Select Water Solutions, Inc. (WTTR) Q2 2015 Earnings Report, Transcript and Summary

Greetings. And welcome to the Nuverra Environmental Solutions Second Quarter 2015 Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Liz Merritt, VP of Investor Relations. Thank you, Ms. Merritt. You may begin.

Thank you, Operator. Good morning. And welcome to Nuverra Environmental Solutions second quarter 2015 conference call and webcast. As we turn to slide two, I would like to introduce today's speakers. With me are Mark Johnsrud, Chairman and Chief Executive Officer; and Greg Heinlein, Executive Vice President and Chief Financial Officer. Before we get started, we will quickly cover a couple of items. First, we will be using slides to accompany today's call. These slides are accessible on the Investor Relations page of our website at www.nuverra.com, where you will also find a link to a replay of today's call about an hour after we conclude. Moving to slide three, today's presentation will contain forward-looking statements about our expected financial and operational performance. This includes revenue trends, the expected performance of our businesses, and our strategies, services, cost controls and related matters. These statements involve a number of risks and uncertainties and could cause actual results to differ materially from our projections and include a variety of factors, some of which are beyond our control. Potential risk factors that could cause these differences are described in our SEC filings, including our Form 10-Q for the three and six months ended June 30, 2015, our Form 10-K for the fiscal year ended December 31, 2014, our current reports on Form 8-K and our press releases posted on the Nuverra website. These documents maybe obtained from the SEC or by visiting the Investor Relations section of our website. All information provided on this call is as of today, August 10, 2015, and Nuverra undertakes no duty to update or revise this information based on new information, subsequent events or otherwise. Today's discussion will also include certain non-GAAP financial measures, including adjusted EBITDA. Reconciliations of our non-GAAP measures to the most closely related GAAP results can be found in our press release. With that, I will turn the call over to Mark Johnsrud, Chairman of the Board and Chief Executive Officer.

Thank you, Liz, and welcome, everyone, to our call. Let's turn to slide four for a review of the broad industry trends that impacted results in the second quarter. First, rig counts continued to decline. In the Bakken, rigs were at a five-year low of 74 as of August 5th, representing a 62% drop in rig count from a year ago. Overall, the national decline from year ago is about 53%. Rig count declined since 2014 peak in other basins that we operate include 29% drop in the Haynesville, a 57% drop in the Eagle Ford, 42% drop in the Utica and 21% fewer rigs in the Marcellus. In this environment, operators are seeking to reduce costs and meet their 2015 plans with fewer drilling rigs drilling more efficiently than ever before. The North Dakota Division of oil and gas puts it this way, operators are running one to two fewer rigs than their planned minimum to determine if drilling times and efficiencies will continue to improve. Operators are also moving their drilling rigs to Tier 1 acreage or initial production is much higher thus requiring fewer rigs to maintain production. With WTI price is dropping below $50 per barrel in recent weeks, we would expect more pressure on operators to find ways to drill wells quicker, more efficiently and at a lower cost. Secondly, E&P capital spending expectations were further lowered in the second quarter. The recent industry report shows worldwide 2015 CapEx cuts of roughly $150 billion and North America capital spending projected to decline about 34%. Our expectation is continued lower oil prices will curtail spending into next year. Finally, U.S. oil production continued to decline into the second quarter and early into the third quarter, amid reports that global oil supplies remained ample. At the end of July, weekly production data hinted that the oversupply of crude was beginning to shrink with inventories of domestic oil falling 4.2 million barrel. August U.S. production estimate showed a decline of 91,000 barrels per day. Despite this trend, global oil production continued to exceed consumption, resulting in worldwide inventory builds that may continue into next year. What this means for Nuverra is, we will remain consistent with our operating strategy and our goal to remain free cash flow positive for the year. We will support this by prudently managing expenses, enhancing operating efficiencies, preserving capital and remaining responsive to our customers and flexible to changes in the operating environment. As difficult as this feels, we are pursuing growth opportunities in a couple key areas and we will talk more about that in a minute. However, as most leading companies do during downturns, we are making selective investments in growth initiatives, so that we are positioned for stronger, more consistent returns in the -- when the up cycle comes. More on that to come. On slide five, revenue from continuing operations for the second quarter was $92.4 million, down 22.4% sequentially from the first quarter and 27% from the second quarter of 2014. This compares with year-over-year rig declines in the basins where we operate of more than 50%. Sequential declines was driven primarily from further reductions in drilling and completion work, especially in the Bakken. This was in addition to full quarter impact of pricing concessions earlier this year. We believe most operators have obtained substantial price reductions from their water logistics providers with some weaker peers exiting altogether. We do not believe current prices are sustainable over the long-term. A closer look at our mix between non-rental and rental revenue provides a good illustration of the profound impact of lower drilling and completion activities. Total non-rental revenue, which includes fluids and solids management services was down 20% in the second quarter. Rental revenue which was generated from equipment debt is almost exclusively supports drilling and completion work was off by nearly 65% from 2014 levels, which directly correlates to the rig count decrease in the Bakken where the vast majority of our rental fleet is located. In the Southern Division an overall decline in water logistics revenue was partially offset by 11% sequential increase in revenues for both the Haynesville Pipeline and West Texas Water Transfer Services. Southern Division adjusted EBITDA margins were up 230 basis points, compared with the second quarter of 2014 and up 340 basis points on year-to-date comparison. This speaks to the effectiveness of our cost management initiatives coupled with efforts to maximize operating efficiencies. The Marcellus/Utica delivered solid performance in the second quarter. We achieved steady growth that included new customers, which drove year-over-year revenue increases of nearly 22%, a key factor was higher activity levels. Volumes into the water recycling facility were up 93% and salt water disposal volumes were up 9% when compared to year ago. We also generated substantial margin improvements of 810 basis points, compared to the second quarter of last year and 700 basis points on year-to-date comparisons to 2014. Given these tough market conditions our team in this region has done an exceptional job of positioning our business for increased reliance and recycling, reuse and disposal options. With that, I'll turn the call over to Greg to cover our results in more detail.

