Superior Drilling Products, Inc.
Q4 2020 Earnings Call Transcript

Published: 11 Mar 2021

[Operator:]

Greetings and welcome to Superior Drilling Products, Inc. Fourth Quarter 2020 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 fourth quarter and full year 2020 and talk a little bit about the conditions in the market today and 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 you should also have the slides that will accompany our conversation today. You can find both of those documents on our website at www.sdpi.com.

[Troy Meier:]

Thanks, Deb and thanks everybody for joining us for our fourth quarter 2020 call. Go ahead and let’s turn to Slide 4. Let’s talk about some of the accomplishments that we have achieved throughout 2020 and in Q4. So, as we look at the highlights for 2020, I am going to touch on a few of these so that you have an understanding that throughout 2020, we didn’t just locked down and try to survive. We’ve got a lot of things done and not just the strengthening of our balance sheet, but we achieved certification in our ISO 9001, our AS9100 and this led to the implementation of our QMS system. So company-wide now, we have a total QMS system that we have got up and running, and it’s working very, very well. This was a big achievement through our team – for our team throughout 2020. And this will also lead as we talk about our diversification model. As we go forward, this really, really helps getting that put into place. We are able to restructure our international business team. We have had few years over there now and we have had an opportunity to look at who we have and in what positions and where is our strength and weaknesses and we were able to restructure that team. And we have been able to get service agreements in place with large service providers in multiple countries. The team has done a really good job on still going out there, even though lockdown mode in the Mid East, we couldn’t have our boots on the ground in the countries we have already introduced the tool into. Everything was done via phone and e-mail. The team has done a tremendous job on getting the word out there and showing post-run recaps. I sit on a call every Tuesday as we go over, the KPIs of our product line and are they being achieved. And I want you all to know that this product line is achieving the KPIs really, really well. So we are very pleased with what we are seeing. We are able to expand the size and scope of this product line. We have added some design enhancements that is going to increase our revenue, rental margins as we go forward. And that was a very strong enhancement that our engineering and R&D teams have come up with. It’s going to pay as we go forward. We were able to make some very strong amendments to our legacy contract and our legacy contract with very large service providers that had our hands tied in some areas that are expertise that’s now giving us opportunities to look at as we go forward into 2021.

[Chris Cashion:]

Okay. Thank you, Troy and welcome everyone. Let’s continue our discussion by looking at Slide 6. This provides an overview of our revenue. And while the impact of the pandemic and the geopolitical supply and balances and the global oil markets are obvious when you look at our quarter trends, we were very encouraged with how our revenue stabilized in the fourth quarter. In fact, revenue in North America increased 8% sequentially on higher contract services from an increasing rig count and we ended the year with a U.S. rig count of 351. That’s a good strong increase of 44% over the August 2020 low of 244. The increase in market activity resulted in our largest U.S. distributor of the Drill-N-Ream to begin buying more tools. We received late in Q4, a $225,000 order that we delivered in the first quarter. Through February, we have received an additional two orders, totaling $270,000 for new tools and we are encouraged that this trend will continue throughout 2021.

[Troy Meier:]

Thanks, Chris. So, as we look at our outlook and opportunities, let’s turn to Slide 11. And we are very encouraged with the disciplined growth activity we see in the global market right now in the oil and gas industry. We are confident that this improvement in activity will allow us to get further penetration of our Drill-N-Ream product line into this growing market. And it also serves our manufacturing service as well, our repair service as well, our third-party very well. And I want everybody to know we are continuing to strengthen our relationships with our third-party, our legacy customers, our channel partner customers. We are really pleased with our domestic channel partners. You have heard us talk about them. They have done a phenomenal job. Our relationship with Baker Hughes continues to strengthen as we do more and more products for them all the time. So we are encouraged by what we see and we are excited for 2021. If you look at the – I want everybody to understand that the certifications that we have got when we talk about ISO and we talk about AS and we talk about all the things that we are putting in for diversification, I want everybody to understand that, that we are an oil and gas technology and service company. That’s what we do. Our diversification model is going to make it just so when we get into these dips, these horrible dips that are common in this marketplace, they don’t have the negative effect on our company like they have had in the past. So make no doubt, we are an oil and gas service provider and technology inventors. So that’s where we are. We are still – we are getting MSAs throughout the international market. We’re signing more MSAs all the time as we – every country we go into, it’s a process. It’s not you’ve got a tool deployment in the Mid East, and it’s good for the Mid East. Every country that we introduce our tool 2 is another MSA. Even with the same service providers that we currently are with, it’s a new contract. It’s a new agreement country for country, and we’re getting good at that. As a matter of fact, we have a gentleman now, and that’s his focus. We’re going to get these MSAs in place that’s going to really help with getting tools in the hole. We’ve got a lot of request for Drill-N-Ream on a global basis, but these companies cannot deploy this tool until we get these contracts in place, and that’s what we’re doing now. So going forward in 2021, we’re very excited about what this year is going to do to strengthen us as a company. And we hope that you’re always enthused about this as we are because we feel that we’re in a better shape now than we ever have been as a company, and we’re ready to move forward.

