Ranger Energy Services, Inc. Class A

Good morning and welcome to the Ranger Energy second quarter 2020 conference call. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Darren Anderson, Chief Executive Officer. Please go ahead.

Thank you, Operator. Good morning, and welcome to Ranger Energy Services' second quarter 2020 earnings conference call. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. When we last spoke, Ranger was in the midst of materially rightsizing our business to match the needs of the market. As we sit here today, I would consider the result of that effort to have been very successful. If you recall, at the time of our May 1st earnings call, we had already reduced our headcount by 50%, taken across the board pay cuts, shut down two unutilized operating locations, and initiated a number of other cost savings initiatives. Triggering these difficult decisions early provided a tremendous benefit to us for the remainder of Q2. First of all, it lessened the demand of additional downsizing as the market continued to contract. Our headcount ultimately dropped an additional 10% by mid-Q2, while only needing to consolidate one additional operational location. Second, making our internal adjustments quickly allowed us to turn our full attention back to our customers giving us the best chance to obtain all profitable work with a focus on flawless execution. And finally, despite the velocity and intensity of this downturn, our management team's extraordinary and efficient efforts allowed us to deliver Q2 results that featured both positive EBDA and positive cash flow alongside near-stable sequential segment margins. In benchmarking this performance against an extremely challenged OFS marketing, I can't be more proud of the job that our team has done, and I'm truly appreciative of the customers that continue to choose Ranger as a partner. Both Ranger and our customers have been challenged across the board, as demonstrated by our 62% drop in revenue. But the challenges do vary across spaces. We've experienced activity and revenue drops in certain basins greater than 60-plus percent. In these basins, customer activity dropped to almost nonexistent for a period of time, or market pricing eroded so badly that a ranger opted to not even participate. Conversely, in other markets, the reduction in activity was still severe, but remained closer to a 50% drop with better pricing disciplines. Regardless of the various space and dynamics, overall, Ranger is benefiting from our operational and financial positions of strength, resulting in market share gains during a declining market. Our Q2 results are truly a reflection of our high-quality operations and disciplined cost management. We maintain positive adjusted EBITDA and cash flow through each month of the quarter. Our two largest business lines, high-spec rigs and wire lines, were able to hold segment-level margins at pre-downturn levels, an exceptional achievement. Brandon will walk you through the details in a moment, but our ability to deliver this type of margin performance, generate cash, and pay down debt by 35%, is arguably one of the worst orders that our industry has ever experienced truly demonstrates the capabilities of the Ranger platform. While it is far too early to call a recovery underway, our business has come off the trough experience in late May. I will provide some of these details as I now walk you through our segments, specifically starting with high-spec rigs. For the quarter, rig hours were down 61% and composite rig rates down 17%. While rig hours are self-explanatory, the change in composite rig rates was predominantly driven by our higher rate full rig completion packages coming to a near end in Q2. While I will not discuss absolute figures, at the trough of our rig activity during Q2, 24-hour completion work dropped to approximately 3% of our total rig activity. As we sit here today, our overall rig activity is up approximately 40% from our trough, with 24 activity returning closer to historical norms of approximately 10% of our active rigs. While these increases read as fairly large, please remember I'm referencing our absolute low activity mark. The point I am making is our rigs are measuredly going back to work. and barring a macro-driven reversal, the worst is behind us. One other item on the rig side, we continue to pursue our strategy of customer alignment specifically with IOT. Again, our operational and financial strength is paving the way for these conversations and negotiations to take place. We hope to have more to share in coming quarters on the success of this strategy. Moving on to our completion services and other. On our last call, I stated that our Mallard wireline group ended the month of April with five dedicated wireline trucks running. That number further declined and bottomed at four in late May. Dropping from an average of 11 trucks in Q1 to a trough of four, all due to completion stoppages and not pricing, was a material hit. The only positive metric for Ranger in this data is the permanent frack count dropped to a low of approximately 20 spreads as published by outside sources. This equates to a 20% market share for our mallet group. I believe this demonstrates the quality of services we've historically intended to bring to our customers. Currently, I'm very pleased that our dedicated active truck count is back up to six as our work continues or resumes with some of the strongest Permian EMP operators. Rounding out our completion services in the other segment, as would be expected, our smaller other services within this segment also experienced activity and revenues declines. The declines experienced here were comparable to our rig and wireline activity changes. And finally, our processing solution segment. Given the activity declines experienced by this segment in earlier quarters, The performance of this business had already endured a large portion of its challenges and therefore held up relatively better than our other segments. While our reported revenue was down, this was materially driven by lower mobilization and demobilization charges, which produced a smaller margin than our recurring rental revenue, resulting in an increase in gross margin relative to last quarter. Before I turn it over to Brandon, I want to close with this. The results we produced this quarter were the products of strong operations, a great balance sheet, and a culture of prudent and efficient decision making. These are things that are not created in a single quarter, but over time. So while it was a very tough quarter, Ranger's capabilities were on full display, showing that we built an organization that can withstand the most difficult markets. Brandon, I will now turn it over to you for details on the numbers.