Thanks, Mark, and good morning, everyone. On slide six, revenue from continuing operations for the second quarter was $92.4 million, a 22.4% decrease sequentially from the first quarter and the 27.1% decrease when compared to the second quarter of 2014. As Mark touched on, the decreases were due primarily to further declines in drilling and completion activities. Additionally, we experienced a full quarter impact of pricing concessions, which contributed to lower revenues and margin compression. Net loss from continuing operations for the second was $20.6 million or a loss of $0.75 per share, compared with a loss of $24.7 million or loss of $0.97 per share in the second quarter of 2014. For the year-to-date period, net loss from continuing operations was $32.6 million or loss of a $1.18 per share, compared with a loss of $36.6 million or loss of a $1.45 per share for the first six months of 2014. On an adjusted basis, net loss from continuing operations, excluding special items was $18.5 million or a loss of $0.67 per share in the quarter and a loss of $29.8 million or a loss of $1.08 per share year-to-date. Adjusted EBITDA from continuing operations for the second quarter was $12.3 million, with a margin of 13.3%. This compares with adjusted EBITDA from continuing operations of $18.79 in the first quarter and a margin of 15.7%, and adjusted EBITDA of $22.9 million with a margin of 18% in the second quarter of 2014. On a year-to-date basis, adjusted EBITDA from continuing operations was $30.9 million, at a 14.6% margin, compared with adjusted EBITDA of $41.8 million and a margin of 16.4% for the same period in 2014. While we had hope to hold second quarter margins near first quarter levels, the reduction in volumes could not be fully offset with cost reductions during the quarter. Revenue declines were primarily related to lower overall base of water logistics, solids management and rental revenues, offset somewhat by the $53 million in cost reductions achieved in the first half of the year. As Mark mentioned, our rental business has declined at a faster rate than our non-rental business, primarily affecting the Bakken region and secondarily the Eagle Ford. Rental revenue for the quarter was down 64.7% from the second quarter of 2014 which was directly the result of lower utilization in conjunction with significant reductions in drilling and completion activities. It is noteworthy that we have aggressively reduced first half operating costs and expenses by 19.5% to help offset anticipated revenue declines and minimize margin compression. Our headcount reductions have been 22% since the start of the year. On slide seven, we begin our division review, starting off with the Rocky Mountain Division, where the substantial drop in drilling and completion work that we discussed earlier is evidenced in the results. Second quarter revenue was $47.6 million, down 38.6% compared with second quarter 2014. On a year-to-date basis, Rocky Mountain Division revenue was $117 million, a decrease of 26.6% compared with the same period in 2014. These results were primarily driven by the accelerated decline in overall drilling and completion activities, which substantially reduced demand for water logistics, solids management and rental services, as well as an impact from customer pricing concessions. Second quarter adjusted EBITDA for this division was $10.8 million, a 53% decrease compared with $23 million in the second quarter of 2014. Adjusted EBITDA margins declined to 22.6% from 29.7% in the same quarter of 2014. On a year-to-date basis, adjusted EBITDA was $29.1 million with a margin of 25% compared with adjusted EBITDA of $44.7 million and a margin of 28% in 2014. Given the decline in this region, we are taking further cost management measures to rightsize the business to lower activity levels. Let’s now turn to slide eight and review our Southern Division results. Second quarter revenue was $17.4 million, a 35% decrease from the second quarter of 2014. On a year-to-date basis, Southern Division revenue was $39.8 million, a 26% decrease when compared to the same period in 2014. In the Haynesville, pipeline revenue was up 11% sequentially. Revenue related to water transfer services in South and West Texas also trended up 11% sequentially. These increases were offset, however, by decreases in water logistics and disposal revenue due to the overall reduction of activities in the region as well as pricing concessions. We also experienced a fair amount of storm-related slowdowns in our southern operations in May and June, which impacted revenues and drove higher operating costs. Second