[Operator:]

Thank you. Our first question comes from the line of Dick Ryan with Colliers. Please proceed with your question.

[Unidentified Analyst:]

Thank you. So Troy, just looking at the order trends late in the year and so far through February. What really kind of drove those? And can you talk maybe what the, let’s say, the near-term pipeline looks like? Is this – is it still pretty active or how would you describe the other near-term opportunity?

[Troy Meier:]

Yes. So the near-term opportunities are very active. One of the things that drives these orders is the fact that the age of the fleet that our channel partner has, even though that fleet was built for a lot larger rig count than what we’re currently at, that fleet is getting old. And so as they have to start turning over that fleet, it allows us to replenish that fleet. And we also have – we have new connections. When we thought connections, we’re talking the threaded pin and box end of these tools. And as new threads come out, you have higher tensile strength threads, and you have different types of threads. These tools that our customers have in their fleet are not those spreads, and a lot of the operators don’t like to run cross holders. So we end up making them new tools. So that’s what’s driving the majority of our new tool manufacturing. And keep in mind the tools that you see us talking about here are not the tools for our Mid East fleet. We’ve also – we talked earlier about how we increase the size and scope of our product offering – well, our DNR offering. And when you look at the DNR, when we broke out with that tool in 2011, 2012, it was a 6-inch series tool. We rent it in the lateral in North Dakota, and that’s not the case anymore. We’ve got tools that we run in the Ukraine that are 4 and 3-inch quarter inch tools for going back into reentries and cut and windows and helping operators to drill down. We’ve got – our sizes in the Mid East are – we got 16-inch tools that are becoming very, very popular. We’ve got 12-inch tools. So when you look at the offering of the DNR product line, it’s not just 6-inch anymore. It’s 4, and it’s 5. And it’s 6, and it’s 8. It’s 12. It’s 16. It’s – as we’ve expanded those sizes, it’s really given us a lot more opportunity. So that’s what’s driving most of what you’re seeing.

[Unidentified Analyst:]

Okay. As you say grow through 2021, will that be domestic, international or both?

[Troy Meier:]

It’s going to be both. We look at a tremendous opportunity with our channel partners here domestically, but we also understand that the need for Drill-N-Ream on a global basis is massive. And we’ve never – ever since 2015, we haven’t had a sales and marketing structure in this company. We’ve been a tech company that’s handed this stuff off. So we’ve had to learn the process as we deliver these tools on an international basis. And believe me, it’s – every step of the way is something new for us, but we’ve learned it. And we think the big growth model for our company is going to be international, but there is still a tremendous amount of opportunity here in the domestic market.

[Unidentified Analyst:]

Okay. With that, Hard Rock not coming up in July, do you think you can pay that off with cash generated through the first half of the year or are there options or flexibility to maybe push that out as well?

[Troy Meier:]

We’re soon to pay it off with cash generated, but we have options. We have some flexibility on it. So, I mean, it’s out there. We see it. It’s something we’ve got to take care of, and we’re focused on it, but we have some options.

[Unidentified Analyst:]

Okay. When could we see some of the revenue streams outside of oil and gas contributing?

[Troy Meier:]

Dick, I wouldn’t count on it contributing much throughout 2021. We’re looking – we’re being very selective. At the end of 2020, as we started going down this diversification of the third-party machining is – outside of oil and gas is incredibly competitive. So we’re entertaining those bids that fit one, fit our equipment and the tooling that we have, but we’re also looking for that repeatable work. So every time somebody sends us – they need this widget made, it’s not a prototype. And it’s not we buy tooling and go through all the programming and post-processing and design stage of that just to make a one off. We’re looking for – we’re entertaining these companies that can give us work that fits the size of machines we have, but it’s also complicated that really reduces that bidder pool. And so we’ve been bringing companies in, we put a team in place here within Superior that is doing a really good job on understanding what truly are those costs when we scrap apart. We have got – Chris has done a phenomenal job with the accounting team and getting the knowledge base in there that we need. We just made a phenomenal hire there as well in the controller side of things. So we’re building the team. We’ve got the processes in place. And now we’re being really stingy on what we’re willing to take in because like I was starting to allude to, in Q4 of ‘20, as we went out and started doing third-party work for other people, man, margins in that arena is incredibly tight. But we have been into talks where we’re identifying the areas where we can make margins that look closer to what we are used to in the oil and gas.

[Unidentified Analyst:]

Okay, right. I appreciate then. Congratulations on the recent order trends.

[Troy Meier:]

Thank you.

