Select Sands Corp

XTSX:SNS

Earnings Call Transcript

[Operator]

Good day, everyone, and welcome to the Select Sands Q1 2019 Earnings Conference Call. [Operator Instructions] And please note that today's event is being recorded. And I would now like to turn the conference over to Zig Vitols, President and CEO. Please go ahead.

[Zigurds R. Vitols, President, CEO & Director]

Thank you, William, and good morning, everyone. We appreciate you joining today's call. As in the past, with me are Chief Operating Officer, Rasool Mohammad; and Chief Financial Officer, Darren Urquhart. Yesterday afternoon, we released our earnings results press release for the period ending March 31, 2019, which is available on our website, selectsands.com. Please note that any comments we make on today's call regarding projections or expectations for future events are forward-looking statements. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our SEDAR filing.In addition, during today's call, we will reference certain non-IFRS financial measures. Reconciliations of these non-IFRS measures to the most directly comparable IFRS measures are included in our earnings release. Finally, after our prepared remarks, we will answer any questions that you may have.As we discussed on our fourth quarter earnings call the middle of the last month, we, along with other frac sand producers, faced difficult second half in 2018 driven by an industry-wide drop in demand that began in third quarter. Complicating the situation has been a significant amount of new in-basin supply coming online in West Texas and, to a lesser extent, other basins. We have also been impacted by a further move by E&Ps in the southern U.S. oil producing basins to use a much higher percentage of local regional brown sand being produced in Texas basins instead of the high-quality Northern White sand we produce.On a positive note, we did see frac and industrial sand sales volumes for the first quarter grow to 40,000 tons from 25,000 tons in the fourth quarter last year. Driving the increase was improved customer demand as E&P budgets were reloaded and drilling and completion activity picked up as we move through the first quarter.Although there has been a considerable flooding in Arkansas area, it's not affected our operational facilities. We continue to monitor the situation and we will take appropriate action as necessary. Sales remained at relatively low levels with some loaded railcars were parked at destination transload for weeks to be slow -- were slow to be offloaded by customers. As one would expect, this also impacted railcar turnaround time.Given this backdrop, we continued with our cost containment and working capital preservation efforts during the first quarter, including remaining at a single-shift operation to control overhead.To preserve cash, construction on our Independence Property expansion project remains on hold. As we discussed in the past, the project will increase our annual production capacity 67%, 600,000 tons to 1 million tons, and have a variable operating cost savings of more than $4 per ton for this stand-alone project.Given the low total cost of $4 million to $4.5 million, the expansion project will result in a strong return on capital. As such, once frac sand demand reaches appropriate levels, the expansion project will be resumed quickly and completed in 4 to 6 months.I'll now hand it off to Darren to discuss our detailed first quarter financial results. Darren?

[Darren Charles Urquhart, Chief Financial Officer]

Thanks, Zig. Looking at the summarized consolidated interim statements of operations and comprehensive loss and income table included in our first quarter press release, first quarter revenue was $1.6 million versus $913,000 in the fourth quarter of 2018. Driving the majority of the increase was higher sales volumes period-over-period due to slightly improved customer demand.Cost of goods sold, excluding depreciation and depletion for the first quarter, was $1.7 million as compared to $1.4 million in the fourth quarter, with the increase substantially associated with higher sales volumes in the first quarter. We did see improvement in our cash cost of goods sold per ton as fixed and semi-variable costs were absorbed over a higher number of tons sold.General and administrative expenses decreased from $828,000 in the fourth quarter to $619,000 in the first quarter. Excluding noncash share-based compensation, first quarter general and administrative expenses decreased to $562,000 from $681,000 in the preceding period.We reported a net loss of $807,000 or $0.01 per basic and diluted share for the first quarter, as compared to a net loss of $2.5 million or $0.03 per basic and diluted share for the fourth quarter.Turning to the consolidated interim statements of financial position. As of March 31, 2019, we had cash and cash equivalents of $3.2 million, inventory on hand of $2.2 million, combined accounts and current taxes receivable of $1.1 million and working capital of $4.6 million.I will now turn it back to Zig for his closing comments.

[Zigurds R. Vitols, President, CEO & Director]

