Ranger Energy Services, Inc. Class A

Good morning and welcome to the Ranger Energy third quarter 2021 conference call. All participants will be in a 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 Stuart Bowden, Chief Executive Officer. Please go ahead.

Thank you, Operator. Good morning, everyone. I hope everyone is well. And welcome to Ranger's Q3 2021 Analyst Call. As Operator said, this is Stuart Bowden, President and CEO of Ranger Energy Services, and I'm joined by Brandon Blossman, Ranger's Chief Financial Officer. Before we dive into the numbers, I think it's important to reflect on what the Ranger organization has accomplished over the last 12 months. During the first half of the year, we rebuilt our legacy business from the 2020 trough, rehiring and adding nearly 600 employees. More recently, through the acquisitions of Patriot, Perfects, and the Basic Assets, we have tripled the size and revenue potential of the company, building meaningful scale in our rigs and wireline businesses. The two wireline acquisitions increased our unit count more than five times, from 13 to 68 wireline units. We more than doubled the scale of our high spec rig business, along with the addition of incremental service lines and a significant number of ancillary assets. We also greatly simplified our capital structure. We refinanced our entire balance sheet, eliminated a potentially burdensome tax receivables agreement, and paved the way to collapsing our equity structure into a single class of stock. We also diversified our investor base. In short, Ranger is a very different company today than it was at the beginning of the year. We're pleased with the progress to date, but there's still a lot of work to do, particularly with regards to margin improvement and generating sustainable cash flow. Given the strong macro environment and given the early indications from our acquisitions, we are optimistic about our ability to improve margins and generate cash. I'm going to briefly review company-wide performance in Q3 and then talk about our future outlook. Then Brandon will review Q3 segment level financial performance. and outline in more detail the changes we made to the capital structure. I will then come back and talk about the basic acquisition in more detail and wrap up our prepared remarks. For Q3 company-wide performance, revenue increased sequentially $32 million from $50 million in Q2 to $82 million in Q3, driven primarily by the Patriot and Perfect's acquisitions. Please remember, Revenue associated with the basic asset acquisition is not reflected in the Q3 numbers, but will be fully reflected in Q4, since we took control of the basic assets on October 1st. Adjusted EBITDA increased from $2 million in Q2 to $3.3 million in Q3. Company-wide EBITDA margins remained at 4%, which is effectively the same as the EBITDA margin in Q2. On the rig side, we have enjoyed some pricing improvements in Q3. However, there has been little net benefit to the bottom line because of increased labor costs and supply costs. On the wireline side, pricing remains the biggest obstacle to improved performance. We are seeing positive benefits from the integration of our recent acquisitions, including cross-selling opportunities, cost benefits from consolidating yards, along with some crew sharing. Similar to rigs, these gains have been largely offset by increased labor costs. As we look forward, Based on October, including the basic assets, our annualized revenue run rate is now between $450 and $500 million. That is roughly split 60% for high-spec rigs and 40% for completions and other services. Torrent revenue continues to be modest. Based on expected price increases and potential activity increases, we are looking to be on the top end of that range for 2022 or to surpass it. Our target is to achieve 15 percent EBITDA margins or greater at the company level, which translates to segment EBITDA margins of 20 to 25 percent. Clearly, we have work to do since our EBITDA margins for the high-spec rigged business were 16 percent in Q3, and they were approximately 5 percent for completions and other services in Q3. In addition to expected increases in demand and tightening of the market, there are several initiatives already underway to improve margins. First, we are continuing to work on net price improvements across all service lines, and we are engaged in pricing discussions with the majority of our customers. These conversations are generally going very well, and most of our customers understand that prices need to increase to promote a healthy service sector. Further, several of our largest customers are asking for additional rigs, and we expect the market will continue to tighten in the coming months. Second, we are changing our sales organization to better leverage our sales team and promote cross-selling and cross-service lines, particularly amongst larger customers. Third, we expect margins will improve as we continue to relapse cost synergies from yard consolidations as we fully integrate our most recent acquisitions. We expect yard consolidations will continue through the end of Q1 of 2022. Finally, we've made several key management changes in our wireline segment, which we think will have a positive impact on future performance in our completions and other segments. other services segment. I'll now turn it over to Brandon to discuss Q3 segment level performance and our capital structure, and then I'll come back and talk about the basic acquisition and wrap it up.