quarter adjusted EBITDA for the Southern Division was $1.9 million, down 18% compared with $2.4 million in the second quarter of 2014. When we look at adjusted EBITDA margins for the quarter, we achieved 230 basis point increase to 11.1% compared with 8.8% in Q2 of ‘14. These margin improvements were driven by shift in revenue mix toward our water midstream assets and a corresponding reduction in core logistics expenses. Year-to-date adjusted EBITDA for this division was up 8.5% to $4.2 million and margins improved by 340 basis points when compared to the same period in 2014. Turning now to slide nine our Northeast Division, second quarter revenue was $27.4 million, an increase of nearly 22% when compared with the second quarter 2014. On a year-to-date basis, revenue for this division was $54.7 million, an increase of 31% when compared to the first six months of 2014. Results in the Northeast continue to be driven by ramping up of activities among several large customers. In the second quarter, this activity drove higher salt water disposal volumes with increases of nearly 90% on a year-over-year basis. Additionally, we have seen substantial growth in our customer base for services that are water recycling facility with volumes there up 93% year-over-year. We're also pleased to mark significant improvements in adjusted EBITDA and margins in this division on both the quarterly and year-to-date basis. Second quarter adjusted EBITDA in the Northeast was $4.7 million, a 135% increase when compared with the second quarter 2014. Q2 adjusted EBITDA margin was up 810 basis points to 17%, compared with 9% in the second quarter 2014. Year-to-date adjusted EBITDA was $8.4 million, an increase of more than 140% when compared to the first six months of 2014. Again margin improvement was meaningful with an increase of 700 basis points to 15.4% from 8.4% for the 2014 year-to-date period. The margin improvements were due to the overall higher base of revenue combined with the impact of cost management initiatives. Let’s turn now to slide 10 and take a closer look at progress we've made to reduce cost. During the second quarter, we took additional measures as we continue to align our cost with this slowing in drilling and completion activities. We reduced total Q2 cost and expenses by $38.8 million. This included $11.5 million in compensation savings and a sequential personal reduction of approximately 15%, $6.2 million in fuel savings and $18.1 million in legal and all other expense savings. We also noted a $3 million reduction in depreciation and amortization expenses. Year-to-date we’ve achieved a reduction of $53 million in total costs and expenses or a 19.5% reduction compared with the first six months of 2014. We responded as quickly as possible during the quarter as the decline in drilling and completion activities progressed and have identified more costs that we are attacking quickly, given the current environment. We previously guided to a reduction in total operating cost expenses to a range of $30 million to $35 million. We now estimate our full-year savings will be approximately $100 million compared to 2014 levels. On slide 11, net cash provided by operating activities from continuing operations for the year-to-date period was $42.3 million compared with a negative $3.8 million for the same period in 2014. The increase was largely driven by lower CapEx expense, improved collections and collections cycle times and a strong focus on cost management. DSO improved by five days to 60 compared with 65 days in the first quarter. As Mark mentioned earlier, maintaining positive free cash flow is one of our key initiatives for the year. Our team has done an exceptional job bringing down DSO on this challenging environment. Year-to-date net cash CapEx was $7.3 million, which includes $3.4 million in asset sales. The majority of the net spend related to investments at the Terrafficient facility as well as targeted transportation related equipment in the Baaken region. Our full-year net CapEx guidance remains in the range of $10 million to $15 million. Total liquidity as of June 30th was $63.8 million, including $34.6 million in cash and $29.2 million of net availability under our ABL credit facility. We continue to deliver strong cash performance for the second quarter, generating $35 million of free cash flow in the first half of the year. This demonstrates our ability to preserve capital and operate within cash flow even in a tough market conditions. With that, I’ll turn the call back over to Mark for our final commentary and then we’ll open up the line for questions.