Thanks, Darren. As I discussed in my opening comments, clearly the last several months have been challenging for all frac sand producers in the U.S. Having said that, we believe this environment is temporary in nature. Supporting our view is the growing customer interest we have seen in the past few months for our premium quality Northern White sand products for use in multiple basins, including the Permian and Eagle Ford. While oil price is key, we expect a frac sand market recovery as demand for white sand increases along with price. I would note that we see the most opportunity for improvement in the back half of this year.Looking at the Permian, the general consensus is that offtake constraints will be noticeably improved over the coming months as further takeaway capacity comes online and E&Ps more aggressively address their expensive inventory of drilled but uncompleted wells.On the other hand, the industry is dealing with an oversupply of West Texas in-basin sand. As previously announced, new supply continues to come online. After this process is complete, forecasters believe that West Texas in-basin capacity will remain relatively flat while drilling and completion activity absorbs the recently added production. While this will help bring supply and demand more into balance, we expect Permian Basin frac sand to remain under pressure for the remainder of 2019. I would note that additional in-basin supply is coming online in other regions as well.Over the past months, considerable attention has been focused on long-term utility of in-basin brown sand and Northern White sand. We, like many other in the industry, believe that Northern White will continue to play a critical role in the effective development of unconventional shale plays for many years to come. As we discussed in our last earnings call, up until early 2018, the vast majority of frac sand will source from Northern White sand mines located in the Upper Midwest.The move for longer laterals and high-intensity well completions caused demand in prices for Northern White sand to materially increase. Given this backdrop, over the past 2 years, there was a move in the industry to develop sand mines that are located much closer to wellsite locations with new mines coming online over the last 12 months.Many E&Ps have embraced the opportunity to lower their upfront well investment given the reduced cost to transport in-basin frac sand to the wellsite. However, what has become more readily apparent is that there is a trade-off between upfront reduced cost and the overall ultimate recovery of wells. Salient characteristics of crush strength and conductivity are 2 key quality characteristics that determine the quantity and the rate of hydrocarbon recovery over time.The reality is that the quality in-basin sands, along with Northern White, have combined long-term utility. Our opinion is that Northern White will remain a preference for certain E&Ps in the Eagle Ford, Midcon, with both basin, in-basin brown sand and Northern White sand being used. The same holds true for the lower Delaware Basin in the Permian where 40-70 will retain a niche in these relatively deeper wells that require high crush factor and will supplement in-basin brown sand. We expect in-basin brown sands will continue to be the most effectively utilized in the shallower Midland Basin.Bottom line, we fully anticipate there will be continued long-term demand for Northern White sand, its unique and preferable characteristics. Most important, we are in a solid position for long-term success as market conditions continue to improve given our favorable location in many of the most prolific producing regions in onshore U.S. The result is much lower delivered cost for our product offering as compared to traditional Northern White sand sources located in the Upper Midwest.With that, we'll open it up for questions. William?

[Operator]

[Operator Instructions] Our first question today will be [ Francesco Guzzone ], a private investor.

[Unknown Attendee]

So just reading the news released yesterday, noticing for Q2 your projection in terms of tons to be sold is 30,000 tons to 40,000 tons, is that correct, which is a little less or in line with Q1?

[Zigurds R. Vitols, President, CEO & Director]

Yes. The primary reason for the 30,000 tons to 40,000 tons was we see that April was in line with first quarter. We're looking at June to be in line. We had a very weak April because there is a couple of factors. One was that we had railcars that were stranded at destination and the fracking activity was slow. So those cars did not return. We also saw some northern mines were moving product very cheap as they were preparing to close their operations, which in the long run is a positive for us, but it's basically because of the one month. So we took a cautious view although we have pretty positive view about June.

[Unknown Attendee]

Okay. Just because -- so the reason why I ask that is the cash flow and the cash position as well as the working capital position, because of the economic downturn, continues to become depleted. Do you think that -- so because Q2 -- obviously, if Q2 looks like Q1, Select Sands' working capital cash is going to continue to be depleted because I can't imagine you guys are breaking even at 40,000 tons sold. So when do you think the company can eventually break even? A. B, do you think that the company is going to require to raise capital from now until we can at least become cash neutral? And then if you do believe we have to raise capital, have those discussions been had? And does the company have any plans if they need to cross that bridge as of today?

[Zigurds R. Vitols, President, CEO & Director]

Well, as of right now, we don't have any plans for raising capital. Our focus is on preserving the cash that we have. We had a cash drain in Q1. One of the things that happened was we had essentially 0 receivables by the end of the year and we have built that up to about $600,000 to $700,000 in the first quarter. So obviously, that's a good cash drain in one sense. So there were a number of things. What we're focusing in on is really staying laser-focused on the cash constraints and making sure that we're doing everything as efficiently as possible. But there is no plan for capital raise at this time. We think that we might be able to get through this low period with what we have currently.

[Unknown Attendee]

Okay. Yes. No, I definitely appreciate the AR going up and that affects the cash flow from operations, but even backing that out, you're still -- and then even disregarding the cash flow with regard to financing and the repayment of the capital -- the debt, pardon me, you're still at like , I think, around $700,000. So because quarter 2 is very similar optimistically to Q1, just because of it's -- obviously 30,000 is even worse, so that cash burn is going to continue. So the second part of my question is when do you think that cash burn will stop and we can at least see some sort of breakeven because the issue isn't being laser-focused on cost? It seems like the laser focus should probably be redirected to getting sales upright because there is a bunch of fixed costs that are being allocated amongst the tons sold. So in order for like the gross margin to break even first, right, the company has got to be moving sand. So obviously, you are trying to do that, I appreciate that, but when do you think we can see a breakeven in gross margin? When do you think we can see a breakeven in cash flow, your thoughts?

