82 million, while EBITDA margins at the same time moved up from 13% to 15%. Those 2 metrics combined pushed adjusted EBITDA up 30%, as Darron noted, from $9.7 million to $12.6 million. Now let's run into the segment details, starting with revenue. As in the past, we'll break out the consolidated report - the consolidated results into our 2 reporting segments: our smaller, Processing Solutions segment; and our larger, Well Services segment. And again, keeping with history, I'll further break out well services into high-spec rigs and all of the other well services. Starting with revenue. Our overall sequential revenue increase of 12% was driven at the segment level by our Well Services segment. Here, revenue was up 13% over the same $9 million, moving Well Services revenue from $69 million in Q2 to $78 million in Q3. Within Well Services, it was the other or the non-rig services side of that business that drove essentially all of the revenue increase. We'll run through the details on the non-rig side in a minute. But first, let's take a look at the high-spec rig metrics. High-spec rig revenues were flat quarter-over-quarter at $39 million, where an increase in rig rates and incremental asset deployments were offset by a decrease in utilization. The metrics are average hourly rates up quarter-over-quarter by a bit more than 1% or $6 an hour, moving from $513 an hour in Q2 to $519 an hour in Q3. Rig hours for the quarter were down 3% from approximately 76.2000 hours in Q2 to 74.2000 hours in Q3. For the quarter, our rig fleet was up an average of 3 rigs from 136 rigs in Q2 to an average of 139 rigs in Q3. The combined effect of the drop in hours and increase in rig count moved rig utilization down from 78% to 76% for Q3. We had 20 rigs working completion work in Q2. That was down, too, from the 22 in Q2, but notably, still well above Q1's completion rig count of 13. Now moving back to the other side of the non-rig businesses and the Well Service segment, which does notably include our wireline business. Here, we saw revenues increased 31%, off of the $30 million base that we saw in Q2, to just over $39 million of revenue for Q3. This increase was driven by both additional wireline assets placed into service in Q3 and a higher blended rate for our wireline assets. Our completions-focused wireline fleet averaged 9 units during Q3, up another 2 units from Q2's average of 7, and we exited the quarter with a total of 10 wireline units. Finally, moving to our Processing Solutions segment. Here, revenues were sequentially flat, holding at around $4 million. An increase in the average rental rate of 5% quarter-over-quarter was offset by a decrease in utilization from 88% down to 85%. As Darron noted earlier, we expect our Processing Solutions utilization drop to be a temporary phenomena at several units during the quarter. During Q3, we're in transit to new locations. And there, they will be serving new, generally higher-priced contracts. We also added 2 new MRU spreads to the Processing Solutions fleet during Q3, bringing our total unit count there to 27. Now let's move on to the margins at the segment level. Overall, consolidated segment gross margin before G&A continued its upward progression, moving sequentially from 21% to 23% in Q3. That progression is very similar to the Q1 - our Q2 over Q1 progression. Both segments moved in the right direction with Well Services. Segment margins, up from 19% to 21%. And Processing Solutions segment margins, up from 52% to 56%. Moving back to consolidated results for a moment. Adjusted EBITDA - our adjusted EBITDA print of $12.6 million includes adjustments totaling $600,000. Those adjustments include $600,000 of stock-based compensation along with several smaller, largely offsetting items. Among the offsetting items are: incremental costs incurred in the shutdown of two small legacy field offices, along with contractual bonus obligations associated with the 2017 ESCO acquisition. Those 2 items together offset largely by gains on miscellaneous asset disposals. And finally, on a net income line. For Q3, we reported net income of $4 million. It was a nice $5.2 million improvement from Q2's loss of $1.2 million. Moving on to cash flows. Cash flow from operations for the third quarter was $13 million, just bettering adjusted EBITDA and, again, reflecting another solid quarter of solid working capital management from our team. Total growth CapEx recorded for the quarter was $21 million. This $21 million breaks down into: $10 million related to our wireline business, which includes 2 new wireline units, 2 set of pump-down pumps and a handful of associated ancillary equipment. $6 million of that $21 million is associated with service rigs, which includes one new high-spec rig delivered in the quarter and ancillary equipment for that rig and other existing rigs. Also, we had $2 million associated with the Processing Services segment. That's for two incremental processing units or MRUs. And then finally, we had $3 million of new light duty vehicles leased during the quarter. Many of those supporting the growth in the rig fleet and the wireline business with a handful kind of tagged as replacements for existing vehicles. Last quarter, we touched briefly on maintenance CapEx but only really to note that maintenance Capex for Ranger as a whole was not particularly material given the young age of our fleet. With this go around, I'd like to highlight that point and provide actuals for maintenance CapEx. For the third quarter, it was a little bit lower than our run rate at $300,000. So again, third quarter maintenance CapEx, $300,000. For the full year-to-date, we spent $1.2 million for maintenance CapEx, again, highlighting that relatively young fleet across the board, across our entire portfolio, means that very few dollars are spent on maintenance items, particularly capital maintenance items. Moving onto liquidity. We ended the quarter with $42 million of liquidity. That consists of $22 million of capacity available on our revolving credit facility, $18 million remaining on our $40 million secured financing agreement and $2 million worth of cash. We continue to reduce our legacy high-spec rig purchase obligation balance. We paid down $10 million of that obligation in Q3, which reduced the balance at the end of Q3 to $17 million. We expect to have that fully paid off by the end of the year. That is that current balance of $17 million is relative to the original $42 million balance on that new build rig purchase obligation. As we close out 2018, we expect that our cash flow from operations, combined with the $18 million of remaining capacity under our secured financing facility, will allow us to pay the remaining balance of the high-spec rig obligation while still leaving plenty of flexibility to finish out our 2018 growth capital program. Darron, that's it for my prepared comments, and now I'll turn it back over to you.

