Ranger Energy Services, Inc. Class A

Good day and welcome to the Ranger Energy third 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 touch-tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. And now I'd 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' third quarter 2020 earnings conference call. Joining me today, as always, is Brandon Blossman, our CFO, who will offer his comments in a moment. Q3 has been a successful quarter for Ranger with improving results across each month, a trend that has continued into early Q4. While the recent volatility has tested our organization, our team has risen to the occasion and passed with flying colors. We have exited this downturn incrementally more efficient and focused, which is easing the path to a ramp back up and allowing us to divert our full attention to addressing our customer's growing service needs. Over the past two quarters, the focus of our attention has solely not been on cost and cash management, but beyond to include ongoing increases to organizational efficiency, new customer development, and enhancement of real-time operations monitoring and data capturing for improved performance. The actions taken and decisions made through the downturn, combined with our solid financial footing, are now starting to pay dividends through additional market share gains. While our year-to-date headcount and revenue are each still down approximately 50%, we have seen a very substantial increase in activity off of the Q2 trough. Our current revenue run rate is up 55% and headcount up 40% from the bottom. It is still too early to point to a broad market recovery, but within our segments and select phases, we are experiencing positive trends of improvement. These improvements include month-over-month increases in high-specification rig hours and rates, an expected increase in active wireline units, along with additional contract opportunities from customer schedule to ad frac crews in late Q4 or early 2021, and a significantly growing backlog of bid opportunities within our processing solutions group. Now for a little more segment-level detail, starting with high-spec rigs. For the quarter, sequentially rig hours were up 23% and composite rig rates up 4%. While full third quarter metrics are up nicely versus Q2, the quarter's month-to-month trajectory was even more dramatic. For the trailing six months, our activity low was in May with a pricing low in June. Versus those monthly troughs, our current October rig hours are on a run rate to double with pricing up 18%. That momentum projected into a fourth quarter average implies a 25% to 30% increase in rig hours and a greater than 5% increase in pricing versus our Q3 averages. Another positive metric we are experiencing in our rig business is our growing 24-hour work. For Q3, roughly 20% of our activity was 24-hour work performing completion, refrags, or major work over operations. That mix has continued to move up in recent weeks, with October's 24-hour rig activity trending at greater than 25%. As mentioned in my opening comments, one of our focuses has been on our real-time monitoring and data capturing systems. With the growth in our 24-hour reactivity and a considerably higher customer spend with this type of work, we are having early success with system implementations. The data monitored and collected is being used to further drive efficiencies, thus improving the performance of both our and our customers' operations. Moving on to our completion and other services segment. We maintain a wireline truck count of six dedicated units throughout the third quarter and remain at that activity level today. We have seen some price erosion through Q3, but have continued to offset it with increased efficiencies as measured by stages completed by truck day and further cost reductions. Our October run rate is tracking up 8% on stage count, but that gain is being offset by nearly 8% decline on pricing per stage. Looking forward, we are pleased with our efforts to expand our wireline customer base within the Permian. We have nothing finalized to report on this call, but we are optimistic about the near-term possibilities. The balance of our completion and other services segments experience quarterly declines. With a decent portion of these service offerings being DJ based and focused, their performance was simply in line with the continued weakness across this basin's overall activity level. And finally, our processing solutions group. Current results are clearly not where we want them to be, but this segment's longer contracting process in the midst of a weak commodity price environment has definitely not supported an immediate rebound. But our new match team has been busy and has built one of our deepest backlogs of bid opportunities. The end of the fourth quarter will yield a majority of our bid results. We are optimistic that even a small portion of contract wins will materially change the performance of this segment. To wrap up, while the macro environment continues to challenge the sustainability of some OFS companies, Ranger's performance shows that our organization is clearly on a different path. Every month of Q3 has yielded improving consolidated results. Our balance sheet continues to strengthen with a modest 20 million of term debt And our liquidity position is up approximately 40% from our low point in late Q2. I can't say enough about the work that our team has done and about the customers who have chosen to partner with Ranger during this difficult market. We're proud of the fact that our business is on solid footing, which is allowing us to focus our customers' performance and strategic options. I will now turn the call over to Brandon for details on the numbers.

