Nov 9, 2016
Executives
Arty Straehla - CEO Mark Layton - CFO
Analysts
Jason Wangler - Wunderlich Securities
Operator
Good day ladies and gentlemen, and welcome to the Mammoth Energy Service Third Quarter 2016 Earnings Conference Call. At this time all participants are in a listen-only mode.
Later we will conduct a question-and-answer session and instructions will follow at that time. As a reminder, this conference call is being recorded.
I would now like to introduce your host for today’s conference, Mr. Mark Layton, Mammoth Energy Services Chief Financial Officer.
Sir, you may begin.
Mark Layton
Good morning and welcome to the Mammoth Energy Services third quarter 2016 conference call. Today’s call is being webcast and replay will be available on Mammoth Energy Services website for seven days.
Joining me today is Arty Straehla, Chief Executive Officer. Some of our comments today may include forward-looking statements, reflecting Mammoth Energy Services’ views about future events.
These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Mammoth Energy Services Form S-1, recent current reports on Form 8-K and other Securities and Exchange Commission filings.
We undertake no obligation to revise, or update publicly any forward looking statements for any reason. Our comments today may also include non-GAAP financial measures.
Additional details and reconciliations of the most directly comparable GAAP financial measures are included in our third quarter press release which can be found on our website. Now, I’ll turn the call over to Arty.
Arty Straehla
Thank you, Mark and good morning everyone. Let me start out by saying that I’m very excited and pleased to be conducting the inaugural earnings call for Mammoth Energy Services.
This is very exciting time for Mammoth with the completion of our IPO, repayment of our debt and the fortification of our balance sheet to support our Company’s growth, both organically and through acquisitions. The Mammoth team has accomplished a lot in a short period of time and continues to execute at every level of the organization.
I am very proud of this team and all that it has accomplished during what has arguably been one of the harshest periods for oilfield services. Our organization is focused on executional excellence and getting the job done safely and in a quality manner at every level of the organization.
Let’s take a minute and talk about what has transpired over the third quarter and beyond. The industry has gone through a crimping [ph] and will recover as a healthier business.
We’ve seen the recovery start, most recently with the rig count in the U.S. increasing from the lows of 400 rigs at the end of Q2 to close at 570 rigs last week.
While the recovery of rigs is one metric of activity, we’re keenly focused on wells completed and completion design in addition to rig efficiency, all of which has continued to increase throughout this downturn. The technological improvements to this industry have been truly remarkable.
The recovering activity is notable and TUSK has been a beneficiary of this increasing activity. We were able to have our best quarter this year in all four of our operating segments on an adjusted EBITDA basis.
While year-over-year comparisons are less relevant, we’re focused on sequential improvements. Our largest segment completions and productions was able to increase margins through cost control.
We saw increases in sand pricing. And activity in our logistics division continued to be a positive adjusted EBITDA contributor.
On an adjusted EBITDA basis, it was our first best quarter since Q2 of 2015. Mammoth produced adjusted EBITDA of $17 million for the third quarter of 2016, up from $12.8 million in Q2 of 2016.
In fact, the month of September was our best month on an adjusted EBITDA basis since May of 2015, driven by improved frac utilization, higher sand prices and volumes, as well as continued utilization of our remote accommodations business. Consistent with our past practices of protecting our balance sheet, we applied this cash flow to pay down our debt, to $72 million at the end of the third quarter from $82 million in the 6/30 quarter period.
We subsequently paid off all of our remaining debt balance with the portion of the proceeds of the IPO. And as of November 7th, we had a $174.6 million in liquidity.
We’re now poised and ready to selectively expand the Mammoth portfolio. We’re well-positioned in the key areas of development in the North America and envision broadening out our exposure by adding capacity and by filling in additional services that make sense to us.
Certainly, as we go into Q4 of 2016, many challenges are still facing us, given that the oilfield service companies -- there are very few oilfield service companies are making money. Therefore, we’re looking for green shoots.
Pricing and utilization remain low, but despite weak spot market prices, Mammoth continues to benefit from contractual agreements that provide us earnings visibility in to the future. Since this is the first time, we’re reporting our earnings, let me give you a broad overview of the performance of each of our segments and where Mammoth is going strategically.
