FTS International, Inc.
Q4 2019 Earnings Call Transcript

Published: 14 Feb 2020

[Operator:]

Greetings and welcome to the FTS International Fourth Quarter and Year-End 2019 Earnings Call. [Operator Instructions] As a reminder, this conference is being recorded Thursday, February 13, 2020.I would now like to turn the call over to Michael Messina. Please go ahead, sir.

[Michael Messina:]

Thank you and good morning everyone. We appreciate you joining us for the FTS International conference call and webcast to review fourth quarter and full-year 2019 results. As a reminder, this conference is being recorded for replay purposes.Presenting today’s prepared remarks is Mike Doss, CEO, who will also be joined by Lance Turner, CFO; and Buddy Petersen, COO for the Q&A portion of the call.Before we begin, I would like to remind everyone that comments made on today's call that include management’s plans, intentions, beliefs, expectations, anticipations, or predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the company’s actual results to differ materially from those expressed in any forward-looking statement.These risks and uncertainties are discussed in the company’s Annual Report on Form 10-K and in other reports the company files with the SEC. Except as required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statements. The company’s SEC filings may be obtained by contacting the company and are available on the company’s website, ftsi.com, and on the SEC’s website, sec.gov.This conference call also includes discussions of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures, as well as reconciliations of these non-GAAP measures to their most directly comparable GAAP measure.And with that, I’ll now turn the call over to Mike Doss, FTSI’s CEO. Mike.

[Mike Doss:]

