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Good morning, ladies and gentlemen. Welcome to the Essential Energy Services Limited 2019 First Quarter Results Conference Call and Webcast. I would now like to turn the meeting over to Ms. Karen Perasalo, VP, Investor Relations. Please go ahead, Ms. Perasalo.
Thank you, Alanna. Good morning, and thank you for joining our first quarter conference call. With me on the call today are Garnet Amundson, President and CEO; Jeff Newman, CFO. This morning, we will give you an overview of our first quarter results, speak to the outlook and open the line for questions.In this conference call, we will be discussing financial measures, including certain non-IFRS financial measures, such as EBITDAS and bank EBITDA. Please see our May 7, 2019, first quarter news release for definitions of these terms. Today's call may include forward-looking statements. Such statements are given as of the date of this call and involve risks and uncertainties. A number of factors and assumptions were used to formulate such statements. Actual results could differ materially, and there can be no assurance of future performance or market impacts. For additional information with respect to forward-looking statements, factors and assumptions, please refer to our May 7, 2019, first quarter news release.In this call, we will refer to Essential Coil Well Service as ECWS. We will also refer to IFRS 16, which is the new Canadian financial accounting and disclosure standard related to lease accounting.First, a few words about the quarter. Once again, the Canadian oil and natural gas industry experienced a difficult quarter. Q1 '19 drilling activity and well completions were both significantly below Q1 '18. Political, regulatory and market access issues reduced E&P capital spending, which in turn, reduced oil self-service activity. In the quarter, Essential generated $47 million of revenue, 21% lower than Q1 '18. EBITDAS was $7.5 million, $1.6 million lower than the prior period quarter due to lower revenue, but partially offset by cost savings and the impact of IFRS 16.Essential implemented IFRS 16 effective Q1 '19 without restatement of prior years. This increased Q1 '19 EBITDAS by $1.2 million compared to Q1 '18. Jeff will be pleased to answer questions about IFRS 16 implementation after our formal comments. Essential continues to have low debt with long-term debt on May 7, 2019, of $10 million, funded debt to bank EBITDA on March 31 was 0.7x. Working capital at the end of the quarter, which is primarily inventory and accounts receivable of $54 million was far more than debt. I will now turn the call over to Garnet
Thanks, Karen. Good morning. I will comment on our patent litigation victory. It has been a long wait since we won the original trial in November 2017. On April 25, the Federal Court of Appeal dismissed the Packers Plus appeal. This was a fantastic win for Essential. We have been fighting this claim since late 2013 through one of the most devastating downturns in the history of our industry. So we were very pleased with the court's decision. This important decision upholds our position all along that the claim was without merit. To date, we have spent approximately $5 million on external legal fees and disbursements defending this claim. Essential was awarded costs in both the trial decision and the appeal decision. A hearing for costs related to the trial phase of this litigation is scheduled for May 10. Jeff will now speak to each of our businesses.
Thank you, Garnet. ECWS reported Q1 '19 revenue of $26.1 million, 20% lower than Q1 '18, similar to the decline in industry well completions. Even though industry activity was significantly below the prior year quarter, demand for the portion of our fleet that is focused on long-reach deep wells was consistent with Q1 '18. This [ couldn't have ] worked for a number of different customers, primarily in the Montney and Duvernay regions. ECWS' overall revenue decline was due to lower activity for our shallower rigs and low-rate pumpers. Pricing was generally consistent with Q1 '18. We were pleased to report 25% gross margin for ECWS, especially considering the revenue decline. This was an improvement from 19% in Q1 '18. ECWS implemented a number of cost-cutting initiatives in Q1, including wage rollbacks, headcount reductions and effective logistics management, reducing fuel and travel expenses. Gross margin also improved with the adoption of IFRS 16 in Q1 '19.Tryton reported Q1 '19 revenue of $21.4 million, a 22% decrease compared to Q1 '18 due to customers deciding to reduce or defer capital spending. Tryton experienced lower demand for both MSFS and conventional tools compared to Q1 '18. The percentage of revenue from MSFS tools was lower than the prior period quarter. However, the revenue split between MSFS and conventional tools varies quarter-to-quarter due to changes in customer spending plans. Tryton U.S. revenue increased slightly relative to the prior year quarter due to increased activity, particularly in the Permian Basin. This is a relatively small part of our business focused primarily on conventional tools. Gross margin for Tryton was 21% for Q1 '19, below the prior period quarter due to lower activity, competitive pricing pressures and fixed cost comprising a greater portion of revenue. Garnet will now speak to the outlook.