Thank you, Brandon. So looking forward, as I mentioned in my opening remarks, we do see some risks of seasonal slowdown in the latter part of Q4. For example, last year, our Q4 rigs were down 4% sequentially on an hour-per-rig basis. Thus far, on a public company view, we have yet to experience any impact from customer exhaustion or slowdown related to the Permian and construction constraint. Additionally, we feel good about our ability, so far, to offset any customer slowdowns with market share gain. As I've said before, our strategically-designed, diverse footprint and customer base allows us to reallocate resources to basins and clients with the highest demand. However, given the potential seasonality risk, incremental work is required on our side to ensure we mitigate this risk as effectively as possible. For our high-spec rigs, we will focus on ensuring our crews are working the highest-margin jobs and upgrading work when and where possible. The previously mentioned easing of wage pressure should provide a bit of a tailwind as we continue our work on optimizing our labor force, both in the sales and in the corporate office. This pause in wage pressure is allowing us to high-grade our rig workforce with increased training and reduced turnover. During Q4, our high-spec rigs will continue to benefit from the ongoing deployment of incremental rigs and ancillary equipment to support our 24 operations. On the Mallard side, we should average 10 trucks in Q4 and exit the year with 12 operational trucks. Within Mallard, we'll continue to deploy incremental pump-down trucks in conjunction with some of our dedicated wireline units. We expect to have four sets of pumps operating by year-end, up from an average of 1.5 in Q3. Within our Processing Solutions group, we expect a step-up in performance with both better utilization and higher rates as more units are mobilized into new higher-priced contracts. As we look to 2019, we'll have a new round of strategic choices to make. Given our expected cash flow generation, we'll have a substantial amount of capital to deploy. I'm expecting to be opportunistic with our decision-making, but all options are likely to be on the table. In summary, while it continues to be a large potential headwind, our 2018 trajectory has been reassuring. We'll continue to work with our client base to achieve the pricing levels required to assure their serviceability and protect our profitability. We'll continue our diligent efforts in reviewing and adjusting our cost structure outside of labor while remaining focus on day-to-day execution and efficiency gains. Service companies who have constantly demonstrated the ability to execute through safe and efficient operations will gain market share and maintain activity levels even in the face of a growth pause. We will continue to work to ensure Ranger stays in this position. That concludes our prepared remarks. Operator, we'll now open up the call for questions.

[Operator Instructions] And our first question comes from James Wicklund with Credit Suisse. Please go ahead.

It's Jake on for Jim. First question. Just on - you kind of touched on it in your prepared remarks, but we keep hearing about some tightness in the labor markets. Is this going to be for wireline crews? I'm just looking for an update on what you're seeing there. And are you having any issues in passing through things, specifically labor cost inflation, but perhaps more generally as well just inputs cost inflation? Any issues passing that through to customers?

On the wireline specifically, we just came up on our 1-year anniversary of starting that business. And as you've seen our performance, it continues to grow. It continues to do very, very well. We've not had any issues attracting a high-quality labor force. I think with the purpose-built assets that we have with our operating efficiency, we're getting some of the highest, I think, metrics as far as stages pumped in the day. All that translates into additional value to the workforce. And so from a retention standpoint, recruiting standpoint, I think we've been doing very, very good there. Because of the execution, the efficiency for delivering to our customer, we're getting paid a very fair value. So the value we're getting from our customer is, by all means, absorbing any wage pressure that we've historically had in that business. But I think on the wireline front, wage or labor concern is not an issue for us at this point.

And then what about, just more generally, input cost inflation?

Yes. I think on the rig side, in some of the comments I gave earlier on the labor on that side, I think of - throughout the first 2.5 quarters of 2018, we were continually fighting labor pressure there, wage pressure. And I spoke about our price increases on previous calls, and we were achieving to increase pricing to not only cover the wage pressure but also to drop something to the bottom line. As we got to the back half of Q3 on the rig side, at least internally, that wage pressure started to subside. The labor market is still tough. I expect that when we get into the back half of Q1 of 2019 and activity start to ramp up across the industry again, we'll start to see some of that pressure. As far as other, I think, cost input, there's nothing that is concerning right now, nothing we're not able to absorb from a pricing standpoint. Brandon, anything else you want to add to that?