Thank you, and good morning everyone.Despite the seasonal slowdown our fourth quarter came in better than expected. This was the result of very strong operational efficiencies in tracking ahead of schedule on the $40 million of annualized cost reductions we discussed on our last call.Revenue was $142 million down 23% sequentially while our state's count was down 10%. The drop in revenue was due to the lower activity, more customers providing their own sand and lower pricing which declined about 5% during the quarter.Adjusted EBITDA was $22.7 million up from $20.6 million in the third quarter, annualized adjusted EBITDA per fleet was $5.5 million compared to $4.2 million in the third quarter.SG&A was to $22.7 million higher than in the third quarter due to $2.8 million of accelerated stock comp related to layoffs. Excluding stock comp SG&A was $16.9 million in the fourth quarter, down from $18.2 million in the third quarter. For the first quarter SG&A is expected to be about $19 million including $3 million of stock comp. Net loss for the fourth quarter was $13 million or $0.12 per share.CapEx was $14.9 million up from $13 million in the third quarter with the increase driven by expenditures for dual fuel conversion kits. We ended the year with five dual fuel capable fleets, and we'll have seven by the end of next month.For the full year, CapEx was $54.4 million and we expect about the same or approximately $55 million for 2020. Maintenance CapEx is expected to remain at $2.5 million per fleet. Free cash flow was $19.1 million in the fourth quarter, and for the full year it was $69.5 million, including asset sale proceeds totaling $34 million we generated $103.5 million of cash during the year.As of year-end we had $223 million of cash and our net debt was $237 million, a $93 million reduction for the year. We have a total of $460 million of outstanding debt which consists of two pieces, a $90 million term loan due next year and $370 million of term of senior notes due in 2022. We're maintaining significant liquidity to increase our optionality while we evaluate possible liability management alternatives to extend maturities.Our average active fleet count was 16.5 in the fourth quarter compared to 19.8 in the third quarter. We ended the quarter with 16 fleets and currently have 17 working. Of those 9 are located in West Texas, 4 in South Texas, 2 in Mid-Con, 1 in the Northeast and 1 in east Texas. We completed 385 stages per fleet in the fourth quarter, an 8% increase over the third quarter despite more seasonally driven whitespace in the calendar.We have steadily increased pumping hours per day in stages per fleet every single quarter in 2019. We continue to see more customers focused on efficiency which working together with us allows us to achieve industry leading performance with fleets that routinely pump 18 or 19 pumping hours a day. With efficient moves between pads, these fleets are able to put away 250 plus stages per month. That kind of performance is only possible due to our crews’ complete dedication to service quality, highly effective operations’ leadership and our outstanding maintenance team.In terms of sales activities, the last 18 months have been challenging but current indications are that we are beginning to turn the quarter. Over this 18 month period, Natural gas prices have fallen in activity and gassy areas where we had a big presence, has declined. We went from 11 fleets in gas basins in mid-2018 to just 2 fleets today.We relocated several of those fleets to other areas primarily West Texas but that came at a cost to margins as pricing for new work became increasingly competitive. Also in late 2008 we began directing more of our sales resources towards solidifying longer-term relationships instead of chasing transactional work. We've always had both types of works - of work but the heavier emphasis historically on transactional work has caused us to be more sensitive to market changes than some of our peers.By transactional work, I don't mean the distinction between dedicated and spot. Transactional customers are those primarily focused on using the lowest cost provider rather than engaging in business partnerships that allow both parties to share in successes. The change in sales strategy is beginning to bear fruit. Over the last six months we have placed two fleets with strategic accounts that we view as long term partners.In addition, we have converted one of our spot customers which had used us as a swing provider to a more stable highly efficient dedicated customer. While the frac market remains oversupplied overall, our operations calendar has firmed up for the first quarter and we are receiving more than usual RFPs for this time of the year.It appears that some of our competitors are being more disciplined which has resulted in some unexpected tightness in the spot market. While we do not yet have pricing power this is a welcome development.In terms of pricing, we lost about 5% on contracts that rolled over to the new year. However, for new work this year and going into the second quarter we believe that pricing has stabilized. Despite slightly lower pricing we kicked off the year on a stronger footing in terms of results driven by further efficiency gains and sustained cost reductions. Currently we expect to average about 17 fleets in the first quarter and end with 18 or 19 fleets active. We also expect our annualized adjusted EBITDA to improve to between $6 million and $7 million per fleet in the first quarter.Next, let me give you a brief technology update. Our automation project which has been years in the making is now live. Computer-assisted pump control can now automatically take action to shut down pumps to show indicators of probable failure. It will soon be able to seamlessly redistribute the load to other pumps.This innovation will allow us to get more reliable hours out of our equipment, reduce costly repairs caused by excessive damage accumulation and maintain more consistent stage performance for our customers.Another project recently completed is a significant redesign of our blender reflecting over 100 improvements, the new blender is considerably more durable, easier to operate and easier to maintain. This is a perfect example of one of the perks of being a manufacturer where we can cost effectively and continually improve our equipment with operations in mind.Lastly on dual fuel, I mentioned earlier that we’ll have 7 dual fuel capable fleets by the end of next month. We've seen significant interest from customers in dual fuel over the last six months as a way to reduce fuel costs. We can convert a conventional Tier 2 fleet to dual fuel or capital outlay of only $1.5 million.We also have the capability to upgrade a fleet with the new CAT Tier 4 BGB engines. They have a higher displacement rate and a better emissions profile but they involve a more significant outlay of about $10 million per fleet. We would need a firm commitment from our customer before proceeding. However there is some interest in the initial field test results we have on the engines performance looks really good.That's all I have for prepared remarks. Operator lets please go to Q&A.

[Operator:]

[Operator Instructions] Our first question comes from the line of Taylor Zurcher with Tudor, Pickering, Holt. You may proceed with your question.

[Taylor Zurcher:]

First question I had is just on efficiency performance in Q4 and it sounds like embedded in the Q1 guide is some incremental efficiency as well. Probably, because there are some reduced whitespace in there, but could you just frame for us how much room there is left to go on the efficiency front moving forward, and what extent maybe customer mix or geographic mix in Q4 played a role in the stages for a quarter for fleet that you're able to do?

[Mike Doss:]

Sure. So as it relates to the fourth quarter the efficiency did tick up even though we did have more whitespace. I think a lot of it has to do with just customer type, the type of work we're doing more zipper operations as opposed to single well, you know tighter time between locations and less time between stages, less in PTOs it’s really a lot of those factors that resulted in the net efficiency gain.For first quarter the main driver for the efficiency gain is just less whitespace in the calendar. Fourth quarter you know I think as everyone expected was very gappy in terms of - in terms of utilization just very typical and a lot of customers for example took off the last couple of months, a couple of weeks rather of the quarter. And so we're going to see that tighten up in the first quarter, but very pleased with operations performance in the fourth quarter and they're continuing to do a great job.