Thanks, Greg. Please turn to slide 12 to summarize there is no doubt we’re up operating in a very challenging market and visibility recovery is limited. A lot simply depends on oil and gas prices and there are too many political crosscurrents to know whether we have stabilized. Based on our discussions with customers, we do not believe capital spending will increase meaningfully as long as these lower oil prices persist. Given the recent weakness in commodity price, utilization of pricing for the service side of our industry may be adversely impacted through the remainder of the year as customers maintained a very cautious approaching to spending. We are planning for a slow, methodical recovery sometime in 2016 as such we will remain focused on our customers aggressively managing costs and being very prudent with our capital. Our employees are doing an excellent job adjusting to current market conditions without compromising the quality of our services as we meet the needs of our customers each day. Let's turn to our final slide 13. We continue to focus on key growth initiatives on our Bakken water midstream project. We have made significant progress in the second quarter to secure the rights of way necessary for the construction of the first four segments of the McKenzie County water delivery and gathering system. We have selected a leading global EPC firm for this project and we have completed our system engineering and material bids. We are targeting to begin construction during the third quarter subject to selecting the right financial partner. We are finalizing our choice for a partner who shares our vision of building a platform of water midstream projects while achieving reasonable economics. Because of the high density well spacing and enhanced completion techniques, which require significantly more water, our customers recognize the efficiency and compelling economics that the water midstream services can bring to their well cost. We remain committed to the water midstream space and continue to advance the XTO project.. Turning to an update on Terrafficient, we efficiently introduced our new solution for the recycle and reuse of drill solids to the public earlier this summer. We were pleased to be joined by North Dakota Governor Dalrymple and industry leaders as we were named as one of the state selections as a pilot project facility under the North Dakota Bill 1390, which cleared the path for the development of the state regulations on recycling and reuse of industry waste. Shortly thereafter, we were awarded a $744,000 research grant by the North Dakota Industrial Commission Oil and Gas Research Council to demonstrate the beneficial use of recycled drill cuttings through the Terrafficient process. As we announced in late June, we believe the conversion of drilling waste to valuable reusable products will have a significant impact on the environment and simultaneously reduce material and transportation costs. We are working on three independent programs with state and county agencies to verify the performance of the Terrafficient program for road surface material, general fill, and landfill cover. We have spent considerable time with customers, who are actively reviewing and evaluating the use of Terrafficient in their drilling programs. During Q2, we continued testing and calibrating our equipment with various consistencies of wet drill cuttings for customer's wells. Depending on each operator’s process, the variability of cuttings can be quite different from one operator to another operator. As such, we've been working to refine our handling and processing methods accordingly. It’s worth noting that the same customers, who are interested in our Terrafficient process, are customers we are talking with on our water midstream projects. These two activities focused on long-term solutions for the industry and our customers are proactively engaged in reviewing and evaluating both options with Nuverra due to our widespread regional expertise. Our customers are focused on reducing costs, creating greater operational efficiencies, and reducing environmental exposure. We're working directly with customers to accomplish these objectives through our water midstream business and Terrafficient. As an integrated provider, these are the types of projects that we are building our company around. This concludes our prepared remarks. Let’s open the lines for your questions.

