Ranger Energy Services, Inc. Class A

Welcome to the Ranger Energy Services Second Quarter 2021 Conference Call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing star then zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touchtone phone. 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 Bill Austin, Chief Executive Officer. Please go ahead.

Thank you, operator. Good morning and welcome to Ranger Energy Services second quarter 2021 earnings conference call. This is Bill Austin, and I'm speaking to you this morning as interim CEO and chairman of the Ranger board. Joining me today is Brandon Boston, our CFO, who will offer his comments in a moment. As I noted in this quarter's press release, strategically and operationally, this quarter was a pivotal one for Ranger. Our high-spec rig segment delivered strong sequential revenue growth along with margin performance, which matched historic peaks. And given that momentum that built across quarter two, we are expecting additional revenue and margin gains for our rig business in the third and fourth quarter. Our wireline business did see some modest revenue growth in quarter two. However, here margin performance continues to underperform in the face of industry-wide low completion pricing levels. Strategically, we executed on two acquisitions, Patriot and more recently, Perfects. Expanding our wireline fleet with newer, high-quality equipment broadened our geographic footprint in strengthening our service offerings. We are currently in the process of integrating these companies into our existing business and are already experiencing cost synergies and early cross-selling successes. We are looking forward to demonstrating the earnings power of this newly expanded fleet in the quarters to come, and I'll talk a little bit more of that in the additional remarks. On the M&A front, as our results begin to reflect the positive impacts of these first two acquisitions, we expect to gain further market acknowledgement that Ranger's combination of low-cost, efficient overhead cash flow-focused operations, and clean balance sheet is the right platform to pursue further energy industry consolidation. I'll touch on this theme again and will finish my prepared comments today with an announcement on a pending corporate structure change. But in the meantime, we have a fair bit of ground to cover. As I said, there's plenty to talk about with our acquisitions, the quarter results, and our outlook. I expect there are also questions about our CEO transition, so I'd like to address that right off the bat. On this point, most importantly, you should see no change to Ranger's overall strategy. With the two wireline transactions now closed, we are just beginning to see the result of the last three years of strategic groundwork led by Darren, and many thanks to Darren for that. We as the board and management team expect to continue to move forward along the same strategic path regardless of who is in the CEO seat. On the CEO search specifically, the board is working through an evaluation process that is considering both external and internal candidates. This process is moving along its planned timeline, and frankly, I expect to reach a conclusion within this current quarter. Now talking about our strategy. As to our strategy, to be clear as possible on this point, I'll take a minute to articulate the bullets that outline what we are working towards with Ranger. One, it's a focus on long-term sustainable cash flow. This is the lens through which all capital allocation and operational decisions are made. Two, we have an efficient, low-cost G&A structure. We deploy systems, allocate people, and design processes to maximize the value of each dollar of our SG&A spend. Note with our two recent acquisitions, we are sitting at approximately a $350 million revenue run rate, which when we compare to an $18 million forecasted 2021 G&A expense, returns about a 5% of revenue SG&A burden, a rate half of what our peer group spends. And three, a clean balance sheet. We acknowledge that there is a higher theoretical cost of capital with an unlevered balance sheet. But in our minds, the practical reality of distress at the bottom of the cycle far outweighs that concern. Our target leverage remains a net debt zero. Additionally, our acquisition strategy has been fixed and simple. We are focusing on potential counterparties with top-tier assets who have a reputation for best in class service quality. We are looking at both bolt-ons for existing service lines and complementary service lines that extend our current core service offerings. As we have said before, tactically, we believe in being opportunistic. There's a right time and a wrong time in each cycle to be acquisitive. As we have noted before, what proves to be the right timing decision in the long run is often counter to the consensus thinking at the time. Now, before talking about the quarter's segment results, I'd like to spend a few minutes on our recent acquisitions. The strategic intent underlying both of these acquisitions was to increase the scale and scope of our existing wireline business. Consistent with our acquisition strategy, both Patriot and Perfect have a