[Zigurds R. Vitols, President, CEO & Director]

Well, the target -- let me talk about sales first. You're right. I mean, that's a good point, [ Francesco ], and thanks for the question. On the breakeven side, we're looking for somewhere in the second half to start breaking even. We can't break even at 40,000 tons, but I can't tell you the exact number, and that depends on pricing. So pricing is changing. Our product mix is changing. It's going back and forth between 47 and 100. The contracts that we see that are going to be available through a large degree are going to be -- those discussions will start in third quarter, probably August, September, and they will be let at that time. The long-term contracts is something that we're involved in discussions now, but we don't have -- right now, we're working in a spot market. We don't have any long-term contracts to announce. So with a long-term contract, we think that, that's when breakeven will happen, and I think that those things will be let somewhere in the third, fourth quarter. And that's what we are aiming for, is to hit a breakeven number by that time.

[Unknown Attendee]

So to secure a contract in Q3, and then Q4 moving forward, the company should be cash flow, either neutral or positive, correct?

[Zigurds R. Vitols, President, CEO & Director]

It would be inappropriate for me to forecast that exactly, but, yes. That's entirely what we want to do is have a breakeven business somewhere in the third and fourth quarter so that we can start to continue to move on. That's one of the -- we would probably name the 3 big projects that we -- 3 big time consumers that we have here is, of course, number one is always sales, it takes priority over everything. Everybody that can be involved is involved. Secondly, we look at cost constraint, and that, of course, is a diminishing return, as you know. And then finally, we're looking at opportunities to break into the in-basin sand market, and we have been looking intensely at that over the last few months, as a matter of fact, over the last year, and have been sorting through the opportunities that we could take part in, especially ones that have synergistic effects where we could have forward staging of white sand. That kind of answered your questions?

[Unknown Attendee]

Yes. No, you answered all my questions. And I'd like to close by just saying, like, I do recognize you've built this thing up, it's extremely profitable, extremely efficient and then the rug got kind of pulled out from under us in terms of like the economic environment that you're conducting business in, which isn't your fault. I think to summarize all my questions, I know you run a tight ship. It's a great business. So because of the economics, the solvency of the company, especially right now, is very, very questionable. I'm done with my questions, but I like to just leave it with you maybe to close what you can say to ease all of the investors' concerns, especially some of your competitors are going bankrupt which benefits you in the long run. What would you say to investors who are concerned about cash flow, the cash position, potential dilution and the longevity of the company?

[Zigurds R. Vitols, President, CEO & Director]

Okay. [ Francesco ], and I appreciate that. The idea is to ride through this low. Since we started in 2016 in December, the prices were actually lower than they are today, it seems to us. And the volumes were much lower, the demand was much lower and then we ran into -- and since the January 2017 when we commercialized the business, we're actually seeing 2 shortage scenarios and we've seen 2 flood scenarios. I don't know if that volatility will switch back quickly, but we see ourselves coming out of it. I think that if you go through all of the data, we do continuous review of everybody that's putting data, we see a significant increase in frac sand demand over the next few years. The white sand data is coming in. We just saw a Rystad Energy presentation where they are talking about in the, I think, in the first year of putting white sand in compared to an in-basin sand, the difference in performance is quite remarkable. In the first year, off of peak, we see a decline to about 45% of the peak level of production, of oil well production, that to using white sand. With brown sand, it's well below 40%, 36%, 37%. That difference in performance has a payback of less than 1 year based on our 200-barrel a day, $52 oil. We look at those stats all the time, and we see more and more data coming in that says that there is a difference between the 2 sands and our customers are collecting that data. And so as they see the long-term benefit of utilizing the white sand, there will be more of a balance that comes in. We think that there will be changes, there will be places for brown sand, there'll be places for white sand. And we don’t think that white sand gets eliminated at all or else we would be looking -- we would be moving on to getting just into brown sand. We think that the white sand asset remains part of our portfolio during the operation of this business. We also see Rystad showing that they're going to take, in the next 2 years, 30 million tons of white sand in the Wisconsin and the Midwest is going to come on.

[Rasool Mohammad, COO & Director]

Yes. So Rasool here. I see where you're coming from, what your concerns are in terms of the company cash position, if we could survive the downturn. We're fully aware of it and keeping a close eye on our cash levels and looking at the next couple 3 quarters of ways to cut cost and conserve cash. So yes, we're fully aware of it and we're doing our best to make sure that the company and the business stay solid.

[Operator]

[Operator Instructions] Okay. There looks to be no further questions at this time. So this will conclude our Q&A session. And I would now like to turn the conference back over to Zig Vitols for any closing remarks.

[Zigurds R. Vitols, President, CEO & Director]

Well, we recognize that the last few quarters have been difficult from an investment point of view. We'd like to thank everybody for joining today's call. But at the same time, we appreciate your support, and we look forward to speaking to everyone regarding our second quarter 2019 result. Thanks again, and have an enjoyable day, William.

[Operator]

The conference has now concluded. Thank you all for attending today's presentation, and you may now disconnect your lines.