[Operator Instructions] Our first question comes from the line of Eric Stine of Craig-Hallum.

Hi, Mark. Hi, Greg.

Good morning, Eric.

Just wondered if you could expand a little bit on the competitive environment, you talked about it. But, I mean, is this anyway to quantify the share gains you may be seen with customers as they move away from small providers?

That’s probably kind of a hard thing to differentiate. But I guess the way that we’re looking at it is, when we look at our key customers, are we -- are we kind of the first call, second call, or third call. And I think that as we look around into each of the individual basins, I think we feel very positive about where we are with each of our customers. At the same time, I think we're starting to see some of the small competitors that are probably at kind of current rates having hard time being competitive or staying cash flow positive. One of the things that help us too is that, where our transportation then is supplemented by in the Northeast by our water recycling or our disposal wells. In Louisiana, we have our pipeline and disposal systems. In the Bakken, we have our landfill, disposal wells. And ever though our rental business is down, we still have a nice market share of what percentages are remaining with the drilling rigs that are out there today.

I mean, is that something we are -- I know your goal is to take a customer and go national with them, I mean is that something that spurred discussions along those lines? Or are that more of a long-term process?

I would say that today that most of the customers are not in every basin, that we have some customers that are a lot stronger than oil versus gas. There's some also some more regional type players. One of our largest customers in the Bakken is in a couple of basins and we take care of most of their work in both basins. So I think that we are trying to use that common group -- common shares of service for the customers where we can. But the environment is kind of challenging today.

Okay. Thanks for that. Maybe just turning to pricing, I know in your commentary think these levels are not sustainable over the long term. And with the oil price decline over the last five, six weeks, I mean do you anticipate or are you seeing additional requests for concessions in 3Q, or do you think that's something that’s kind of leveled off?

Yes. This is Greg, Eric. Generally, we see it having levered off, but it’s early in the quarter, right. We are midway through the quarter. So we will wait and see how it unfolds. But generally from other earnings releases we’ve seen from our peers as well, from the large guys, Halliburton to Schlumberger to smaller guys onto us, most people are saying they are unsustainable right now. So it’s $40 to $45 oil. So we will see how that oil unfolds.

Our next question comes from the line of Michael Hoffman of Stifel.

Hi, afternoon. This is actually Brian Butler in for Michael today.

Hey, Brian.

Hey, Brian, how are you?

Good. Thank you for taking the question. First one just on the free cash flow and your thoughts for the second half, how should we think about the working capital -- working capital trending? You had a big positive on success on the DSOs. How does that -- does that reverse in the second half, or should we expect working capital again to be positive going forward here?

Yes. I think we have accomplished a great deal in the first half of the year. We’re not smart enough to call whether it’s going to end up at 57 or 63, on which side of 60 it ends up. The entire team is focused on improvements, continued improvements, avoiding any kind of credit risk or calamity around weakness in customers. So we’re going to keep driving that as hard as we can, but it feels like we've accomplished a great deal and we will see how the second half unfolds. Again, as I said in the first quarter, if it ramps up substantially in the second half, which no one is expecting, but if it were, that typically is a use of working capital. Under this environment, we think we have accomplished a great deal for the first half already.

Right. But Brian activity really increasing and you should be thinking about that being more flattish, I am not saying you are going to see another huge increase, but is that the right way to think about it in the current environment?

Yes. I think that’s a good assumption.

Okay. And then on the water pipeline where you talk about selecting a financial partner that suggests that it’s not a matter of if there is a partner, it’s a matter of just picking the best partner at this point?

Yes. It’s never been of our -- yes, it’s about who and when. And we’re trying to do the right thing to have the right kind of structure that benefits Nuverra and their partners and XTO, our customer.

And then the push-on on the construction because I believe that was supposed to be more summer than third quarter, but is that still pending on just getting the rights of way or is that really still on selecting the financial partner?

It’s a couple of things. Right of ways we’re making good progress and then having the right financial partner making sure that we can build the first four phases this year and go the distance and the spending that that will require.

There is one more thing that is really taking quite a bit of time for us also, and that is the enhanced completion techniques. Year ago when we started talking about this, everyone was still looking at kind of 40,000 to 60,000 barrels a day of water that will be used to frac oils. And I would say probably two-thirds of the operators in the McKenzie County core area North Dakota are now talking about how the enhanced completion techniques are significantly increasing their overall production, and that’s causing a reduced breakeven cost for them. As a result that much more water really had us step back and kind of evaluate and rethink our original engineering and so that we can handle four to six times the amount of water at a frac and then consequently in flowback.

So potentially resizing the pipe?

Resizing the pipe but also just rethinking about how we are going to operate, because there is a -- that’s just a lot more volume water, pipe size, pump size, volumes that need to come in and then ultimately how do you handle that much volume that comes back relatively short window during slow back.

Okay. Great. And then, on the Northeast activity, how is that trended into the first part of the third quarter? Is that still been very positive or we’ve seen any changes now we had a little bit of the pull back in pricing?