Our completion and production segment, the largest of our four operating segments, continued to perform well. We were able to achieve a sequential improvement to adjusted EBITDA of $1.5 million from Q2 of 2016 to Q3 of 2016.
In addition, we were able to reduce costs further within our coil tubing operations. We’re very focused operation when it comes to cost reduction.
Some smaller divisions within this segment continue to face lower utilization and pricing forcing us to reduce cost further through improved management of labor and repair and maintenance. Our 160,000 hydraulic horsepower pressure pumping in Ohio remains in solid condition and focused on supporting our customers.
During the quarter, we performed under our contract with Gulfport and set several records for the number of stages that we pump Gulfport and for the full week in July averaged 9 stages per day, for each contracted crew. These are internal achievements for our team that we’re very proud of.
We continue to work hard on efficiencies and strive to perform for our customers. Our proppant segment increased volumes of brokered sand during the period and continued to fulfill its obligation under our long term contract with Gulfport.
The segment remains active in fulfilling orders in brokered sand both from affiliated and unaffiliated entities. Sand pricing remains challenged, although it appears to be -- there seems to be a modest recovery.
We continue to envision continued substantial increases in demand across the unconventional space, which will consume much the available low cost sand capacity. Customers are pumping record volumes of sand per foot today, and we wonder what will happen when sand is practically given away.
We were pleased with our ability to produce positive adjusted EBITDA for the quarter. Looking forward, we’re equally focused frac logistics as we’re on equity sand opportunities.
We’re vertically integrated in the Northeast and envision maintaining that strategy as we expand to new regions. We believe bottlenecks at or near the last mile are ahead as the completion of business ramps back to pre-downturn status.
We believe logistical issues such as transload facilities, railcars and trucking will need to be dramatically improved to supply wells where the lateral lengths are getting longer and the sand concentricity in the longer laterals is continuing to rise. The notion that the industry is shifting towards 3,000 pounds per lateral foot and testing levels in excess of that is remarkable.
We are not sure which part of the sand and logistics supply chain tightens first, but we believe we will be prepared when the time comes. Our contract land and directional drilling segment saw increased activity in utilization in Q3.
We recovered from the lows of Q1 of 2016 where we were running one rig in the Permian basin to run the five rigs for the entire month of September. We also have incorporated cuts in SG&A as well as reduction in hourly wages.
Some of these savings were offset by costs incurred to ramp back up an increased maintenance costs as we brought rigs from a warm stack condition to running in Q3. Our rig moving operations had the best quarter since Q3 of 2015 on an adjusted EBITDA basis, reflecting their survival as others left the business and the recovery in the rig count in the Permian basin.
Our directional drilling operations increased utilization during the quarter, although pricing still remains very difficult. That said, reflecting some recovery, the segment had the best quarter since Q4 of 2015 from an adjusted EBITDA perspective.
Over the past 12 months, our directional drilling unit has begun to incorporate a low cost rotary steerable system into their service offering, primarily focused on a more economical solution through the lateral. They’ve been seen positive customer feedback and growing more optimistic about the breadth of its application in differentiation of their product offering versus some of the larger more expensive players.
While we don’t think GE is buying Baker Hughes solely for their rotary steerable tool, it’s certainly a key part of their strategy as discussed on their recent call. The adoption of rotary steerable technology can reduce days on well significantly for the E&P operators and we believe it should be a competitive advantage for us going forward.
This can represent another area of growth within the division that we recognize will remain challenged for an extended period of time because of overcapacity. Our remote accommodation segment continued to outperform our expectations and had its best quarter of the year on an adjusted EBITDA basis.
Total room nights were approximately 65,400 during the quarter compared to 47,500 in Q2 of 2016. We were able to pull additional costs out of the unit and did not impact our quality of our surface.
That said, as we’ve described in the past disclosures, this segment will face contract roll off risk into 2017 and that will include lower utilization. As you would expect, our teams are diligently focused, scaling our costs to fit lower occupancy and keeping it adjusted EBITDA positive although the segment will provide a de minimis contributions in 2017.
As many of you recall, one of the uses of proceeds was besides paying off debt, which we did, was to source growth opportunities for our business both organically and via acquisitions. Since going public, we’ve been integrating [ph] with opportunities in various forms including teams that want to join the platform and smaller sponsored units that are seeking exits.