[Operator:]

Our next question comes from the line of John Bair with Ascend Wealth Advisors. Please proceed with your question.

[John Bair:]

Thanks you. Good morning, Troy and Chris. How are you doing?

[Troy Meier:]

Doing well, John.

[Chris Cashion:]

Doing well.

[John Bair:]

Is that – hang on, okay, sorry, I was on the speaker. Okay. I am just curious if you have much exposure, your existing customer base that has oil and gas companies that have exposure to federal acreage, and whether or not those or companies that might be impacted if this federal leasing and operations moratorium that the current administration is put in place. And if it were to be extended, and also along those same lines, do you have much exposure to companies operating in the offshore Gulf of Mexico and Federal Waters? I know historically, that’s not been a big area, but...

[Troy Meier:]

So when we look at the customer base, that’s – in the U.S., in the domestic market here, we’re where one step removed because of the channel partner that we have there that delivers our product to the customer. However, when we look at that customer base, majority of the work is Texas, Oklahoma. I think most of Texas – and I could be wrong, but I think most of Texas is fee ground compared to like, if you look at Utah. Utah is a lot of federal and state ground. It’s what they call the state ground. I do believe the rush that we were seeing in late into Q4, and what we’re seeing right now, in Q1. Are those – are some companies that are getting leases drilled that are on federal acreage. So they don’t lose that lease. I do hear that, that’s some of the activity that we’re seeing. But knowing the amount of work that’s coming from Texas and Oklahoma, I can’t believe that, that’s very much of that work. New Mexico, when you look at the drilling that goes on down there that’s associated with that Permian, that there – in New Mexico, I would imagine you probably got some federal grounds that are being drilled there. But I don’t see that as pending the federal drilling on federal ground is a major impact to us. I’m hoping I’m not wrong there, I don’t think I am, because if I look at like Utah, there wasn’t much drilling going on here anyway. And we actually have some rigs standing up, which is great to see. I think we’ve got 4 or 5 rigs now standing up, but I do know that some of that is on federal ground. The stuff we’ve seen on tribal here in Utah, they were excluded from the deterrent of drilling on federal ground. I’m not quite sure how the tribe got around that issue, but they got a release from that non-drilling on federal ground. So that’s probably why we’re seeing some of the activity pick up here in the state.

[John Bair:]

Right. Well, and I would think that if – I mean, I hope come to their senses about this. But if it doesn’t, I would imagine that could perhaps pick up activity in other areas like up in the Appalachians perhaps, where there is not a lot of the federal acreage up there. So...

[Troy Meier:]

Correct. And we’re going to – we need oil and gas, and we’re either going to get it on an international market or we’re going to get a lot of it here domestic, but we’re going to get it. So that’s how we look at it. That’s why the strengthening of our international platform is very important. And to answer your question in regards to the Gulf, again, where we send tools to our channel partner and they send them out, I do know we’ve run Drill-N-Ream on offshore in the Gulf, and I do believe it had some good performance. But that’s – I can definitely find out how many runs that we have had in the Gulf and the performance of those tools and be able to get back to you on that.

[John Bair:]

Okay.

[Troy Meier:]

I was going to say, circle around, but I won’t say that.

[John Bair:]

Yes, yes. Okay, right. Okay. Also wondering, as you see demand for products starting to pick up, are you – do you feel pretty confident you can keep your overhead expenses pretty much in check or are you going to be perhaps impacted by ramping up on that. In other words, you’re trying to orders come in that hopefully – that will just flow to your – hopefully, flow to your bottom line?

[Troy Meier:]

Volume is key. We have fixed costs here. And we’ve been able to hire back some very, very good talent that we had to let go midway through last year. We’ve been able to hire those people back. As volume is everything to us, and we start getting volume – the amount of people that we have in place now can absorb more volume. And when we do, our margins really start to look nice. So I think we can grow this company without adding a ton of cost. We’re going to have some international expense. We have to get a repair facility in the international market. So we’ve budgeted for that. We had a goal to get that done by the end of 2Q. It may be pushed back a little bit because there is still some travel restrictions going on that we are trying to deal with as we look to train individuals over there, but we’re going to have a repair center and a fabrication option in the Mid East in the not too distant future.

[John Bair:]

Okay. Well, very good. Keep after it. Good luck forward.

[Troy Meier:]

We will. Thank you.

[John Bair:]

Alright. You take care.

[Operator:]

There are no further questions in the queue. I’d like to hand the call back to management for closing remarks.

[Troy Meier:]

Everybody, thanks for joining us. And we’ve got a lot going on here. I think it’s going to be very positive in 2021 and beyond, and I really feel optimistic about the team. We’ve got and the opportunities in front of us. So stay tuned, and we’ll keep pounding away, and we’ll get this right. We’ll get down the road. We’ll get it right. With that, I want to tell everybody, have a good day. Thank you.

[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.