Thank you, Darren, and good morning to everybody on the phone. Let's go ahead and get started with a walkthrough of all the second quarter details. First, the consolidated numbers. Relative to last quarter, Q2's revenues were down 62%, or approximately $50 million, moving from $81 million for the quarter for Q1 to $31 million for Q2. Adjusted EBITDA was down 72%, or $8.2 million, moving from 11.4 million to 3.2 million in Q2, while adjusted EBITDA margins moved down from 14 to 10.4%. A quick note on the bridge to adjusted EBITDA here, the as-adjusted result does back out $1 million of severance and restructuring charges for the quarter. As Darren noted, we believe that we are done with our resizing efforts and do not expect to incur any further severance costs in the second half of the year. And now moving down to the segment level and starting with revenue, quarter-over-quarter revenues saw a decrease across all segments. Specifically, high-spec rig revenue was down 67% or $23.5 million, moving from $34.9 million to $11.4 million in Q2. This is the combined effect of a reduction in period of rig hours and a decrease in the composite rig rates. Revenue hours declined 61% or 37,800 hours, moving from 62,400 to 24,600 hours. And as Zarin mentioned, composite hourly rig rates declined 17% or $95 an hour, from $558 an hour to an average of $463 an hour in Q2. In the completion and other services segment, revenue was down 59% or $26 million, moving from $43 million to $18 million, with both the wireline and other non-wireline services seeing declines. Here, within this segment, wireline revenues were down 60% sequentially, driven by a 53% decrease in period stage count and a 14% decrease in composite price per stage, while the drop-off in other non-wireline service lines was largely in line with regional market dynamics. And finally, at our processing solutions segment, revenues here were down 43% or $1.2 million, moving from $2.8 to $1.6 million with the majority of that decline driven by the lack of lower margin mobilization, demobilization revenue. And now, moving to the segment-level EBITDA and margin percentages. Overall, segment-level EBITDA, this is before corporate G&A, saw a decrease of 58 percent, or $10.5 million, moving from $18 to $17.5 million. Again, all segments contributed to this decline. On the margin front, consolidated segment margins were actually up from 22 to 24%. And now to disaggregate those two numbers down into the segment level, high spec rigs, adjusted EBITDA was down 66%, or $3.3 million, moving from $5 to $1.7 million, with margins here holding flat at about 14.5%. Completion in other services, saw adjusted EBITDA down 60% for $7 million, moving from $11.6 to $4.6 million. And here, margins were down just slightly from 27, moving down to 26% in Q2. For processing and solutions, adjusted EBITDA decreased just 8% from $1.3 to $1.2 million, while segment margins were materially up from 48% in Q1 to 75%. As Darren noted, the margins associated with this service revenue, the primary driver of the decline in revenue, was much lower than the base business's rental margin. And as such, the revenue decrease here had a materially disproportionately small impact on the absolute segment margin and drove a positive impact on the gross margin as a percentage of revenue loss. Moving on to G&A expense, as adjusted, G&A expense was down 23 percent year-over-year and down 34 percent sequentially, moving from $6.5 million to $4.3 million in Q2, this reflecting the impact of our recent rightsizing efforts. And finally, on the net income line for Q2, we reported a net loss of $8.9 million. a $11.7 million decline versus Q1's income of $2.8 million. This decrease in net income that was incremental to the adjusted EBITDA decline was driven by Q2's lack of Q1's $2 million gain on the retirement of debt and Q2's severance and restructuring expenses. Now moving on to cash flow and the balance sheet. During Q2, $16 million of cash flow from operations was offset by less than $1 million of cash CapEx expense, which drove a net sequential decline in our net debt number of $15 million. At the end of Q2, our net debt, and this is inclusive of all our vehicle leases, stood at $28 million, again down $15 million from Q1's ending $43 million balance. At the end of our quarter, our term debt balance stood at $22 million, down the usual $2.5 million from Q1's balance. Total CapEx recorded for the quarter was less than $700,000, which breaks down into $200,000 of maintenance CapEx, that is maintenance CapEx across all of our business lines, and $500,000 related to the final payments on two wireline trucks ordered at the very beginning of this year, along with payments on a new prototype gas processing unit. We also added $300,000 in non-cash lease obligations for the renewal of some of our IT infrastructure. On the liquidity front, we ended the quarter with $11 million of liquidity, which consisted of $6 million worth of cash and $5 million worth of capacity in our revolver. That is down $11 million from Q1's $22 million of liquidity, which was driven by the reduction in borrowing base as our accounts receivable balances declined through the quarter. At our release date, our revolver was undrawn, and our availability stood at $10 million with a cash balance of about $1 million. That's all for me, and I'll shoot it back over to Darren for his concluding comments.