The bid aspect remains wide but we expect to be active in our dialogues with many opportunities. Despite these opportunities, Mammoth has built from the ground up, which we believe remains the best way to expand if we’re able to secure equipment at attractive prices.
We feel we’ve identified such an opportunity and plan to move forward shortly on 75,000 hydraulic horsepower of new equipment and expect to take delivery by the middle of 2017. We expect that this capacity expansion will fuel additional growth in the second half of ‘17 and all of ‘18 and will be funded from cash on hand and cash flow.
We think that this is a very important opportunistic move for us strategically as we see frac equipment getting tight in the future and believe our price for our services will return to pre-2016 levels. We look forward to a balanced portfolio expansion along with this expansion to our pressure pumping fleet and look forward to remaining as integrated as possible within the completion and production’s area.
With that let me turn the call over to Mark to cover our financial and operational results. Mark?
Mark Layton
Thanks, Arty. For the third quarter, revenues were $62.8 million.
Revenues decreased compared to $86.2 million in the prior year due to lower industry activity levels, equipment utilization and pricing for our services. Operating loss for the quarter improved to $0.1 million compared to an operating loss of $7.2 million in the prior year.
Our loss per share was $0.08 compared to a loss per share of $0.15 in the prior year. Adjusted EBITDA for the third quarter of 2016 increased to $17 million compared to $11.6 million for the same period last year.
Cost of revenue decreased from $70.4 million in the third quarter of the prior year to $42.7 million in the current year, primarily due to lower activity coupled with lower labor related costs and lower repairs and maintenance expense. Cost of revenue as a percentage of revenue increased from 68% in the prior year to 82% in the current period due to lower activity levels and continued low pricing for our services.
Selling, general and administrative expenses decreased from $4.2 million in the third quarter of the prior year to $3 million this year. The decrease resulted primarily from lower total employment costs due to headcount reductions.
SG&A expenses as a percentage of revenues decreased from 4.9% last year to 4.8% this year. Depreciation and amortization was $17.1 million during the third quarter of ‘16 compared to $18 million in the prior year.
The decrease resulted from minimal capital expenditures during the past two years. Impairment of assets $0.9 million in the third quarter of the prior year; no assets were impaired in the most recent quarter.
As of the end of the third quarter, Mammoth Energy’s pressure pumping fleet totaled approximately 160,000 hydraulic horsepower of which one third is unmanned but available to work. While utilization improved in many markets, we’ve not yet placed any unmanned equipment back in service.
As of September 30th, Mammoth Energy’s total headcount was 511 compared to 485 as of June 30, 2016. Capital expenditures during the second quarter were $1.6 million and Mammoth Energy’s full year 2016 capital expenditures are currently projected to be approximately $5.2 million exclusive of the acquisition additional frac equipment currently under negotiation that Arty mentioned earlier.
We continue to remain focused on maintaining a strong balance sheet and ensuring our equipment is adequately maintained and ready for work. With that, I’ll turn it back over to Arty for some closing remarks.
Arty Straehla
Thanks Mark. Let me summarize the call.
As we’ve discussed several times, Mammoth continues to execute well. We’re pleased to have brought the Company public, paid off our debt and continue to generate positive cash flow in a very challenging environment.
We’ve produced steady positive results in the third quarter and provided some underpinning to growth as we seek to add brand new equipment for deployment next year. We think that Mammon is poised operationally and financially to grow at a very rapid pace.
We’re heavily engaged in identifying the wining strategies for the next market upturn, which with particular focus in the area of frac sands, transload facilities, cementing [ph] and logistics. Thank you very much for your time and let’s open it up for question.
Operator
Thank you. [Operator Instructions] Our first question comes from the line of Jim Wicklund with Credit Suisse.
Your line is open.
Unidentified Analyst
Hey guys, this is actually Charles [ph] calling on for Jim, congrats on a great quarter. I just wanted to dig a little bit on the C&P business.
Margins came in at about 33% of the EBITDA line. I’m wondering sustainable that is moving forward.
Does that have to do with some of the Gulfport deferrals from Q1 and any more color on that would be appreciated?