reputation for best in class, service quality, along with a top-tier asset base. Frankly, as an added benefit, we have also inherited two teams of exceptional people with deep technical skills and innovative, nimble cultures. To provide some more background on these transactions, I'll note that we've spoken for multiple quarters about the unsustainable low wireline pricing we've seen in the market. Some competitors continue to bid work at near-bearable cost, leaving little to no margin to support a management structure. excellent small to midsize organization carrying proportionally high G&A cost structures have been and are still actively looking for consolidation opportunities. Our mallet business with its proven operating success and streamlined efficient cost structure has risen to be a consolidation partner of choice for these organizations. With our two recent acquisitions, we are pleased to be participating in those consolidating efforts that add technology scale and geographical diversity to our existing efficient platform. I would also note that we've expanded our customer base dramatically from around three in the Permian Basin to 27 or a greater across our spectrum. Again, I won't repeat all the detail we shared in the wireline press release, But we do want to add some incremental thoughts. We were able to accomplish these transactions at exceptional value points. For example, we spent $1.6 million per wireline truck to organically create Mallard Plug and Perf wireline business. The combined purchase price for Patriot and Perfex came in at a per truck cost of approximately $500,000, or about 30% of new build cost. The combined revenues of these two platforms was $260 million in 2019. It has now a current run rate of $150 million. While we would need to see both the step change in activity levels and pricing to return to those 2019 levels of revenue, we do believe that moving back to a 20% segment level margin is very achievable through some modest price increases and cost savings as we move into next year. In addition to the G&A Extend synergies, we are anticipating revenue synergies coming from cross-selling. This is across the plug-in PERF and intervention work customers. From a per-stage price rationalization and from the potential incremental customer adoption of the lower-cost XConnect gun system. We did bring on some incremental debt with the second PERF-X acquisition. I'll note this is $11.4 million balance is more than fully collateralized by the perfect asset base, and as such, we do not see this as driving any incremental risk to the Ranger balance sheet. The integration of both these companies is moving along nicely. Combined, we have onboarded almost 320 new largely field-level wireline employees, increasing our headcount by almost 40%. and we are well underway to combine systems and processes with the goal of creating a single, fully integrated, multi-basin wireline platform. Now, with that, talking about the wireline, let's talk a little bit about the second quarter because it was a busy one. In April, we did close a $13 million sale lease-back transaction of our DJ Basin facility, which we discussed in our quarter one earnings call. In May, we announced the Patriot acquisition, and just outside of quarter two in early July, we announced the acquisition of Perfect. Now, let's talk a little bit about the segments. At the segment level, our high-spec rig business continues to see the combination of both hours and pricing increases, again indicating that our growth is not coming at the expense of customer quality or undercutting competitor pricing. Rather, this is the continued manifestation of the groundwork we have been laying over the last three years in high-grading our customer base to those top-tier clients that are willing to pay for service quality rather than just seeking the lowest quoted rate. Sustainable pricing that supports training, maintenance, and acceptable return levels is good for the entire industry, both E&P and service providers. But back to the quarter. With the weather interruptions on the first quarter, we saw a pause in the high-spec rig growth. That pause, however, was not repeated in the quarter, too. The second quarter has us returning to the type of growth rates that we are seeing towards the end of last year. We deployed more rigs, worked more hours per rig, and saw pricing gains resulting in a 34% sequential revenue increase. Our rig rates on a per-rig hour basis posted the highest number we have seen in our post-2017 IPO configuration. While we have seen rig-only rates move higher off last year's trough, this record rate is more the result of an increased level of ancillary equipment being deployed at the well site rather than any dramatic increase in the base rig rate. As a side note, while our full package rates are acceptable, we believe there is plenty of economic rationale for bear rig pricing to continue to move up as current market rig rate only rates provide little return on investment for the sector. The operating last metric I want to highlight is the trajectory of our high-end 24-hour rig activity. At year-end last year, we were running five 24-hour rigs. At the end of quarter