All right. Thank you, Darren, and good morning to everybody on the phone. Let's do a quick walkthrough of all the third quarter details and make sure that we don't miss any of the numbers. So first, on a consolidated basis, a reminder of the numbers. Relative to last quarter, Q3's revenues were up 13%, or $4 million, moving from $31 million to $35 million. Consolidated adjusted EBITDA was up 36%. or $1.2 million, moving up from $3.2 million to $4.4 million, while adjusted EBITDA margins moved from 10.4% to 12.7%. And now going down to the segment level and starting with revenue, high-spec rig revenue was up 26%, or $3 million, moving up from $11 to $14 million. The combined effect of an increase in period rig hours and composite rig rates, as Darren mentioned. Here, rig hours increased 23%, or 5,600 hours, moving from 24,600 to 30,200 hours in the quarter. Composite hourly rig rates increased 4%, or $17 an hour, moving up from $463 an hour to $480 an hour. In the completion and other services segment, Revenue was up 6% or $1 million, moving up from $18 to $19 million, with our wireline business posting the majority of those, well, all of those increases, and those increases were partially offset by declines in other non-wireline services. Specifically, wireline revenues were up 15% sequentially, the mix of a 34% increase in period stage count which was partially offset by a 13% decrease in composite pricing. The drop-off in other non-wireline services, as Darren mentioned, was largely driven by continued weakness in the DJ Basin market. And finally, at our processing solution segment, revenues here were down 22%, or $400,000, moving from $1.6 million to $1.2 million, driven by a net reduction of one MRU package, along with some lower service revenues. Now moving to segment-level EBITDA and segment margins. Overall, segment-level EBITDA, adjusted EBITDA, and this is before corporate G&A, saw an increase of 11%, or $800,000 quarter over quarter, moving from $7.5 million to $8.3 million. With high-spec rigs, and completion in other services seeing increases, which were partially offset by a decline in processing solutions EBITDA. On the margin front, consolidated segment margins here again before corporate G&A were flat at 24%. And now to disaggregate some of those numbers to the segment level, high spec rig adjusted EBITDA was up 41%, $700,000 up moving from $1.7 million to $2.4 million, with margins also moving up from 14.5% to 16.5%. At the completion and other services segment, adjusted EBITDA was up 9%, or $400,000, moving from $4.6 million to $5 million. Margins here, again, were up 26% to 27%. The processing solutions segment, saw adjusted EBITDA decrease 25%, moving from 1.2 million to 0.9 million, while segment margins here were roughly flat at around 75%. On the G&A expense line, G&A expense as adjusted was down year-over-year 26% and down again quarter-over-quarter. For the third quarter, we saw a 9% sequential decrease moving G&A expense down from $4.3 million to $3.9 million. This Q3 $3.9 million as a run rate does now fully reflect the impact of our Q2 resizing efforts on the administrative side, along with some benefit from reduced per capita healthcare expense that we've seen over the last quarter and a half or so. That run rate should be what we expect on a go-forward basis. Net income. And finally, here for Q3, we reported a net loss of $5.7 million. That is an improvement of $2.3 million over Q2's loss of $8.9 million. The decrease in net loss beyond the adjusted EBITDA increase was primarily driven by Q3's return to a more normalized depreciation level after some Q2 catch-up depreciation, along with some quarter-over-quarter differences in severance impacts. And just a note before we move on to the balance sheet on adjusted EBITDA. You'll note that the as-adjusted Q3 EBITDA of $4.4 million is lower than the unadjusted number of 4.8. This reduction is the result of the net impact of the release of an earlier period bonus accrual, which reduced adjusted EBITDA, which was partially offset by the one-time costs associated with our earlier in the year take private response. With that out of the way, let's move on to the balance sheet and cash flow. So cash flow, during Q3, we saw 3.8% $1 million of cash flow from operations. That, combined with $500,000 of asset disposals and $600,000 of vehicle lease returns, which was partially offset by $600,000 of cash capex spend, allowed us to reduce net debt by $3.6 million sequentially. At the end of Q3, our net debt, this inclusive of vehicle leases, stood at $24.4 million, that down from Q2's ending $28 million balance. I'd like to note that that, the Q3 results, brings our year-to-date net debt reduction total down to a decrease of $22 million. That's down nearly half from year-end 19's ending $46 million balance. And at the end of the quarter, our term debt balance stood at just $20 million, down the usual $2.5 million from Q2. Moving on to CapEx, the $600,000 of total CapEx recorded for the quarter breaks down into a bit less than $200,000 of maintenance CapEx that was spread across all business lines. The balance, 150 of relates to upgrades to rigs being prepped for new higher tier work 80,000 for wireline equipment upgrades and 175,000 which should be one of our last payments on a new design prototype gas processing unit in our processing solutions business segments And finally, on liquidity, we ended the quarter with $14 million of liquidity consisting of $3.4 million of cash and $10.4 million of net capacity on revolts. That is up $3 million from Q2's $11 million of liquidity. This is driven by an increase in borrowing base as our accounts receivable balances ramp back up close to the trough. Darren, I think that's all for my comments, and I'll hand it back to you.