No. I mean, I think the slowdown in activity, as Darron pointed out, in the back part of Q3 kind of put some - took pressure off of all aspects of the input costs and allowed us to kind of get a little bit of focus on doing small blocking and tackling and further reducing kind of the cost structure. And hopefully, that's a structural change that'll help us out as we, as Darron pointed out, deal with kind of the wage or - wage and other cost pressure at the beginning of '19.

And then hoping we could get a little more color on some of the conversations you're having with the customers about incremental capacity for 2019. How much visibility do you have in your highest demand? It sounds like your company will be able to fund any incremental capacity from cash flow from operations. But how much visibility do you have in those conversations? How in-depth are you at this point? Or is it just sort of initial conversations that indicate that, at least, demand is going up?

Well, the additional completion demand is going up. A lot of customers are still working through 2019 budgeting process. I think, directionally, demand will be going up. What that means for Ranger on the rig side, we say that we have enough rigs at this point to continue to build out around those rigs with additional ancillary equipment that will further drive 24-hour completion-type [indiscernible] opportunities, will be our growth aspect of the rig side. We continue to see customers talking about, especially in Permian, lateral lengths getting longer, lateral length getting materially longer, which bodes well for our high-spec rigs and drill-out process that we're seeing there. So great opportunity there. On the wireline side, again, all of our units are working on a dedicated basis. Every unit that we put out still has been delivered, has gone out on a dedicated basis. So we still virtually run 100% utilization there. You would expect that the Permian takeaway constraint issue starts to subside in the back half of 2019, will lead to additional growth opportunities for that business as well. And then on the Torrent side, we continue to see growth in that business. As Brandon mentioned, we put out a couple of more MRUs. We're transitioning to newer higher-priced contracts, which reflects the demand of those assets. So great opportunity going into 2019. We expect activity to be up for the reasons I've just given. But as far as specific clarity from customers, again, they're working through their budgeting processes.

[Operator Instructions] Our next question comes from John Daniel with Simmons Energy. Please go ahead.

Good quarter, and please excuse me if I'm not - I'm driving right now, so I don't know have my numbers in front of me. But I guess, congratulations, I think your EBITDA is more than your largest peer and rapidly approaching the second largest well service players so on a much smaller asset base. Congratulations there. Can you speak, Darron, just to the - if you have this, an optimal size or desired size for the Mallard business?

Yes. So first of all, thank you for the night's opening commentary there. And specifically, be careful driving. And hopefully, you pull over to the side of the road while listening here. To the Mallard side of the business, optimal size. That business has great performance, and we want to grow that business. We'll be strategically looking at where will the next basins be that we will move and penetrate. There are still growth opportunities in the Permian, but we're not going to hang our hat strictly on the Permian. So I don't want count or give specifics as far as what an ideal unit count would be. I've always been a believer in running oilfield service company that you need consumer diversity, you need geographical diversity. Right now, we have great customer diversity within the Permian basin, which is one of the reasons that our revenue and performance have hugged in as we've seen operator slowdown. And with our performance, while we've been attached to a frac fleet that's been released, we've actually had our spread moved to another frac fleet where they're keeping them. So that customer diversity we have is a great attribute to the business. We now need the geographical diversity. So we'll continue to look to grow that business into 2019 and beyond for the reasons stated.

When you look at the revenue generation from your wireline businesses, it's really good. And I'm just curious, is there anything different from a design standpoint from your units that you've got out in the field versus maybe the traditional wireline unit? Just any color there would be appreciated.

Well, I think when you look in the comment I made that we started the business a year ago, and we do 100% pump-down completions. We do the oil production and maintenance work. And so when you look at our unit design and when you look at the ancillary equipment and when you look at the pressure control equipment, all of the equipment was procured within the last year, specifically for long lateral horizontal wells that need high efficiency for completion opportunities to keep frac spreads up and running. And so I don't want to give specifics of our assets, but when you look at the type of assets that we have, they are purpose-built assets for this type of activity and to drive this type of efficiency. As a result of that, the customers are meeting that demand. That's very different than wireline companies that were started 3, 4, 5, 10, 15 years ago that have a different type of asset base that was more geared toward vertical well completions and more geared toward maintenance. Again, we are a completion-focused pump-down company. The great attribute of that is it's allowed us to have an ancillary equipment to pump down spreads that we've added to it. So those pump-down spreads have gone out, attached right to our wireline business and running at the same utilization. So a very, very good business model. We have a very, very good team running that business that we're very proud of.

At this time, I'm showing no further questions. So I would like to turn the conference back over to Darron Anderson for any closing remarks.

Thank you all for participating in our third quarter call. Thanks for your continued support. And to our different brands of Ranger, Mallard and Torrent, thank you for the hard work that you're doing to produce these performance and benefits. So we look forward to talking again at the end of the fourth quarter. Thank you, everyone.

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