one, we were at seven, and at the end of quarter two, during the quarter two, we were between 13 and we're currently running 15. On the expense side in quarter two, we again saw increased costs associated with the ongoing activity ramp with incremental make-ready expense totaling $980,000 for the quarter. Here it's interesting to note that those increased costs occurred in April and May, while June saw no incremental Make Ready expenses. Segment margins for the first quarter came in at a reasonable 17%. However, June, with the absence of Make Ready costs, printed a 23% gross margin. This is a result that we are not currently learning through our forecasts, but one which we will strive to repeat in the current months, or in the coming months, I should say. Now moving on to completions and other service segments. Starting with our legacy Mallard wireline business. During the quarter, our wireline business saw little change in the revenue line. We averaged six trucks, which is down slightly from quarter one, 6.3 average number. However, these trucks were a bit more productive on average, resulting in little sequential revenue change. we did see a sequential decrease in margin, largely driven by a 5% increase in per-gun perforating expense. I'll note that this gun price increase was largely an artifact of inventory accounting rather than a structural gun price change in the second quarter. Our reported results include a month and a half of contribution from Patriot and no contribution from Perfects as that occurred post-quarter. However, as a standalone business, if we were to look at both, both businesses, their combined revenue, that is Perfects and Patriot, were up 15%, moving from a quarter one run rate of $30 million to a quarter run rate of $34.5 million and holding at a roughly 13% gross margin. Our other non-wireline businesses in this segment are DJ Basin focused, and as such, we've not seen much of a recovery as the other basins have seen. Here, quarter two's revenue and margins were not materially different from that of quarter one. Moving on to the process solutions, in our process solution business, revenue was up just slightly for the quarter, as we have seen success in recontracting our gas cooler units moving up to a 94% utilization rate. Renewal rates are somewhat a bit lower than 2019 and previously contracted rates. With our mechanical refrigeration units, our MRU fleet, we continue to press into the frac business and have had a handful of units in service each month. This developing line of work is much more cyclical in nature. and has been slower to grow than we had originally expected. We saw little change quarter over quarter with our MRU fleet in terms of either revenue or margin. I know that's a lot, but let me turn the call over to Brandon. I do have some closing remarks, and I do, again, want to talk about the corporate structure change. Brandon?

All right. Well, thank you very much, Bill, and good morning to everybody on the call. Let's go ahead and do the standard walkthrough of the second quarter details and numbers. First, for the consolidated numbers, to recap, Q2's consolidated revenue was $50 million. That was up 30% for $11.7 million as compared to Q1's $38 million. Adjusted EBITDA came in at $2 million flat. That's up $2.2 million from Q1's $200,000 loss. And also note that, again, like in the first quarter, embedded in and reducing this quarter's EBITDA is incremental make-ready expenses, as Bill noted, of $980,000. And, again, that is associated with high-spec rig reactivations and make-ready and upgrades. Now moving on to the segment details on revenue, high spec rig revenue was up 34%, or $7.3 million, moving up from $21.7 to $29 million in the second quarter, the result of both an increase in rig hours and an increase in composite rig rates. Specifically, revenue hours increased from 43,200 in Q1 to 50,100 hours in Q2. That's a 16% increase. Q2's average rig count was up 5.5 rigs, or 8%, moving from 65 rigs to 71 rigs. And the quarterly average composite hourly rig rate was up 19%, or $94 an hour, moving from $493 an hour in Q1 to... as Bill noted, a record $587 per hour in Q2. That is a high watermark, that rig rate, a high watermark for Ranger since the inception, essentially, of the business. And though this is not on the back of a significant bear rig by customer rates, but rather the result of larger rig packages. As Bill mentioned, That increase in pricing was a mixed shift towards, again, higher rate, full answer package, 24-hour work. Okay. And then to kind of add on to Bill's comments about the 24-hour work cadence of increases, Bill talked about the incremental rigs. I'll talk about the incremental hourly makeup of our total hours that is attributable to 24-hour rigs. So going over the last three quarters, in Q4, 24-hour work made up 26% of the total rig hours. In Q1, that number moved down to just 19% driven by February's weather interruptions. However, in Q1, we ended that quarter in March having 35% of the rig hours tied to 24-hour work. And for Q2, that average moved up from 35% to a full quarter average of 39%. And that is approximately where it sits here today in July. Now moving on to