Ranger Energy Services, Inc.
Q4 2018 Earnings Call Transcript

Published: 6 Mar 2019

[Operator:]

Good morning, and welcome to the Ranger Energy Fourth Quarter 2018 Conference Call. All participants will be in listen-only mode. [Operator Instructions]. After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions]. Please note that this event is being recorded. I would now like to turn the conference over to Darron Anderson, President and CEO. Please go ahead.

[Darron Anderson:]

Thank you, operator. Good morning, and welcome to Ranger Energy Services fourth quarter 2018 earnings conference call. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. On the last quarterly call, I characterized Q3 as improving metrics across all aspects of our business. This quarter’s results not only demonstrate improving metrics but also the strength and diversity of our portfolio to deliver its performance during a seasonal low activity period and declining oil prices. I would like to start up the call this morning by bringing your attention to some of the more significant events of the quarter. First, modification to segment reporting. As you probably read in our press release last night, we modified our reporting by adding a third segment. Today and going forward our reporting segments are

[Brandon Blossman:]

Thanks, Darron and good morning to everyone on the phone. It is again my pleasure to be running through the details of another solid quarter from the Ranger team. First off, housekeeping item before we get into the details. As Darron noted, we've added an incremental reporting segment. Historically within our single Well Services segment we have disaggregated rig and Other Service revenue and operating costs in our prepared comments, have not fully broken out those business lines into segments and into our other disclosures. Given the growth of our non-rig service businesses it makes sense to formalize the separation of the rig and the non-rig service businesses into separate segments. So this quarter and going forward, we will break out the previous Well Servicing segment results into two separate segments

[Darron Anderson:]

Thank you, Brandon. So looking forward, on our last call during the Q4, the seasonal slowdown and Permian takeaway constraints had not impacted us as an organization. However, we are cautious to guide that the second half of the quarter did post some risk. In review of the quarter, we did see positive impact but nothing still material to impede our improving performance. I’m pleased to report that we have moved past the trough of the late Q4, early Q1 ‘19 activity decline. While our optimism is high moving into this New Year, we remain cautious and aware of the discipline our customers are implementing within their 2019 budget and their focus on generating cash. While this may appear to be a strength to service organizations’ performance, we view this as a strategic opportunity. As you're aware Ranger made significant capital investment across 2017 and ‘18. Our new purpose built asset base is a diverse offering that serves the completion through long-term production operations and design for long lateral, high volume efficient operation. Prudent customers need maximum production and service efficiency of the focus capital programs. Service companies who can bring these efficiencies with a high quality asset base have the opportunity to garner market share without sacrificing price. We believe we are in a great position to do this. Here is a focus for 2019. I’ll not go into the detail of our current operating strategies but I will say we’re highly focused on execution. This execution covers everything from a focus on customer alignment and longer-term contracts to operational execution on location, continued real-time data analysis for quicker decision-making, select differentiating technologies and process improvement. I look forward to providing tangible results of these strategies across 2019. And finally as Brandon hit on through his comments, strong cash flow generation is of high focus in 2019. We’re winding down our almost two year new build program, which will have a significant impact on our free cash flow going forward. To further for cash generation our new high quality asset base requires minimum maintenance CapEx. Growth CapEx will be minimal as well and directed towards term contracts with quick payback and high cash flow generation. Capital discipline combined continued improving results as demonstrated in the fourth quarter as Ranger positions very well in 2019. And with that, operator, we will would now open up the call for questions.

[Operator:]

[Operator Instructions]. We’re going to take John Daniel from Simmons & Company. Go ahead please.

[John Daniel:]

A lot of what we hear from your wireline peer has been a bit more turmoil, utilization pressure, pricing pressures. You guys have built a very strong business now. Can you just talk about opportunities sets there, why the business is doing so much better relative to peers and just how you see that business evolving over the next several quarters?

[Darron Anderson:]

Yes, so first of all I have to give accolades to our Mallard team, they are doing an absolute wonderful job at the Permian. I think it’s a combination of again the job that they're doing, it’s a combination of the tools, the technologies that we’re using and I think most importantly is the efficiency that we are bringing to our customers. So as we talked about on previous calls, John, stage count, how many you can get done in the 24 hour period, and I think we lead the market with select frac companies on producing some of the highest stage count numbers on a 24 hour basis and it’s strictly a performance issue. As long as we’re producing that performance, it’s long enough to staying fully utilized. And your right most wireline companies aren’t having that level of success in the Permian. We’re not resting on our performance. We’re keen on our focus every day and execution every day. So we look at that business. We are very optimistic on the business moving forward. Yes, we have opportunities to continue to grow within the base of the basin and we will look at those opportunities on an ongoing basis. But as I’ve mentioned in my comment, our primary focus is cash flow generation. We’ve put significant assets to work in that service line and we want to enjoy the rewards of the assets we’ve put in service.

[Operator:]

The next question comes from Derek Podhaizer from Barclays. Go ahead please.

[Derek Podhaizer:]

Just turning back to the high-spec rigs. Can you just talk about how many rigs you had on completion this quarter? I think last quarter you had about 20, where did that trend to this quarter?