Mark Layton
We certainly did benefit from a lift related to the deferrals outside of Q1. We also benefited from some lower than normal repairs and maintenance, largely due to timing related to the overhauls of engines and transmissions and primary components of our equipment.
We think the margins are sustainable in the high-20s. We obviously received a bit of a lift in the Q3 results related to that deferral.
Arty Straehla
Let me go little bit deeper and talk a little about the RNM [ph] because RNM [ph] one of the single biggest cost aspects that we do that we have within our frac operations. We have focused very, very intensely on our flow, [ph] we focused on our operations aspects of it, of how we prime pumps, how we bring them online and we focus with our vendors.
Mark and I visited several of our vendors during second and third quarter as we seek to get the right fluid and matches with the pumping intensity that we have in the Utica shale. So, we’re working extremely hard on that and some of that result is starting to bear out.
We’re seeing average hours go up on our fluid ins [ph] and we saw a cost reduction in our RNM [ph] in Q3 compared to earlier quarters that we have.
Unidentified Analyst
Okay, great. That’s very helpful.
And then the third spread that’s not active right now, have you guys started to think about, when that could go back to work and where it could go back to work?
Mark Layton
That spread is currently in the Northeast, it’s available in the Utica and Marcellus. We’ve seen an increase related to the availability of that spread.
We’ve not staffed that spread at this time, and the reason we’ve not staffed that spread is we’re waiting for the calendar to fill in a bit more, prior to bringing on the staffing, the equipment is 100% ready condition. But we’re looking for little more visibility for a longer period of time on the prior calendar before we staff that spread.
Depending how commodities move over the near term, we think that spread could go back to work as soon as Q1 of 2017.
Arty Straehla
In addition to that, we talked about the 75,000 horsepower that we’re going to bring on. We are going to take those fleets to somewhere in the south, where Texas or Oklahoma, we’re going to go and seek a home for it, where we think it will bring the best return on investment.
And part of that equipment quite honestly we’ll be moving from there to the basins that we are going to go to in this south. So, we will fulfill our contractual obligations with Gulfport with the two spreads that we have under contract and we are going to -- we’re going try to optimize the utilization of that equipment and also optimize the pricing where we can get the best operational aspects of everything.
Unidentified Analyst
Okay, thanks a lot. And then just one more on that 75,000 horsepower.
Is that coming -- are you buying that from another service company, is that coming out of the inventory from one of the suppliers? And then -- sorry, go ahead.
Arty Straehla
It’s brand new equipment coming from the supplier. We think this is the opportune time.
As we said on the road show repeatedly that we think we saw and have looked at equipment that we can get for about 67% of what it would have cost new two years ago. We think it’s an opportune time to buy new.
We’ve looked at the lot of the used equipment in the marketplace either through auctions or though refer of opportunities and/or acquisition opportunities, and we think quite honestly that there has been awful lot of cannibalization and awful lot of where equipment is in very, very bad shape. We wanted to go new, we thought it was the opportune time to do it and we are continuing to negotiate and move forward on that.
Unidentified Analyst
Okay, great. And then just final one, would you expect those -- I’m assuming that’s 75,000 two spreads, will those go to work you think before the third spread that’s ideal right now?
Any chance of that or is that more -- it’s 2h 2017 event?
Arty Straehla
No. We think it’s all together with the strategy.
We will have three additional spreads that depending on what basin we go. If you go to the Eagle Ford, the pressures are much lighter, the number of pumps required on job are less.
If you go to the Stack/Scoop, you have to use -- the intensity of equipment is higher in some over-pressured areas; it’s lower in some another areas. So, we’re looking at the opportunities to do that.
But anywhere we go, we will be vertically integrated all the way back to the sand mine. We think that becomes an important part of the 2017 story, the logistical aspect, the sand, the load-outs, the transloads, the rail and mining aspects of it.
We think all that becomes big part in future and we’re going to have all that vertically integrated. So, not only are we looking at just adding equipment, we’re actually looking at adding a whole business line anywhere we go.
Operator
And our next question is from the line of Jason Wangler with Wunderlich Securities. Your line is open.
Jason Wangler
Maybe kind of dovetailing on the previous couple of questions. I think you mentioned with the new equipment getting that mid 2017.