Thanks, Jeff. Activity has slowed now that we are in spring breakup. Similar to the decline experienced in the first quarter, April 2019 was slower than April 2018. This is expected to be the case for the remainder of the second quarter. Customer activity and demand for the second half of 2019 remains unclear. While Canadian oil prices have improved from late 2018, it remains to be seen if E&P customers will translate stronger cash flow into investment in growing their production. Canadian natural gas prices are low and volatile. Pipeline and egress constraints remain a significant hurdle for the industry to overcome. Political and regulatory delays have created a made-in-Canada problem. The inability to make progress on pipelines and the threat posed by Bills C-69 and C-48 have driven capital away from the Canadian oil and gas industry. This irresponsible conduct has a significant cost to all Canadians. And why? This is the part that doesn't make sense, since the production of Canadian oil and gas is subject to very stringent environmental safety and labor standards, likely the best in the world. In this challenging environment, management continues to be focused on what we can control. Cost management, capital discipline, ensuring our service offerings meet customer demand and allocating free cash flow to maintain our low long-term debt.
Alanna, at this time, we would like to open up the lines for questions.
[Operator Instructions] The first question is from Tim Monachello with AltaCorp.
Just wondering if you guys could quantify the cost savings that you reaped in the quarter?
We probably got a bunch of internal schedules that we could pull something together, but I -- we intentionally haven't done that and part of the reason is some of those cost savings were done throughout the quarter, some of them were initiatives we put in place in December and January. And I think at this point, we're trying to focus more on, what I'll call, behavioral change and making changes that are repeatable and hopefully, somewhat permanent. So it's a little different than some of the things we did in the '15 and '16 downturn, where by laying off significant chunks of people and closing leases and that sort of thing, we could come up with quantification. So, yes, we don't really have a total round number, Tim.
Okay. Do you expect further cost savings through Q2?
I would expect that Q2 is a tough one to specify. But the 2 areas that I know we've done a lot of work on, we've done some specific cost reduction measures in corporate coming into 2019 and some restructuring and cost reduction measures within the ECWS organization. Those sometimes don't show up the same way in Q2 because of the lower activity, plus higher R&M. But I think we'll see as we go into Q3, that -- hopefully the sustainable effects of those cost reductions and we'll see where it goes from there.
[Operator Instructions] The next question is from [ Ted Powell ] with [ GemCap ].
Just one quick question, based on where current share price -- I mean, we're trading at like right below working capital even, I mean, has there been some kind of consideration given towards a stock buyback at this point?
Yes. Thanks for the question. We've had, I would say, each quarter, including our board meetings yesterday, we had extensive conversation around the concept of a normal course issuer bid or a share buyback. Our current assessment, if I can call it that, really circles around our comments I made today on outlook. Specifically, that the many years I've been doing this, we haven't often been this unclear about the outlook. Our business -- the nature of our production and completion company, we don't get advanced contractual commitments from our customers like a driller would. And so the problem is, our customers are still really sitting on their hands, trying to say how they're going to spend their money. What we would like to do is really frankly, sit until we get to, I'm hoping, late spring sort of end of June or into July, hopefully we'll start getting some more transparency from our customers. And if we've got that view that this free cash flow situation that I discussed, continues, then we will compare our use of free cash flow against the various things that we're able to do, including some good internal capital spending initiatives, including paying down debt. And another factor that needs to be mentioned. I talked earlier in a question about all the cost cutting and reductions we've done, a lot of those are right off the backs of our employees in the most difficult way of straight salary reductions, suspension of incentive plans and they've all been done voluntarily by our employer group. So -- and that's where the free cash flow is coming from and we don't want to act harshly and then start spending on a normal course issuer bid and find out that the second half of the year, and frankly, into 2020 could be as tough as we've seen.
Okay. And just one follow-up, since you've had the appeal decision, has there been any kind of outreach that you could speak with, say, from private equity or any competitors at this point?
Please clarify what you mean by outreach?
Outreach is interested in potentially being able to put together some sort of a transaction?
Yes, I think you take a look, you highlighted about where our valuation is and a few of the analysts picked up on that last night and this morning, that we are virtually trading for the value of our working capital. One of the analysts commented that our entire fixed asset portfolio for all of our equipment is valued at a couple of million dollars. So I've made this comment publicly before, where Essential sits valued today, I think, we'd be accretive to almost anyone, given that with our low debt situation. However, as a significant shareholder myself and in a lot of meetings I say, I've been doing this for almost 15 years, I still never sold a share in the history of our company, I would not like to sort of see -- give up in the transactional curve at where we're valued today. That being said, we're in constant dialogue with both potentially interested parties on both sides, because this industry needs consolidation and we'll keep our mind open. But that isn't in our current strategy to try and sell ourselves right now.
There are no further questions registered at this time. I would now like to turn the meeting back over to Ms. Perasalo.
Thank you, Alanna, and thank you, everyone, for joining us. Have a good day.
Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you all for your participation.