[Darron Anderson:]

Yes, I think probably saying the number of rigs as we realized was probably not the correct thing, because we have a rig that works for two weeks, is that countable number or not? I think I'd really like to talk about it more in terms of hours. Hours relative to Q3 were relatively flat, actually slightly up relative to Q3. Now, when you look at the Q4 results though, it was a tale of two results there and what I mean by that is the first half quarter was very strong and we saw softening in the second half of the quarter but net-net slightly up relative to Q3 on an hours’ basis.

[Derek Podhaizer:]

And then just turning over to free cash, I know it’s going to be a main focus of yours as you kind of put the end on growth CapEx and move more to harvest mode, optimization mode. Can you may be talk about the different levers that you can pull to really generate some meaningful free cash flow, specifically thinking about the working cap, I see that inventory balance from now, what other contribution can you see from that throughout the year? And then if you can just go into what is embedded in your growth CapEx plan, are there some modest asset additions and just think about, do you still have one rig left to be delivered or is that you delivered earlier in the year and get other assets as you plan on growing throughout the year?

[Brandon Blossman:]

Yes. Hey, Derek. This is Brandon. On working capital, in terms of what we are forecasting and thinking about, I would assume that that would be largely flat as we move through 2019. There might be a little bit of incremental consumption in terms of revenue growth as we move through the year, but that would be it. We’ve done a good job of managing working capital through 2018 and we expect to kind do the similar summer job through 2019. In terms of growth capital, I’d probably like Darron comment on the specifics. But generally speaking, we are wrapping up kind of late deliveries on our 2019 program. We have all our high-spec rigs delivered at this point. So I am not expecting any incremental rigs on that front and there is very little in terms of new CapEx on a 2019 basis.

[Darron Anderson:]

Yes, I echo that. I think we’re hitting ‘19 and we will operate very conservatively from a growth capital standpoint. That now being said, there are contract opportunities that we’re constantly going after. We have a high quality asset base, some of those opportunities may require some additional ancillary equipment, but they will be targeted small investments that have very, very quick payback high cash flow opportunities. So when you think about our capital program, maintenance growth CapEx, usually think about it in the low teens type numbers for 2019. So very, very conservative relative to ‘17 and ‘18.

[Derek Podhaizer:]

And then just last one from me going off of John's question in wireline and your execution that you’re experiencing there, is there technology advantage? We’ve heard about quick lab systems and reducing time between wells and well pads. Can you maybe talk about the technology that’s within in your Mallard business and what you can see throughout the year to enhance that technology?

[Darron Anderson:]

Well I won’t give away all of our secrets. What I will say is that our asset base is just around efficiency. So we’re utilizing the latest technology to achieve those efficiencies whether it’s our surface control system, whether it’s our downhole tooling system. So again the team is doing an outstanding job. The execution is there. The customers are recognizing execution by delivering utilization and keeping our pricing at a nice sustainable levels.

[Operator:]

[Operator Instructions]. Our next question comes from Tom Curran from B.Riley FBR. Please go ahead.

[Tom Curran:]

Darron, I just hopped back on, would you please clarify it sounded as if for total CapEx you were saying that you would expect it to come-in in the low teens, would that mean 13 million, 14 million for total 2019 CapEx?

[Darron Anderson:]

Yes. I mean, again, don’t want to give specific numbers, but in that low teen that you described is a fair assessment. Again that’s maintenance CapEx and growth CapEx combined. So again, our focus is free cash flow. We have a nice high quality asset base, you see the performance driven on the wireline side, the process solutions side, you still have some work to do on the high rig side. We have some capacity there that we need to get consumed. Again, there is contract opportunities that we’re working on every day that I’m hoping to be able to report on next quarterly results of those opportunities. So again our asset base is nice asset base and free cash flow generation is a focus for ‘19.

[Tom Curran:]

And thank you for explicating all of the uses for that growth CapEx, it would be behind that budget. If I just take 4Q adjusted EBITDA and annualize it that’s $55 million or even current consensus of $50 million. Let’s say the total CapEx budget comes in at $14 million it doesn't sound as if you would need much more incremental working capital, but let's put the $5 million aside for that and round up to $20 million, you’re still looking at net cash flow then, free cash flow to work with of $30 million to $35 million. Is there any reason why right now if you have it already, you wouldn't commit to being able to return at least some portion of that to shareholders or at a minimum a preferred method for doing so?

[Brandon Blossman:]

Well, I’d say I follow your math and I agree with your math. Your probably run rate for the fourth quarter is the right starting point. I would say that that was in a very difficult market. And so our objective is to continue to improve performance out of difficult fourth quarter market. So yes your math is correct and cash flow generation it should be achievable there. Use of that cash at the board level, we will figure out what is the right strategic thing to do with that cash, returning to shareholders, growth opportunities from acquisition standpoint, there's nothing that’s off the table right now. Like I said our primary focus is to get the cash produced and then we will make the prudent decision that increases the value for the organization.

[Operator:]

This concludes our question-and-answer session. I would like to turn the conference back over to Darron Anderson, President and CEO for any closing remarks.

[Darron Anderson:]

Thank you. In closing I sincerely want to thank our 1,100 plus team members that are doing a wonderful job that allowed us to produce these results in a difficult quarter for the market. So absolutely outstanding job by the team and want to thank all of our phone participants for their interest and continued supported of Ranger. So with that we will conclude the call and have a wonderful day, everyone.

[Operator:]

This conference is now concluded. Thank you for attending today’s presentation. You may now disconnect.