All right. Thank you very much, Stuart. For this quarter, I'm going to change it up a little bit relative to what we've done historically for my comments. I'm going to go straight to the segment financials. skipping some of the high-level corporate numbers that Stuart mentioned and that you can easily read in the press release. I'll spend a little bit more time on those segments, specifically on the KPIs for our two most significant businesses, try to give you a little bit more detail on those two lines in terms of operating metrics, and then move on with some comments and details on the balance sheet before handing it back to Stuart. So first for the high spec rig segment, here revenues increased 3% or a million dollars moving sequentially from 29 million to $30 million. The revenues were up segment margins decreased a touch moving down from 17% in Q2 to 16% in this quarter. That resulted in a slight drop in EBITDA from 5 million to 4.8 million in Q3. First, on the revenue side, driving that 3 percent revenue increase was an increase of 3 percent, or $18 an hour, in the hourly average rig rate, moving from 566 in Q2 to 584 in Q3. As a sidebar, I'll note that our reported Q2 hourly rig number, or rig hours, was higher today than as we reported in Q2. That was some of the prior period adjustments that we did in Q3, bringing those hours that we reported for Q2 up. And of course the offset is bringing the reported rig rate down. So you'll note that as you compare the Q3 release to the Q2 release. Again, however, on the adjusted numbers, hourly rates are up $18 an hour. That increase in rig rate coincided with about a 3% increase in average hours worked per rig per day. That reflects a small relative increase in the number of 24-hour rigs working during the quarter. So an increase in 24-hour work to Q3 over Q2, though that was modest. Partially offsetting that rate increase was a reduction in rig revenue hours, which saw hours decreasing just slightly 1% from 51,900 hours in Q2 to 51,200 hours in Q3. As we've talked about in the last two or three calls, this reflects the work that the high spec rig team is doing in terms of balancing rates and number of hours worked. So I think that actually is a fairly successful outcome in terms of that balance. On the expense side of the high spec rig segment and driving that downtick that we saw in margin, we did see quite a bit of wage inflation in the quarter with direct field level labor costs up 11% on a per unit basis. That's on a per rig hour basis. However, I will note that there were anomalies in Q3 with some unexpected customer schedule changes late in the quarter, temporarily idling a couple crews in the north. Those particular issues are now passed and month over month numbers on wages, labor on a per unit basis in October look to be showing some, still some inflation, but at a much more modest level on that 11% that we saw on a quarter over quarter basis. Partially offsetting that increased per unit expense on labor was a return of the repair and maintenance costs back down to more historic levels. This is post that inflation that we saw in Q1 and Q2 as we moved incremental rigs into the market, preparing those for higher spec customers than they had been working for in the past. As we move on to wireline, I think probably here's a good point to talk about segment reporting. So as you know, historically, we've talked about wireline as part of the completions and other segment. Once upon a time, our wireline business was quite a bit smaller than it is today. As we move forward, you should expect us to revamp our reporting segments. And what I would expect to see here is that we all have higher spec rigs as a standalone reporting segment, wireline as a standalone reporting segment, and then all our other business lines grouped into a single segment. So still three segments, but we'll stand wireline on its own, and we'll be able to talk about that business line in more detail as we report it as a single segment. I would say that we will try to get that change done by Q4 reporting, and if it doesn't show up in Q4 reporting, it will be a 2022 Q1 event. But again, look for that. Having said that, I will try to give you some incremental details on the wireline business in preparation for it as a standalone segment. So, backing up at the segment level, completions and other services revenue increased 160% or $31 million moving from Q2's $20 million to Q3's $51 million. Other non-wireline services within that segment, the revenue was up 31%, but that represented just $1 million of that $31 million increase. The vast majority of the sequential increase in segment revenue was, of course, due to our wireline acquisitions, which moved wireline-only revenue up nearly 3x, or $30 million, moving the wireline revenue up from $16 to $46 million. As a reminder, we did close the Patriot acquisition, the wireline acquisition, as largely biased towards production work mid-quarter, Q2, and a completion work focus perfects near the beginning of Q3. So that means that the numbers that we're talking about on a Q3 basis, the incremental contribution for Patriot will be incremental half-quarter, and Patriot's contribution will be almost the entire quarter of Q3 with nothing showing up in Q2. So with that in mind, let's go to the KPIs, and here we'll focus just on the perforating