Can you just talk about that timing? It seems like it’s a little bit more than maybe I would have thought, but just maybe some color on that?
Mark Layton
We think that equipment maybe is available as soon as 16 weeks out. The equipment is completely manufactured and available at the manufacture, they need to add a few things to it for us to take delivery.
We’re somewhat conservative in that mid-2017 estimate, as I mentioned maybe available as soon as 16 weeks out.
Arty Straehla
It will obviously come to us in pieces, what, they will get five done at a time and another five and that type of thing as it comes forward typically -- as it typically it does. And then there’s a lot of other equipment that we’ll coordinate.
When we talk about the -- we look to the contribution to our numbers in back half of 2017 and put it into play.
Jason Wangler
And then, as you look at the staffing both for the third crew and then that one as well and obviously you spoke about moving it south, how do you see as far as the timing of that, once you’re able to move it and get into at least the basin from a staffing perspective, whether it’s cost or timing, how long do you think and how much that would be to both mobilize and get that up and running for whenever that’s going to be able to go back to work?
Mark Layton
We’re not seeing current staffing constraints and part of the reason for that is due to the contracted nature of two of the spreads in the Northeast. We’re fortunate to back stop our utilization with those contracts.
And that’s helped maintain the staffing. As we look to add staffing for the third fleet in Northeast and for incremental fleets, we certainly see labor as a constraint going forward.
But we’ve got industry relationships both through our existing companies that we’ve got in each one of the basins, as well as those contracts that I’ve mentioned earlier, that certainly help us recruit and maintain highly qualified staff.
Operator
Thank you. [Operator Instructions] Our next question is from the line of David Anderson with Barclays.
Your line is open.
UnidentifiedAnalyst
Hey, good morning. It’s Will Thompson [ph] sitting in for Dave.
Maybe to follow-up on that line of question, did you mention the budget for that 75,000 horsepower?
Mark Layton
We did not. We’re currently in negotiations for the final price related to that 75,000 horsepower.
We believe it’s an opportunistic purchase, as Arty mentioned earlier. It’s about $0.67 on a $1 compared to what a spread would have cost two years ago.
But we don’t have a final amount on that as the negotiations are ongoing.
Unidentified Analyst
And then, how do -- you mentioned moving that capacity to the south, how do we think about -- I mean you touched on the labor aspect, maybe just the cost friction of going into a new market. I know you have other equipment capacities outside of pressure pumping in the Permian, but how do you think about -- when your peers talk about scale being a competitive advantage and you’re moving kind of maybe one or two fleets down there, what does that mean from sort of the margin profile and the onset of that work?
Arty Straehla
Well, we think it creates opportunity, because we’re one of the few frac companies that is completely backwardly integrated all the way through sand. And we talked a lot about sand being tightened.
You see some of the reflection of that going forward with what’s going on in the overall sand markets. We also think logistics get tight.
So we’re taking every bit of that aspect of it into consideration as we go forward. As you well know we’ve operations in the Eagle Ford, we have the Stack/Scoop is our backyard, the Permian is -- we’ve our rig operations there.
So, we’re currently doing the whole business outlook at it, not only look just at the frac operations but look at having sand, rail capacity, having logistics, having trucking, having making sure that we have plenty of water in order to do the fracs. So, we’re looking at it overall from every aspect.
And we’re just not ready to disclose quite yet exactly where it is going but we’re doing our diligence, we want to go where we can make money, and that’s the driving force behind it.
Mark Layton
And just to add real quickly to that, I think we look at scale, particularly as it relates to frac fleets more in the lines of two to three fleets for a district as opposed to one to two.
Arty Straehla
One of those things that we did -- that as went through and we did road show discussions and all that, we talked an awful lot about our customers. And we talked about the cross-selling opportunities.
And that will be determinant factor for this next fleet as well. We’re in constant discussions with several customers where we think these type of operations will get tight and we will have a customer -- we will try to have customer pull in as we go through.
Unidentified Analyst
It’s a good segue just on the sand business, you mentioned opportunities on the integration side where you think some of the bottlenecks. Can you maybe clarify on that, help us -- I think the confusion is still on kind of what your sand business model is today and may be your vision at what it will be may be in the next 12 to 24 months?