[Taylor Zurcher:]

And then as we think about 2020 clearly the profitability is going to be higher in Q1 and not necessarily looking for guidance in 2020. But Q1 is sort of the status quo for the first couple of quarters of the year any way to frame expectations for free cash flow in 2020 and within free cash flow. What sort of impact you think working capital might have over the course of 2020?

[Mike Doss:]

Sure. I'll make a few comments, and Lance you can answer on the working capital. So you know there's always considerable uncertainty in the market but like I said we are starting off on a stronger footing higher than we had expected a couple of months ago. I think second quarter and third quarter are going to be a good quarters for us. I think second quarter we may flex up another fleet just given the RFP activity currently going on reasonable to assume that into the third quarter.Fourth quarter will probably be some measure of a repeat from last year, it’s hard to know, but it does seem that that's the way E&P companies tend to manage their capital budgets as that front load a bit and then really drop off at the end of the year. I'd like to change that but that's what we're currently anticipating. So I would say just a reasonable layout, first quarter better than fourth quarter of last year, second quarter and third quarter better and then fourth quarter probably similar to the quarter that just passed.

[Lance Turner:]

Yes. In terms of cash flow I think working capital year-over-year I wouldn't expect a big impact interquarter I think we'll have a usage in Q1 and then you know we usually have a release in Q4 so I expect that to be the same this coming year and then obviously you've got your interest in CapEx and so the expectation is to produce a decent amount of cash.

[Operator:]

Our next question comes from the line of John Daniel with Simmons Energy. You may proceed.

[John Daniel:]

Well, I got careless comments. I just have a couple here the first is Mike you mentioned you might flex up another fleet in Q2 were you referring to potentially a fleet number 20 going out? You said that in fiscal 2018 and 2019.

[Mike Doss:]

Yes. Potentially go into 2020 by the end of the second quarter.

[John Daniel:]

Okay.

[Mike Doss:]

And that is a bit of a guess. We haven't secured that yet but given the momentum that's a reasonable assumption.

[John Daniel:]

That’s fine and I mean I guess the question we all wonder here is when you activate 2018, 2019 and then potentially 2020 presumably you're doing that at a rate - an EBITDA per fleet that would be in excess of where you are guiding for Q1, is that fair?

[Mike Doss:]

I would say it’s probably right in the middle of the guide.

[John Daniel:]

Fair enough. Okay. And then want to - as you do the re-activation should we be building into the model any reactivation costs are now?

[Mike Doss:]

Now we just cover those OpEx. I mean there - we got $500,000 maybe a $1 million per fleet just the cost of doing business.

[John Daniel:]

And then the last one for me and not to sound like a jerk, but when you look at an operation and you've got one fleet as you do in say the Northeast or East Texas presumably you guys are looking at you know what does that make sense that one fleet in a basin at what point you go to your customer and just say, hey guys this isn't working. We need a significantly different you know relationship here otherwise we have to pull out. So how does that, can you just walk me through that process?

[Mike Doss:]

Yes. I'll make a couple of comments and I'll ask Buddy to comment as well. So I think up in the Northeast obviously gas prices are terrible and the outlook doesn't look particularly good at the moment. The customer that we are working for up there of course that's not their fault, and so for me to apply pressure on them to carry the district doesn't really make a lot of sense, but we are trying to get an additional fleet I would say margins in that area are not very good. But just to have another fleet to absorb the overhead.We have really made the district very lean and thin as we possibly can in response to the having only one fleet currently. And so we're just really trying to manage through. I really would rather not abandon the Northeast. I do think it's got a good long term potential. Historically it had been a fantastic district for us. I think at one time we had nine fleets working in the area, right but obviously depressed today. So Buddy, do you have anything to add?

[Buddy Petersen:]

No. I’d concur with Mike. I mean, there are some social issues in both East Texas and in the Northeast that we believe you know long-term as we again I echo your sentiment we don't want to pull out of that just because the social piece. The East Texas having to won - the flexibility with East Texas because the proximity of the Eagle Ford is close enough really the carry cost for the East Texas pieces is higher than the Northeast would be.

[Operator:]

Our next question comes from the line of Dustin Tillman with Wells Fargo. You may proceed.