Thank you, Brandon. I'll wrap up with a few brief comments now. While we still have a long road ahead of us, we are optimistic on the future and pleased to have started the fourth quarter with great momentum. For the balance of the year, we expect to see a continued growth in reactivity, primarily driven by the increasing maintenance demands of the overall market. Our completion-related services should remain stable for the year with a potential for modest activity increases very early in 1Q21 based on current customer inbound and active contracting processes. And as I mentioned in my earlier comments, our Processing Solutions Group has participated in a considerable number of bidding programs which could have a meaningful and positive impact to the start of 2021. In regards to our strategic initiatives, Our efficient operating model continues to prove successful as demonstrated through our consistent margin performance across 2020. We will continue to drive efficiencies from our back office to our customers' wellheads. The continued implementation of data monitoring and capturing systems will take place across select 24-hour reactivities, along with pilot programs beginning within select completion service offerings. Our focus on top tier clients is yielding a growing high quality revenue stream with additional contract opportunities ahead of us. While small in scale, we've recently been awarded a four-well refrag pilot program with a new multinational operator. The real opportunity here was the award of their 2021 refrag program conditioned upon the commercial success of the pilot program. Additionally, we've expanded our relationship with an existing ILC customer into a new basin where we've historically not provided them rig services. The current plan is to ramp from our existing one working rig to five rigs by the end of the first quarter. And finally, we have consistently discussed our interest in consolidation each quarter, and that continues to be a focus. The current acquisition and merchant environment remains opportunity rich. However, we continue to take a disciplined approach that focuses on delivering clear value to our shareholders and minimal risk to our strong balance sheet. While we do not have a transaction to announce this quarter, we continue to work diligently on this front and expect to have something to share in the future. Operator, this concludes our prepared remarks and we will now open the call for questions.

And we will now begin the question and answer session. To ask a question, you may press star then 1 on your touch tone phone. If you're using a speaker phone, please pick up your hands before pressing the keys. To withdraw your question, please press star then 2. Once again, that is star then 1 to ask a question. And at this time, we'll pause momentarily to assemble the roster. And our first question today comes from Daniel Burke with Johnson Rice. Please go ahead.

Yeah, hey, good morning, guys.

Morning, Daniel.

Let's see, Darren, appreciate all the quantification around how activity levels have continued to come up from the trough. You know, October is typically seasonally a pretty good month of the year. Granted, this year is different from all other years. But I was wondering if you could just speak a little bit, and I get the activity statement, or the indications of interest for incremental activity, particularly headed into kind of 21. But can you talk about maybe the tempo of activity you'd expect within Q4 as Q4 advances? Do you see any tail off this year?

Yeah, I think it's going to be, in my opinion, probably a little bit of a different year. Because the activity level across the second and third quarters were so low, the room for decline is not really as material this year. What we've seen is the ramp up that's been occurring, particularly in the September and October months. It's hard for us to imagine that operators will reduce that activity materially going into November and December. especially what we're seeing as far as inbound and contracting opportunities for work to start in January or even backing up in late December. So I think it'll be a unique year from what we've seen in the past that you won't get the typical strong seasonal declines. I think from our standpoint, our only concern is just the weather, how tough the winter will be. We've had some nice, nice improving performance contribution coming from our northern operations, which puts us a little more susceptible to the weather from the north. But outside of that, we think fourth quarter is going to be stronger than we would typically see and continue that momentum throughout the year.

Got it. Thanks. And then, Darren, any way to explore further maybe the depth of interest you're seeing in wireline units from Mallard to a company that's incremental demand for frac fleets you're seeing in the Permian market? I mean is there a case where, as we get into 2021, you guys could be back to approaching full utilization?

Yeah, I think approach of full utilization is still a tough bar. I think what we're seeing right now, operators that may be running three or four frac spreads that we have relationship with are looking to add, call it one frac spread at year end, one frac spread early 2021 with the possibility to go up to two. So it's those types of increases. You know, which, again, going from six units to adding a few fleets in our business is a strong business there, would have a nice benefit to us. But to say getting back to full utilization right now, we don't see that in the near-term horizon.

Okay, that's helpful. Let's see, I'll ask one or two more here. Don't frequently query on processing, but it sounded like there was an interesting opportunity there. I think you used the word meaningful if you could convert some of these tenders. Could you return to a 2019 type of cash flow run rate in that business? Or, again, is that stretching too far?

No, I think that one does have some greater upside to it. Again, and that's based off what we have in our queue for our bidding process. Again, we brought on a new management team. And, again, this is a longer contracting process. relative to our upstream wellhead type services. So the queue they built has been kind of over the last four months, with a lot of that to come to fruition, again, latter part of Q4 to early 2021. So it's a material backlog. And again, we're not guaranteed of the wins, but I know we'll be successful with some of those projects and could get back to kind of the 2019 performance level In my opinion, Brandon, you want to add to that?

No. I mean, I think that there's clearly plenty of upside in that business today. The assets are all in good repair and all continue to be relatively new. So there's, you know, the path to going from where it was in 19 to, or sorry, yeah, the path to going to where it was in 19 is relatively easy and it is just on the commercial side. And we think that there's plenty of opportunities out there based on the backlog. and probably early conversations that are not in the backlog. But it's a commercialization effort, and that is the sole hindrance to that business running back up to where it was.

Got it. Okay, guys, thank you for the time this morning.

Thanks for the question, Daniel.

Thanks, Daniel.

And once again, if you would like to ask a question, please press star then 1.

Operator, I think we can probably... Yep.

Go ahead, please. This will conclude the question and answer session. I'd just like to turn the conference back over to you, Mr. Anderson, for any closing remarks. No, great. Thank you.

I just want to thank everyone for joining the call today, and I especially want to thank our great team for a job well done in the midst of a difficult market. Best wishes and safe health to everyone as we enter the holiday season and close out 2020. This concludes the call. Thank you.

And the conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.