I think so far we’re very pleased with what we see out of our region. I think that having our water recycling and disposal wells in place in good locations and our management team up there has done an excellent job of working with existing customers and then adding some new customers to our current mix.

And the Northeast is primarily gas oriented, so the recent pull back in oil hasn’t really affected that, so its been pretty good this year.

Our next question comes from the line of Joe Giordano at Cowen and Company.

Hey, guys. How are you doing?

Hi, Joe.

Joe, how are you?

Good. Just to follow on that question on the Northeast. Is now -- if we assume steady-state activity levels and that basin, is this like $27 million-ish, is that a fair baseline to think about exclusive of activity changes?

Yeah. Joe, generally, we don’t give a whole lot of guidance. I know its helpful to you guys, but we typically don’t give a lot guidance by basin. We are pleased with the results of this division and the team that’s been taking share in that area, but generally we don’t give guidance basin by basin overall of the company.

Okay. And then last quarter you mentioned in the Southern, that you had some plan maintenance to do on the pipeline that you thought would impact some of volumes and then did we see 11% sequentially up, so did that maintenance go forward?

We have a little more work to do on our maintenance down in there, but we really do not see that that’s going to -- if there is going to be any decline in volumes its going to be minimal.

Okay. So you guys offset that with -- you did most of the work during this quarter and this is still like the result was still plus 11%, okay. Then how would you categorize overall or if you call out anything specific on basin by basin the percentage from -- the percentage transformation from drilling completion towards produced water like where do you stand now?

It continues to move closer to that 50-50 threshold. We thought we would accomplish this year more as a result of drilling and completion activities falling off. So we are making progress there, but overall revenue you can see it for yourself.

Sure. Okay. And then, lastly from me, can you just talk about the sustainability of your spending levels here and your staffing levels here? How -- at what point did that start cutting too far or can you stay steady-state like this, you feel comfortable operating at this level comfortable until its necessary to do more?

Yeah. In the first quarter, we said we would take a wait-and-see approach to how the second quarter performs in sort of CapEx budget expectations for the remainder of the year. I think with the recent decline in oil prices that has a lot of customers and operators very cautious about the remainder of this year and most are calling for recovery sometime in 2016, certainly not this year. And so we’re going to do what we have to do to be healthy and positioned and while the first round of reductions are never easy, no ones want to see it carried out continuously. And so, we've taken actions in the second quarter and a little bit in the third quarter that we think will sustain us through this down cycle.

Our next question comes from the line of Scott Graham of Jefferies Company.

Hi. I kind of want to feedback on same question that was my question. Let me ask you maybe a little bit differently. Last year you guys and we take cost of sales and G&A, and sales general and administrative add it altogether about $500 million to $525 million of cost and you’re taking $100 million out? I guess, it would be helpful to know what the $520 -- actually $525 million of cost were fixed versus variable, you have an idea?

Yeah. Generally, Scott, because of the need for drivers and transportation and rental equipment, our costs have been more variable than I think the marketplace has realized this year. And certainly as I came in, when I first looked it, and that has helped us dramatically. So much higher, I won’t give you the percentages, but a much higher variability than we first thought coming into this downturn. We provided a six-month breakdown of our cost reductions. We’re not going to guide as to the back half of the year with the remaining $550 million comes from, but it will be the same things you're seeing in the first half of the year. It will be personnel, it will be fuel, it will be transportation-related, whether its trucks, et cetera, and then on the SG&A type, Mark and I take an aggressive look at SG&A costs, and nothing is too small. So that's sort of high level summary of where its going to come from.

Okay. Let’s maybe talk about that now versus let say, year and a half from now, when I guess, we’re all hoping that oil prices are higher pricing barrel and all that. While these reductions a few appear to be drivers and I don’t know the percentage, but I am guessing its one of a larger percentages? These folks have been meticulously trained for several years and as one of the thing that the prior regime talked about a lot as there were inefficiencies back a couple years ago, because the drivers were still learning, but now that they’ve learned, now we’re letting a lot of them go. So when things turn back positive, how do we handle that?

