Superior Drilling Products, Inc.
Q1 2021 Earnings Call Transcript

Published: 12 May 2021

[Operator:]

Greetings, and welcome to Superior Drilling Products, Inc. First Quarter 2021 Financial Results . As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Deborah Pawlowski, Investor Relations for Superior Drilling. Thank you. You may begin.

[Deborah Pawlowski:]

Thanks, Doug, and hello, everyone. We certainly appreciate your time today and your interest in Superior Drilling Products. On the call with me are Troy Meier, our Chairman and CEO; and Chris Cashion, our Chief Financial Officer. Troy and Chris will go through prepared remarks, discussing our first quarter of fiscal 2021 and talk a little bit about the conditions in the market today. Then we will open the call for questions. You should have a copy of the financial results that we released before the market this morning and should also have the slides that will accompany our conversation. You can find both of those documents on our Web site at sdpi.com.

[Troy Meier:]

Thanks, Deb. Thanks, everybody, for joining us. Q1 was a solid quarter for us. We had strong improvement over the fourth quarter of last year, and this was driven in the strength of the US market. You're all aware of the steady increase in rig count that we've been seeing. I believe so far in this Q, we've been averaging about 19 rigs per month increase. So that's been wonderful. When we look at the tools that are being ordered, we started seeing an increase in orders in late December for new tools, and that's followed through all the way up until today. We're still receiving new tool orders and those tools are being put to work. They're going in the hole, they're being run, coming back to us, being repaired, and we see this. We see this in the other tool revenue that we've talked about, but you also see it in the warranties that we have when these tools go in the hole. We think that when we look at the market, it's not just because the market improvement that we're seeing this big increase in demand for our tools, but we also believe that the operators that are out there and the ones that were left from this horrible downturn that we had, they're the efficient ones. They're the ones that realize the value of this tool. And they're seeing the value and it shows. You see it in reduced rig time. You see it in improved efficiencies, the drilling efficiencies, when you have a smoother wellbore makes a big difference. Tripping times are reduced and casing goes to bottom. So the tool does a good job for people and we're seeing that and they're recognizing that. We're also seeing a big uptick in our contracted services. This is clearly a result of the rig count improving. But when you look at the relationship that we have with Baker Hughes, that really shows right there when you start to see the amount of repair units that are going through our facility not just bits but associated drilling tools as well that we do for them.

[Chris Cashion:]

Okay. Well, thank you, Troy, and welcome, everyone. Let's continue our review with Slide 6 and look at some numbers that we're seeing now with this upturn that Troy has been talking about, really encouraged with this 57% sequential growth in the first quarter over Q4 as activity and overall market conditions have definitely improved in North America. In fact, the revenue in North America increased 74% sequentially. From the Drill-N-Ream tool sales, the Drill-N-Ream royalty and those repair fees, as Troy mentioned, our largest US distributor of the Drill-N-Ream is seeing higher demand for the tool. And early in Q1, we delivered our first new tool order since last summer. Demand for the tools continued through Q1 and it resulted in roughly $0.5 million of new tool sales in the quarter. And as Troy mentioned, we've seen that demand continue into Q2. We're very optimistic that this recovery will continue at a steady pace throughout the rest of the year. Of course, you look at year-over-year, the impact of the pandemic and geopolitical supply imbalances in the global markets, that's obvious when you look at our year-over-year comparison, Q1 last year to Q1 this year. We know why we're down but the really, really encouraging thing is that turn that you see from Q4 into Q1 and the growth that we continue to expect to see. And it wasn't only the Drill-N-Ream that improved substantially in the quarter. It was the Contract Services improving sequentially, reflecting higher drill bit refurbishment revenue from that increasing rig count. We ended the quarter at 417 rigs in the US, that's a strong increase from the low point in the summer, that's an increase of 71% from that point and up strong from that year end 417 -- the year end up 19% to that 417. So the rig count overall market certainly is helping us out, but it's a little more than that. This business, this refurbishment business, as Troy mentioned, I mean, we're doing more and that revenue increased 50% sequentially over that 19% rig count increase. So we're continuing to see good share improvement in this part of the business. As a matter of fact, if you were to go back and look at the quarterly average rig count in Q3 compared to the quarterly average rig count in Q1, you'll see roughly 55% increase. You look at revenue from this business, it's up over 100%. So what we saw in Q1 was really a continuation of what we began to see in Q4 from Q3. So really pleased with how that's developing and has developed. As Troy mentioned, the international markets, they lagged somewhat both in the downturn last year and now in the recovery. Despite the decline in international rigs, our international revenue was relatively flat at $332,000, about what we did in Q4. However, we are gaining some traction. Troy mentioned them with some oilfield service companies and some agreements we're putting in place. And so we expect to see penetration in that Middle East market. There's no doubt we can continue to make further inroads and we're very optimistic about that.

[Operator:]

Our first question comes from the line of John Bair with Ascend Wealth Advisors.

[John Bair:]

A couple of questions. You in the presentation and your slide deck answered a couple of questions that I had. But if the activity that you're seeing in revenues continue to increase, would you consider prepaying the remaining $750,000 due in October 2022 to set out your interest payment and your debt obligations.

[Chris Cashion:]

That's something that we're keeping an eye on, John, to be quite honest. It's a great question, and we are taking a look at that. We do, as I mentioned, with cash flow, we're improving, but we need to keep -- there's a lot of things that need to keep heading in the right direction. So later in the year, we'll see how things have evolved, and most certainly, we could take a hard look at that and maybe pick up that last payment and pay it a little bit early, that would definitely give us some relief on that interest.