completion of other services segment. Revenue here saw an increase of 28%, or $4.3 million, to just under $20 million in Q2, up from $15.5 in Q1. However, the majority of that $4 million revenue increase, $4.3 million revenue increase, came from the Patriot acquisition. Again, Patriot was a mid-quarter acquisition and $2.3 million of revenue came with that acquisition. The balance of that increase, quarter over quarter of revenue, was spread between other non-wireline services and our legacy Mallard business, with both of those business lines showing some modest increase. And finally, at our processing solution segment, revenue here, we're up a modest $100,000, moving from $1.1 million to $1.2 million. Now moving to segment-level EBITDA and margins. Overall segment level adjusted EBITDA, this, as always, is before corporate G&A, came in at $5.9 million. That's an increase of 40% or $1.7 million moving up from Q1's $4.2 million print. High spec rates showed strong gains, those gains partially offset by declines in the completion and other services segment and the processing solution segment. On the margin front, consolidated segment margins, again, before corporate G&A moved up from 11% in Q1 to 12% in Q2. G&A expense, as adjusted, was down a half a million dollars from $4.4 million in Q1 to a $3.9 million print in Q2. The sequential decrease largely in line with the historic first-of-the-year PEG expenses, and that's associated typically with employment tax and other non-periodic expenses showing up in Q1 that don't reoccur in Q2 or for the rest of the year. And now at the segment level EBITDA. For high-spec rigs, segment EBITDA increased 85%, or $2.3 million to $5 million in Q2, up from a $2.7 million number in Q1, with margins moving up from 12% to 17%. As with the last couple quarters of growth, we saw material amounts of spending within the quarter related to customer-requested upgrades of those rigs, and other reactivation make-ready costs. In the second quarter, as Bill noted, and I noted earlier, that make-ready cost totaled $980,000. If you'd like to add that incremental expense back to the results to get more to a steady-state type EBITDA, that would result in a $6 million segment EBITDA and a 21% segment margin. Again, levels that rank at the very top end of our historic range. At completion of other services, EBITDA was down $300,000, moving from $0.9 to $0.6 million. Margins here were down from 6% to just 3%. As we've talked about, this is the result of continued weak completion pricing. And finally, processing solutions, EBITDA was down $300,000 to... $300,000 in Q2, moving down from that $600,000 mark in Q1. Segment margins here were down to 30%. Moving on to net income. For Q2, we reported a net loss of $9.1 million. That is an $800,000 loss. incremental loss versus Q1's loss of $8.3 million. Embedded in this loss and adjusted out of our adjusted EBITDA was $900,000 of legal and other transaction fees related to our two acquisitions. Also note that the reported loss in Q1 was partially offset by the benefit of a $1.4 million 401 forfeiture recapture, a benefit which obviously did not reoccur in the second quarter. Now moving on to balance sheet items. Net term debt dropped $2.8 million over Q2, moving from Q1's ending balance of $30 million to $27 million at the end of the second quarter. This move was largely the net effect of the $12 million of net cash proceeds from our facility sale leaseback transaction, which was partially offset by the working capital bill associated with the $12 million or 31% Q over Q revenue increase. As usual, we reduced our term debt another $2.5 million during the quarter, bringing the Q2 ending balance down to $12.7 million. CapEx, maintenance CapEx was significantly higher this quarter, coming in at $800,000 versus a recent $200,000 run rate. The majority of this is really a time and phenomena associated with our high spec rig. segment, and again, largely related to the ancillary equipment asset base. So most of this is timing. We've been running very low maintenance CapEx numbers, so this was a bit of a catch-up relative to that $200,000 run rate. However, as we go forward and a little bit in this quarter, we'll note that with essentially all of our high spec ancillary equipment running, and being out in the field, we would expect this maintenance CapEx number to move up as we go forward because of the high levels of utilization of that ancillary asset equipment fleet. On the growth capex side, our cash spend was $1.1 million. Actually, the majority of that was for some downhole tools. On the wireline intervention side, our new Patriot acquisition, and there was also some incremental pieces of answer equipment purchased for high-spec rigs. Also, we added some incremental pickup trucks to our fleet, spending almost $500,000. However, this is on a non-cash leased basis. Moving on to liquidity, we ended the quarter with $16 million of liquidity. That consists of $13 million of cash capacity available on our revolver and $3.4 million of cash. As noted earlier, that $3 million, that was a $3 million uptick from Q1 ending $13 million of liquidity. With that, I'll end my comments and hand it back to Bill.