I guess, first of all, I think, that there is, we are seeing some decline in the total number of drivers we have, but some of are -- some of things we’re just looking at Scott though overall is our fixed costs also and taking a look at what do we need, all companies when you go through a downturn. Last October, we all anticipated that there was going to be higher prices and everybody was ramping up and we were extremely busy. So you're adding personnel throughout most of 2014 with the anticipation that they would get busier and you would train them. As we come into ‘15, now we’re taking a look similar to our customers about how do you end up being as absolutely laser focused and get as lean as you possibly can looking at efficiencies. So I think what we've done is we’ve gone back in. We tried to differentiate what is key and what is maybe not key focus on the pieces of business that we make money at. And there is few you things that we were doing that were probably nice for customers, maybe easy but we probably didn't make any money out it. And consequently, we’re going to remove that and stay solely focused on areas where we can expand our business long term and how we can focus on being a lot more efficient with the utilization of equipment and also at personnel.

Fair enough. Some of your more profitable business, I’m assuming rental, I'm assuming disposal. Generally speaking those are maybe kind of competitive advantages that you have that can help you during the downturn. What is the focus right now being placed on those assets as part of your -- just really trying to keep EBITDA as high as possible.

Yeah. It’s huge. That’s a great question.

That's exactly where we’re at. We’re definitely, we’re looking at how do we end up in the Northeast. We still think we have a little more utilization out of our disposal wells over there. We’re trying to put in some more automation, so that we can look at how can we add another few percent or increase our volumes that would come in there. So we’re trying to really just tweak some of the dials on pieces of business that have higher margins in it. Our Haynesville Pipeline is just great example of what we hope to repeat with the XTO project. Incremental volume through that is huge, it falls right to the bottom line and our team is focused on that. Sometimes that supported by trucking activities, sometimes it's a support with customers tied in directly. And so we’ve got a number of dials like that, that we’re turning. This is all about utilization. And as Mark said, we’re trying to make sure every asset we have and every personnel we have is fully utilized during this down cycle.

And this is my last question I promise, just to kind of fill out the previous question, on the rental side, what percentage of your rental revenue actually goes toward improving the customer’s efficiency, solutions like that?

Most of I would say that as we’ve seen our percentage of rental revenue decline, it is correlated almost exactly what the rig count decline. And I think that when I take a look at the fleet of equipment and with the services that we provide around it, I believe we were the best in class. I think that’s why customer chose us because we were efficient. We made sure they didn’t have down time. If they had any issues, our service team was out there and took care of them, so there was no down time for that operation. So I think there is a balance between the core equipment. I think the delivery of it and then I think the servicing side of it and I think that it was very customer focused, Scott, and I think that's why -- you know that business did so well.

Our next question comes from the line of Scott Levine at Imperial Capital.

Hey good afternoon or good morning, guys.

Good afternoon, Scott.

So I guess, I would ask if you guys saw any material stabilization or improvement in your business when oil move back towards 60 and then conversely a pull back in activity just focusing strictly on the volume side of things, as oil pulled back from that level to where we are today. And whether that answer to that question would differ dramatically based on geography focusing you’re your oil rich basins.

Maybe the right way to look at that is, we all felt a lot better when oil was moving up towards $60 to $62 to $65. As we’ve seen this come back down into the mid ‘14s. I think just psychologically, I think that it starts to make us feel a little more concerned, a little more leery. The other factor is that when customer almost everyone is talking about operating with inside of free cash flow. So only when you sees the prices decline, chances our activity is going to pull back some also. Because this is such a recent event, we really don’t know how many customers during this period hedged at 60ish type range, forward sold all of that. So, I don’t know if we had full visibility into nearly that much information. But I would say activity -- I don’t think we’ve seen it materially increase or decrease in the last two to three weeks.

Got it. Couple of follow-ups. Firstly, on the cost saves, is that 53 million year-to-date numbers, is that run rate number versus a $100 million run rate you expect to get through by the end of the year. Is that right, the way you to think about that?

Yeah. That’s right.

Got it. Do you know how much was realized of that run rate in the first half in the P&L or not?

It was predominantly all realized.

Prominently all realized. Okay. Got it. Maybe lastly then with regard to the pipeline you are planning for the Bakken. Not asking for a probability here, it sounds like your focuses on getting invest partner. But are you any less confident that that will proceed now going forward or should we think about this as being a situation where it hinges on finding that partner and agreeing to terms that you're comfortable with or maybe just trying to assess your conviction level this project proceeds in this environment relative to maybe last quarter or when you initially start the agreement last year?

