Essential Energy Services Ltd

TSX:ESN

Earnings Call Transcript 2019-Q4

[Operator]

Good morning, ladies and gentlemen. Welcome to the Essential Fourth Quarter Earnings Conference Call and Webcast. I would now like to turn the meeting over to Mr. Jeff Newman, CFO. Please go ahead, Mr. Newman.

[Jeffrey B. Newman, Chief Financial Officer]

Thank you, Marie. Good morning, and thank you for joining our fourth quarter conference call. Garnet Amundson, President and CEO, is with me on the call today. We will give you an overview of our fourth quarter and year-end results and speak to the outlook. At the completion of our formal comments, we will 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 March 4, 2020, fourth quarter and year-end 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 our forward-looking statements, factors and assumptions, refer to our March 4, 2020, fourth quarter and year-end news release. In this call, we will refer to ECW -- or Essential Coil Well Service as ECWS. First, a few words about our quarter. Fourth quarter was another difficult period for the Canadian oil and natural gas industry. Drilling activity and well completions were down 30% and 18%, respectively, compared to Q4 '18. Similar to the industry commentary from the last few years, Canadian political, regulatory and market access issues continue to result in lower E&P spending, which in turn reduced oilfield service activity and the demand for our services.For Essential, revenue in the fourth quarter was similar to our seasonally slow second quarter 2019. Essential reported revenue of $27 million, 34% lower than Q4 '18.The ECWS revenue decline roughly matched the industry completion decline in the period, but Tryton experienced a more significant drop in revenue. Customer activity decreased as the fourth quarter progressed and our customers exhausted their capital spending budgets.Despite the activity and revenue declines, gross margin as a percentage of revenues remained and maintained in ECWS, but still only at 8% and only showed modest declines in Tryton. Consolidated EBITDAS was $1.7 million for the quarter basically flat to Q4 '18 as a result of the litigation cost recovery recorded in the quarter.I want to highlight 3 positive comments for the quarter. At December 31, 2019, Essential's long-term debt net of cash was $6 million. This is a $15 million decrease from December 31, 2018, a significant accomplishment in a difficult industry environment. Our very low debt position makes Essential unique relative to most oilfield service companies. Secondly, on January 17, 2020, Essential was awarded the first portion of costs related to the litigation trial with Packers Plus. This $1.7 million award represented a 40% recovery of the cost incurred for the trial portion of the ligation. This recovery was recorded in our fourth quarter 2019 results, and we received the funds earlier this week.On December '19, the Supreme Court of Canada also ruled that it would not grant leave to hear the appeal by Packers Plus of the Federal Court's judgment in the patent litigation infringement. This was tremendous news as we finally completed the litigation that we have been fighting since 2013.On a year-to-date basis, revenue was $141 million and EBITDAS was $17 million, both below 2018.I'll now speak to each of the businesses. With respect to ECWS, ECWS reported Q4 '19 revenue of $14 million, 22% lower than Q4 '18 due to the decreased industry activity and competitive pricing. Revenue per hour decline was due to the mix of work. While total ECWS activity was lower than Q4 '18, operating hours for our deep coil tubing rigs were consistent with the same period last year. Gross margin at 8% for the quarter was a disappointment after a stronger -- after the stronger margins reported throughout the first 9 months of the year. ECWS' fourth quarter gross margin was adversely impacted by repair and maintenance and crew retention costs, as we focused on getting equipment ready and retaining crews in anticipation of a busier first quarter. Although these choices were strategically sound, unfortunately the increased costs hurt the fourth quarter 2019 gross margin.On a full year basis, ECWS revenue was $79 million, 21% lower than the prior year, but consistent with the industry completion decline. Gross margin increased from 15% to 20%, reflecting proactive and effective cost management during most of the year. With regard to Tryton, Tryton reported revenue of $13 million, 43% lower than Q4 '18, due to reduced industry activity and competitive pricing. In Canada, our conventional tool revenue, which is primarily related to production and decommissioning work, was steady but still below Q4 '18. There was, however, a sharp decline in MSFS activity as customers reduced spending on well completion activities or opted to use lower cost completion tools, which included Tryton's composite bridge plugs. Gross margin for Tryton was 16% for Q4 '19, lower than Q4 '18 due to the revenue decrease and fixed cost comprising a greater portion of revenue. On a full year basis, Tryton recorded $62 million of revenue, a 31% decrease compared to the prior year. Gross margin at 18% was only 3 percentage points lower than 2018, despite the revenue decline. The margin decrease was a result of lower activity and fixed cost comprising a greater portion of revenue.As I mentioned earlier, Essential has received $1.7 million in cost recovery related to the trial portion of the patent litigation cost. Cost recovery, submissions related to the 3 other stages of litigation are in progress and represent approximately $1 million of additional costs incurred by Essential. The cost recovery percentage and the timing of this receipt -- the receipt is unknown. Garnet will now speak to the outlook.

[Garnet K. Amundson, President, CEO & Director]

Thanks, Jeff. Good morning. It's looking like 2020 will be another difficult year for the Canadian oilfield services sector. The lack of leadership we are seeing from the federal government has led to national protests and supply chain disruptions. Unless this federal government soon finds resolved, it is apparent that even court-approved national infrastructure projects, like coastal gas link, may have trouble getting completed in Canada. The Canadian oil and natural gas industry will continue to struggle to attract new capital investment. This is due to Canada's political, regulatory and market access issues. On a world scale, oil prices have increased -- have experienced a dramatic decline since the beginning of the year. North American natural gas prices remain weak. In an environment of weak commodity prices and reduced access to capital, our E&P customers are likely to restrain spending, which may result in Canadian oilfield service activity that is below 2019. This may not bode well for service pricing. From Essential's perspective, activity to date in the first quarter has been steady, but ECWS activity was disrupted by a prolonged cold stretch in January. The January cold period also increased ECWS costs for downtime, inefficiencies and repairs.Tryton's MSFS product has experienced a pickup in activity in the first quarter of 2020 relative to Q4 '19, but activity remains below Q1 '19. Service pricing remains competitive in all service lines.Activity for the month of March will be predicated on when spring breakup begins, whether driven by temperature or customer budgets. In this challenging environment, management continues to focus on what we can control. The first, quality services. Our deep coiled tubing equipment continues to show relatively consistent demand despite the decrease in industry activity. Our conventional Tryton tool business is also proving to be relatively resilient due to associated production and decommissioning work. Second item, our strong safety record, our TRIF at December 31, 2019, was less than 1.0. This is considered industry-leading and something we work hard at and are very proud of.Next, managing costs. We understand, as a company, the need for effective gross margin management during volatile industry cycles. Essential has demonstrated a unique skill and motivation to manage costs. From a capital discipline perspective, our 2020 capital budget is set low at $5 million, which is expected to maintain the active fleet in good working order. And lastly, free cash flow and modest long-term debt. In 2019, we reduced debt by $15 million. Based on our long-term debt, net of cash of $6 million at December 31, 2019, our funded debt to bank EBITDA at year-end was a very low 0.5x.Low debt and a lean cost structure are competitive advantages, as we continue to navigate these difficult times. Operator, at this time, we would like to open the call up for questions.

[Operator]

[Operator Instructions] There are no questions registered at this time. I would like to turn back the meeting over to Mr. Amundson.

[Garnet K. Amundson, President, CEO & Director]

Thank you, and thanks for everyone for listening in and joining us today. I hope everyone has a good day.

[Operator]

Thank you. The conference has now ended. Please disconnect your lines at this time, and we thank you for your participation.