[Dustin Tillman:]

You mentioned liability management. How are you thinking about you have bonds that are trading south of 60, do you think about going into the market and repurchasing bonds now that you see your cash position growing and stabilizing?

[Buddy Petersen:]

You know it's something that we are carefully considering, and we've been looking at this for a couple of months. One thing we want to be mindful of is the term loan maturity next year And so one possibility is just to pay-off the term loan. But you know it is an attractive discount as far as repurchasing notes and so we may consider doing a tender offer, but that's still under consideration. Lance any?

[Lance Turner:]

Yes, I'd say all options are on the table at this point.

[Dustin Tillman:]

Is it fair to say that looking at the cash flow stability today versus where you were a quarter ago - it makes it more likely to purchase bonds?

[Buddy Petersen:]

Yes, I would think so. And so well - but again you know we want to make sure that we've got a sound liquidity and that the term loan can be dealt with very comfortably. And so just trying to balance all of that is really what's causing us to pause and just make sure that we are going down the right path.

[Operator:]

Our next question comes from the line of Stephen Gengaro with Stifel. You may proceed with your question.

[Stephen Gengaro:]

Two things one just to follow up on the prior question, how do you think about how much cash you actually need to carry on your balance sheet?

[Buddy Petersen:]

Well, I think probably operating cash around 100 - low hundreds probably quite sufficient to be able handle working capital swings and rough patches in the business cyclically. And so you know carrying that plus $90 million for the term loan you know gets us around $200 million and we have a little bit higher than that today. But that's kind of broad thoughts on our cash management.

[Stephen Gengaro:]

And then as we think about the first quarter guide and then sort of how you think about the rest of the year. I imagine based on your comments that the pricing that you mentioned the rolling over at about 5% down is already reflected in that 1Q guidance? Isn't it, I am, thinking about that probably?

[Buddy Petersen:]

Yes absolutely it is.

[Stephen Gengaro:]

And then just finally as you kind of look at your crystal ball over the next 12 months I mean we've certainly seen some equipment removed from the fleet from the industry in total. How are you thinking about the market over, I know it's hard to sort of predict the demand side but how are you thinking about the market over the next 12-plus months and - and looking at sort of the sort of quality of some of the equipment which is still in the mix. How do you think it plays out?

[Buddy Petersen:]

Yes. Well, this is of course just my opinion, but you know I think the announced attrition is very healthy. I think equipment does need to leave the markets. I can't really comment on the quality of the equipment, but I would imagine it's probably the lesser quality or just companies just aren't quite as competitive and just unable to generate sufficient returns in today's market. I really see the market go kind of stable, maybe slightly better in the second half and that's just intuition, not really based on any - any careful analysis of macro factors or anything of that nature.But I mentioned earlier on the call you know I think we are seeing some more disciplined behavior, particularly among some of our larger competitors, and so I think that's a very healthy thing for the industry and that's probably more impactful than the - than the attrition story today.

[Operator:]

Our next question comes from the line of Chris Voie with Wells Fargo. You may proceed with your question.

[Chris Voie:]

I just wanted to check on the visibility that I have for the first quarter and anything beyond that. Can you give us some kind of guidance on how much of the calendar is full in the first quarter and then whether you have visibility into the second and third quarter.

[Mike Doss:]

Well, first quarter, I mean we've got a really good read on that, but the calendar is firm at this point and filled out, and so I don’t think we have any remaining space for the rest of the quarter. And so right now we're building the second quarter, I mean many of our - much of our work is just going to continue evergreen or dedicated. There is some bids that we're currently working on that - that could result in an additional fleet for the second quarter, but full for the first quarter or so, I'm not sure if that was exactly your question but that's - that's where we are.

[Chris Voie:]

I was just trying to get a handle on how much - the length of the visibility that you have. I guess to follow-up revenue per stage was down 15%. There might be a mix shift in there in terms of the size of the stages in the basins as well. Obviously 5% on pricing, you mentioned a shift in sand, can you give a little color on how much shift there was in customers’ writing sand in the quarter?

[Mike Doss:]

Yes, quite a bit actually. So for the fourth quarter only 8% of the stages we pumped are - is using sand that we provided and so customers provided 92% which is a high. I think the highest ever but it was less in third quarter and second quarter.