Now we feel very confident that this is going to move forward. We have done -- our team has done a great job of getting the right way lined up. As we talked about, we had to go back as the number of customers that are adjacent to XTO and with the XTO, we are talking about enhanced completion activities. We had to go back in and rebuild our engineering model that took us a little bit of time and then going back and making sure that our long-term model really fits both XTO and then other potential opportunities in that area. So we feel very confident. The other part is that there are -- we just want to make sure that we're working with somebody that also has what we can do with XTO today. And as this business continues to grow over time that has the expandability so that we can find one partner rather than multiple partners.

Got it. Thanks.

Thank you.

Our next question comes from the line of Sean Hannan of Needham & Company.

Yes. Thanks. Good morning. And thanks for taking my question here. Just want to make sure that I can fully appreciate the comments you’ve provided around the outlook and I do realize if there's obviously some murkiness here as you certainly talked a fair amount of rounds. The market needing to stabilize and a lot of us appreciate that. But the results you had in June. And when we think about typically what we would see in third or fourth quarter or second half, it sounds like to me and if I'm hearing this correctly, we expect more so that there can be incremental softness that could occur sequentially through the course of this year perhaps. And I just want to stop there and see if we're understanding some of these correctly?

Yes. Sean, I think it’s too earlier to say affirmatively to your question whether there could be. It’s mid August so we'll see. We are just this recent like down in oil prices, I think causes everyone down a little bit of pause and rethink their capital spending for second half of this year. It wasn't that long that, operators were talking about adding rigs and in fact the last four weeks you’ve seen rig counts increase. So there is just a lot of moving parts right now. So like, we don’t give guidance. So I’m not going to tell you that’s going to be sequentially down. I think we did talk about that in the second quarter relative to our first quarter that we thought we’d see a sequential revenue declines in the second quarter. It’s too early to call that yet for us for the third and fourth quarter.

Okay. Now how about if I were to drill into the Northeast, I think we've got a little bit of a different dynamic there based on the gas focus. And you have provided some comments in the calls so far. But can you talk in a grander scheme for the region any ability to really grow that area further to the degree that you would have good opportunity to do that in the near and medium term? If you can comment around that, that would be great.

Yes. We are trying. Obviously, every basin is trying to grow off of what I’d call a very, very soft second quarter for us. In the Northeast in particular, our guys are focused on improving efficiencies. So that there is a opportunity for revenue growth, whether it's around our recycling activities, whether it’s around our saltwater disposal and doing some automation that allows us to bring more volumes through. Operators are constantly asking us to step in and pick up activities where maybe weaker competitors have fallen off, but it’s early. And so I think people are extremely cautious and that’s all we are trying to convey as well today.

Okay. And then in terms of Southern division, you had some benefit in terms of increased valves in the pipeline there. Just want to see if there is a little bit more clarity around what perhaps had driven that. And are there any view points around how sustainable that was because obviously that was a positive offset in the quarter. So if that was a little bit more one-time, just trying to get a little bit more prepared for that dynamic? Thanks.

Our guys have done a fantastic job of getting behind our midstream focus and recognizing that every dollar that goes into that pipeline kind of helps fall to the bottomline because it’s fixed and it’s been built. So everything that they have done in going after opportunities in the south has been to help feed that asset. And we’ll see what the third quarter holds, but our hope is natural gas prices, which that predominately built around holds up here and we continue to try and track more volume in the third quarter for them.

So there is an aspect you feel that is sales driven and potentially sustainable.

Yes.

Okay. All right. That’s it for my questions. Thanks so much.

Thank you, Sean.

Thank you.

Our last question comes from the line of [Michael Rodgers] [ph] of Boenning & Scattergood. : Good afternoon, Mark and Greg. Thank you very much for an excellent job you have done in a difficult environment. I’ve got quite a few clients in your fixed income, the [9 and 78 of 18] [ph]. On the strength of your presentation, I’d like to assure that interest payment will be met in October.

Michael, nice to talk to you, this is Greg. Yes, obviously, we’re intending to making interest payments, yes. Thank you. : Okay. And the second thing is might you consider that retiring some of your debt in the open market because it trades at a considerable discount?

Yes. We are not going to comment on that. Thanks.

I would say the only thing that we are -- because there is some -- there is enough uncertainty we believe that liquidity is paramount today and we want to keep ourselves flexible as we can. : All right. Thank you very much for good presentation.

Thank you.

Thank you.

I would now like to turn the call back over to the management.

We want to thank everyone for joining us today and look forward to getting together with all of you and talk about Q3. Thank you.