Arty Straehla
Right now, we’re brokering sand through Muskie and handling the logistics aspect of it. Muskie if you remember has 307 railcars.
An affiliated company by the name of Taylor is a sand mining Taylor, Wisconsin that has 700,000 ton per year capability and it’s an affiliated company that sale the sand. We think that is -- you go back to the intensity of the fracs that are going on, they are going from 1500 to 1800 pounds per lateral foot, we’ve heard them as much as 3000 pounds per lateral foot, because the EURs for the E&P companies are greatly improved with additional sand concentricity.
We heard that Chesapeake well and Haynesville being tested out with 50 million pounds, 5,000 pounds pre lateral foot on 10,000 foot lateral. So people -- there is no doubt people are going to more sand, longer laterals, we think that puts a strain on the entire ecosystem of those supply logistics of how you get sand there.
All the way to -- we can talk about the Delaware. You got one railroad track going down to the Delaware, you got a little bit of the transload facility, but how are you going to transport that much sand to the Delaware basin.
So that’s what we’re trying to go our head on. We’re trying -- we’re negotiating, we had Greenbrier in our offices yesterday talking about as leases runoff and additional leases and saving money and that type of things and how can we do more economically.
So, we’re looking at the whole process as whole supply chain. Frac is a big part of that of course but so is sand logistics, so is transloads, so is trucking.
If you look at the amount of sand that we would have to be trucked out of Midland Odessa because there is not enough transload facilities, it’s just -- it’s incredible. On a two lane road going from -- going down from Midland Odessa to [indiscernible] it’s just incredible amount of logistic nightmare.
And we think we can get ahead of that curve, and we think we can be ready for it and we’re a frac company that will not run out of sand.
Unidentified Analyst
That’s helpful and just a follow-up on that point. You mentioned an increase in sand prices.
How does that impact the profitability of your brokering business today under kind of -- part of that’s under a supply contract with Gulfport?
Arty Straehla
It is. We see it as opportunity.
When pricing gets back up to the $30 per ton, we’ll open the Muskie facility back up. Meanwhile we’re running -- the Taylor facility is supplying the sand during this time period and Taylor has the capacity to be expanded beyond the 700,000 tons without a great deal of investment.
So, we seen the upcoming sand as a great opportunity. And when be perfectly -- Taylor is just an affiliated company; it’s not one that we have any agreements to acquire or anything like that.
Unidentified Analyst
And last one from me if I can sneak one, you guys during the road show were taking about the pipeline of M&A opportunities. Can you just help us how is that vision and what that opportunity set has evolved over time or how should we think about -- I know you are adding the frac capacity but maybe what’s kind of the next opportunity that you think is available?
Arty Straehla
We talked on the road show about having our 25 or 30 in the pipeline. That pipeline for us has doubled when we gotten back.
I think there were a lot of people from what we heard and the feedback we get, there was a lot of people that were impressed that we were able to get the company out, get pipeline and execute. We want to -- obviously it’s got to be accretive for us as we go forward.
And it’s got to be something that’s going to make us great deal of amount. And we don’t always think traditionally with -- or acquisitions.
So, I will tell you we have a number in the pipeline that we will execute as we go forward and we are working very diligently on that. We want to focus on completion in the production area with sand and frac because again as the upfront starts to come back, we think that’s the area that tightens the most.
So, we are very focused on M&A, we are very active going forward and we will continue to be active. We think we have a window of period where we will be able to eventually use our stock after lockup period as a currency and then we’ve got the balance sheet to follow on or it’s cash positive and a whole revolver out there.
Unidentified Analyst
It’s great color. Thank you very much and congratulations on the public offering on an eventful day here.
So, thank you.
Arty Straehla
What else is going on besides our call? Thanks for the call.
Operator
Thank you. And I’m not showing any further questions.
So, I’ll now turn the call back over to Arty Straehla for closing remarks.
Arty Straehla
Well, thanks everybody. Again, we appreciate everybody being a part of the inaugural call on our earnings.
And we thank everybody for your time and good luck.
Operator
Ladies and gentlemen, this does conclude the program and you may now disconnect. Everyone have a great day.