[Lance Turner:]

I think it was getting closer to 20% so it was a pretty big shift down and also fuel continued, we didn't have - we didn't provide fuel for hardly any customers.

[Mike Doss:]

Yes, and so these materials have a - definitely have an impact on revenues specially looking at revenue per stage. But it's - it’s just revenues and cost of sales, we don't we don't put much of any of the markup on the materials these days so it doesn’t really matter in the big picture.

[Chris Voie:]

Maybe we’ll just squeeze in one more. So you're - it’s something your ahead of schedule in the cost savings, are all of those cost savings going to be complete within the first quarter guide or is there a tailwind in the second quarter.

[Mike Doss:]

There's a little bit of a tailwind in the second quarter. I wouldn't say it's material in terms of - the estimates but - largely realized in the - first quarter some of the G&A reduction will bleed into the second quarter it just takes time to get all those cost reductions pushed through.

[Operator:]

[Operator Instructions] Our next question comes from the line of Vaibhav Vaishnav with Scotiabank. You may proceed with your question.

[Vaibhav Vaishnav:]

I guess - we have already spoken about efficiency but just trying to think about. Can you help us frame like. All right, over the last 12 months to 18 months how much efficiency gains have we seen? And if we go - move forward from here what do you think efficiency gains could be over the next 12 months to 18 months?

[Vaibhav Vaishnav:]

Yes, - you know over the last 12 months to 18 months - we're looking at 12 months 20%, 18 months - larger than that. I think one of the big factors for us is the - zipper wells. We had a high zipper well percentage back in 2017 that number came down in 2018, and now it's come back up in 2019. And so that's a big driver of this.Secondly we've just got more customers focused on efficiency than ever before. 12 months ago 18 months ago, you had the leading edge customers focus on efficiency and now more and more customers are more focused now so realized what is possible in achieving those efficiencies. And so as we look forward it’s hard to say.I think the zipper well probably maximizes in Q1, the zipper well effect and I think you're starting to see saturation in the industry - from that as a driver as well. And so, I expect some improvement in Q1 and maybe modest improvement past Q1, but it's hard to say at this point.

[Vaibhav Vaishnav:]

So besides Zipper frac - are there any other things like - we can shave off 10 minutes, 15 minutes here and there on a stage or something like that - that can still continue through next year?

[Mike Doss:]

Yes, I mean I think right now, what we’re looking at is time between stages. So you’re exactly right, can you shave 10 minutes to 15 minutes of the time between stages. And as we go to zipper wells, that shrinks and I think you know there's a natural limit to how small that transition period can be. We think we've hit it on a number of our crews, but - we're still focused on it.

[Vaibhav Vaishnav:]

And I just wanted to get clarification on the guidance. I may not have written it as fast. So my understanding is you guys are thinking that there will be 17 active fleets or 17 working fleets with 18 to 19 being active. And the $6 million to $7 million of annualized EBITDA fleet, that $6 million to $7 million, is that based on the 17 fully utilized?

[Lance Turner:]

Yes.

[Vaibhav Vaishnav:]

Fleets or is it 18 to 19 was asking?

[Lance Turner:]

Yes, no I can clarify that. So, the 17 is the quarterly average. And so we started out with zero fleet and we're going to end with 18 or 19 and just the blended average is 17. So that 17 would be what you would multiply by the $6 million to $7 million.

[Operator:]

Our next question comes from the line of Matt Dushkin with Bank of America Merrill Lynch. You may proceed with your question.

[Matt Dushkin:]

Just regarding the two incremental fleets going to work this quarter, are these going out on dedicated contracts or are these on spot. And can you speak to the pricing difference between the two markets?

[Lance Turner:]

Yes so, this would be for dedicated fleets. And so, the pricing would be starting out probably in the middle of our guide range for adjusted EBITDA per fleet. But we do think there is room for improvement in terms of efficiency once we get into a groove with the customer and possibly some pricing relief in the second half depending on where the market goes. So, good quality additions in terms of customers this quarter.

[Matt Dushkin:]

And then I guess just sticking on the pricing between markets, are you seeing any bifurcation between - the pricing potential for your dual fuel fleets or I mean do you expect the market to give you one at some point?