[John Bair:]

And I think that would be perceived favorably amongst investors, I would think. The other question -- another question I had was, could you expand a little bit more on your ISO certification, creates new product sales potential. What other areas would -- I mean, you kind of briefly touched on that in the end of your comments there, Chris, but could you all kind of expand on that a little bit?

[Troy Meier:]

So John, when you look at -- when we're penetrating the Mid-East, that's the first thing that the NOCs, they ask us for certification, the ISO certification, we've got another one we're dealing with right now, which is more of the -- I believe, it's ISO, it has 2100, but it deals more with the HS&E side of things. We're going down that road right now. But yes, it lets us go directly to that NOC and talk rather than going through a channel. But it also does a lot for us here. When you look at our AS9100, the aerospace, we talk about diversification, right? You've heard us talk about diversification. And these certifications allow us to go in there and start bidding on stuff for the DoD. We've got a team that we've put together that's identifying that work that fits the machines that we have. As you know, our machines are large for oilfield stuff. And so a lot of the third-party machine work that you'll look at is a lot of small products with very low margins. And we've put a team together to identify that work that fits the margins that we're more accustomed to, but we've got to have those certifications to go in there and entertain these bids.

[John Bair:]

So are you gaining any traction on that? I mean is there any meaningful business that's, let's say, new business that is happening because of that now or are you still kind of in the stage of still investigating opportunities in that area.

[Troy Meier:]

We're still in the stage. We did a lot of it in Q4. We went down that road and was looking at a lot of third-party work, and we did a lot of third-party work. I was disappointed in the margins we got from it. And so the team that we've now assembled, they're directed to find the work that fits our machines. It really limits the bidder pool when we look at the bigger work that we can fit into our equipment. But as you well know, this marketplace has a way every time the oil and gas marketplace every time that we start to diversify and look down other avenues, it picks up and it gets you -- and we get really busy and it stifles that diversification model. And we're going to do our best this time to keep focused on diversification and enhancing our product offering.

[John Bair:]

Last quick question. You mentioned that you're seeing increased service fees and so forth. Is that continuing to increase based on additional volumes? Or how is that working out?

[Troy Meier:]

Well, we're going to -- there are some agreements that we made during the downturn that we're going to put the deduction that we had last year, we're going to take that back, and we're going to start charging more for our services. And I think it's well warranted. And I think that operators, in general, I mean, when you look at what's going on right now, nobody is prepared for it. And when you look at it, we're at, what, 450 rigs and the demand on service companies just on those 440 rigs is tremendous. So these rigs are drilling a lot more footage a lot faster. So I think everybody's got to start looking at how they look at rig count and what that means because I believe the rig count that we look at today is about 3 times the rig count just a few years ago. So if you look at 440 rigs, 450 rigs, times that by 3 just a few years ago, and that's about the level of work that we're seeing right now.

[Operator:]

Our next question comes from the line of Dick Ryan with Colliers.

[Dick Ryan:]

So Troy, you mentioned share gains and increasing penetration in the U.S. Can you put some numbers behind that? What's DTI's market share, kind of where has it been? And where do you think it can go?

[Troy Meier:]

DTI's market share in Texas is very strong. They're a southern company that does -- has done really well down there. They've been really good about penetrating and getting this new -- this tool out there. If you look at market share, I don't know -- we've given that out before as far as what DTIs market share is, and I'm not really comfortable giving that out right now. But I can say that it's very strong when you look at Texas, where the majority of the rigs are, and they continue to grow it in Canada. They grow it throughout North America. So they're doing a good job in getting out there and pushing the tool into the marketplace, and we're happy with what they've done, and they do a good job.

[Chris Cashion:]

The other thing, from a share perspective is Baker Hughes. We believe they're picking up share in the bit market and that leads to more demand on us to repair their bits. The other thing is they seem to be giving us more of their internal work. And so we're seeing some share improvements from Baker Hughes as well.

[Dick Ryan:]

Just refresh me on the Contract Services side, the bit refurbishment. Is it solely Baker Hughes or I thought there was -- you had an opportunity to move beyond that? And if so, what's the outlook for that?

[Troy Meier:]

It is, at this point in time, solely Baker Hughes. Our contract that we amended last year does allow us to go after other customers, if you will. We have not done that yet. We've evaluated it. But to be honest with you, we're looking to strengthen our relationship even stronger with Baker Hughes. And right now, in this point in time, that offsets any additional work we feel we may get from somebody else.

[Dick Ryan:]

And on the Middle East, quickly, you said that's kind of lagging. How many different countries are you generating this revenue stream from?

[Troy Meier:]

We've got five right now that we look at. If you look at Kuwait, Oman, the UAE that we'll be back into here, hopefully by the end of the third quarter. We've also -- the Ukraine, I know that's not the Mid-East, but we've also had opportunities there that we've generated revenue cutter. We've got Saudi that we're now taking tools into. And then, of course, the Iraq, which is going to be the new one that our team is working on now, deploying tools over there for 3 of the service companies.

[Operator:]

There are no more questions in the queue. I'd like to hand it back to management for closing remarks.

[Troy Meier:]

Well, thanks again, everybody, for joining us and bearing with us. We're looking forward to talking again here in our second quarter, and we'll keep pushing this forward and keep moving this business forward in a very positive way. Thanks again, and have a wonderful day.

[Operator:]

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.