completion side of the wireline business, leaving aside for now the production side of our new larger wireline business. So for completions, of the 46 wireline trucks, which are currently available to the completion market, we had an average of 20 trucks working during the quarter. That's a 230% increase over Q2's six unit count. On a stage completed per truck per day basis, those 20 trucks that were working saw an 11% uptick in efficiency, moving from 5.6 stages completed per truck day to 6.1 stages completed per truck day. That combination of additional trucks completing more stages per day resulted in a 275% increase in stages per quarter, moving Q2 stage count of 3,000 to 11,400 stages completed during Q3. Pricing on a per-stage basis was down quarter over quarter 10%. That's the result of the lower perfex pricing blending into the overall composite pricing for the business. Now moving to expenses and margin. Again, this is just on the completion side of our wireline business. So despite that 10% drop in composite stage pricing, overall margins for the completion work in the wireline business held flat at 5%. That was the result of a similar drop, 10% drop in total expenses, again on a per unit basis. That 10% drop in total expenses was made up of a reduction in composite gun costs as we rolled out the use of the X-Connect gun system, at least for the business, for the trucks that historically used it in the Legacy Perfects fleet. This reduction in composite gun costs was partially offset by a modest increase in direct labor expense. So that's it for the wireline business. Moving on to the balance sheet. Here, there are several moving pieces that do bear a bit of explanation as we move quarter over quarter. First, there was a material increase in net debt. Net debt was up $30 million quarter over quarter. like to break that down into some smaller, more pipe-sized pieces. First, $11 million of that $30 million net debt increase is related to the Perfects acquisition. Remember, we took on $11.4 million of debt in conjunction with the Perfects acquisition. That debt was secured by a handful of rolling stock that came over with that Perfects acquisition. disclosed previously, but that is a third of that total $30 million increase. The balance, just under $20 million of that quarter-over-quarter increase in net debt, reflects incremental draw on our revolver. That incremental draw was primarily driven by our two wireline acquisitions, working capital needs. Remember, we did not bring over working capital with either of those businesses, along with some transaction and other related one-time expenses. A couple of other balance sheet nuances to highlight. One, the restricted cash line item shows a $42 million balance. That's a new line item for us and a big, fairly big balance. That $42 million was cash raised to fund the basic acquisition with the cash coming in just before the end of the quarter and going out to pay for the basic acquisition on October 1st, just after the end of the quarter. That $42 million balance is fully offset further down the balance sheet on the other current liability line. So that's a wash, but it does show up and is, again, a new line item. That will, of course, go away in the fourth quarter. You also note that our revolver balance, is now shown on the current deadline rather than in long-term debt as it has been shown historically. So this is just a technical artifact of the new revolver credit agreement and is definitely not reflective of the four-year term of that credit agreement. Now, moving on to liquidity. We ended Q3 with $11 million of liquidity. That was down from Q2's ending balance of $16 million. Importantly, I'll note that that liquidity number today stands at $28 million, so quite a bit of an increase. That is largely due to how we structure the basic acquisition. So as a reminder, we did structure that acquisition to be liquidity enhancing. Point one, our $24 million equity raise was around $5 million in excess of our purchase price. And that was specifically to ensure that all transaction transaction-related fees would be easily covered, leaving no net liquidity impact on close in terms of cash flows. Also, our refinancing done before the close of Q3, which included the revolver that we talked about, also included a new incremental term loan B, which we have discussed before. At the close of the financing, that term loan B was undrawn, but at its At the close of the basic transaction, we did draw that term loan B to its $15 million base value. That $15 million injects directly incremental liquidity onto our balance sheet, and given that the pay down of that $15 million is tied to the asset sales that we have started and will continue through the next 12 months, that cash benefit is expected to be a permanent addition to our balance sheet. And then finally, my last comment here will be on cash capex. We spent $2 million on growth capital this quarter and just $200,000 on capitalized maintenance. Of that $2 million of growth capital, 700, or the largest chunk by far, was spent on a couple of larger ancillary pumps to go out to top-tier customers with our high-spec rigs. with the balance of that amount spread out over several small items in both the wireline and the rig side of the business. And I think that concludes my comments, and I will hand it back over to Stuart.