[Lance Turner:]

No, it would be nice if there was a greater gap on that, but it’s largely we give the dual fuel - conversions away for kind of a minimal uplift in the stage rate, just allow us to recover our capital cost over say 12 months or so. In other cases - if it's helpful in us getting access to a new customer, a customer that we want to partner with we just - throw it in as an addition. We’ve really no additional cost to them. It’s like I said it’s a minimal capital outlay for us, so maybe that gives us a bit of an advantage in some bidding situations.

[Operator:]

Our next question comes from the line of Stan Manoukian with Independent Credit Research. You may proceed with your question.

[Stan Manoukian:]

My question is about what is the - your representation of average sort of working capital demand per each of your deployed fleet?

[Lance Turner:]

So I would estimate incremental working capital to be in the $2 million to $3 million range per fleet.

[Stan Manoukian:]

Well, so this $225 million of cash that you carry on balance sheet with $100 million of real needs I mean that you need to consider, that we needed conclusion of some more efficient sort of our capital digitalization potential right where you have alluded to this, previously. It’s just, how sensitive do you think you are - sort of to the timing and to the visibility of the second quarter. You all have to do something more serious with the balance sheet?

[Lance Turner:]

Well I think - yes certainly this year that is a priority and - how sensitive are we to the outlook. I think liquidity is a pretty important function of the outlook but I think in terms of priorities it's one of the top corporate priorities that we expect to make progress on this year, in terms of the capital structure. I'm not sure if I got the full question but.

[Mike Doss:]

Yes I can add on a little bit.

[Stan Manoukian:]

Yes, yes.

[Mike Doss:]

Yes just - Stan I think we're just trying to be prudent and take the best course of action like one option is just to just pay off the term loan just straight which is something that we may well do. But we're just - talking to advisors just wanting to make sure we optimize the situation. The end goal is to maintain strong liquidity and then push the maturity out a number of years. And I think that would be a more comfortable structure for us.

[Stan Manoukian:]

So at this point it is clear that you are continuously and sort of more energetically [indiscernible] interested to shareholders - despite your sort of obviously very low price of the stock., And in this regard my question is more sort of about the change with your marketing strategy. Obviously you have been able sort of to really pour two more fleets, and to get a dedicated contractor - dedicated contracts?And then the question is how successful the condition of your equipment and how competitive is your equipment today to meet demands sort of - to continue changing this - and making this shift in marketing strategy towards more of a longer term dedicated contracts from the spot market that was your previous year focus? Do you think that your segment is competitive? What do you think is better - what are the drivers at this point except the price sort of to increase the utilization of your fleet in your opinion?

[Mike Doss:]

Well I guess there is three or four things there to unpack. So the first is a condition of the equipment and our ability to move forward into the future. Our fleets are absolutely well-maintained and ready to tackle anything that we have as alluded in several calls over the last several years. We've talked about the robustness of our equipment based on our Genesis starting and working in the Haynesville.So being vertically integrated allows us to continue to keep meeting the customer's demands and continue to push the technology window which we're doing with our automation that gives us additional life and additional advantages that some of the others coming into the market wouldn't necessarily have. As far as anything other than price well - the reality is the efficiencies that our customers are achieving today through rig lock and zipper and some of the other things we've worked hand in hand moving forward to help them achieve those efficiencies.And so, we don't necessarily believe that we're disadvantaged at all on anything other than the overall market conditions. So we're going to continue to keep pushing efficiencies, we're going to continue to keep pushing and leveraging our customers, the blue chip customers that give us long-term futures and I think we're going to be successful in that strategy.

[Stan Manoukian:]

And lastly I was curious if you can disclose if you’re a strategic shareholder and holders of your bonds?

[Mike Doss:]

I think - you'd have to ask them that, I'm not I don't know the answer to that question.

[Lance Turner:]

Yes not aware of any significant thing.

[Operator:]

There are no further questions at this time. I will now turn the call back to you.

[Mike Doss:]

All right well, thank you for your interest in FTSI and we look forward to speaking with you again next quarter.

[Operator:]

That does conclude the conference call for today. We thank you for your participation and ask that you please disconnect your line.