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Seventy Seven Targeting Geographic Expansion in 'Challenging' Year

Seventy Seven Energy Inc. (SSE), which spun off from Chesapeake Energy Corp. last year, has shifted some planned 2015 capital expenses to 2016, reduced product and material costs and cut jobs to deal with challenges ahead.

During a conference call to discuss fourth quarter performance, CEO Jerry Winchester said it had become evident that 2015 would be "one of the most challenging years our industry has seen in quite some time. As we experienced in our hydraulic fracturing [fracking] segment during the fourth quarter, we expect to see market volatility and pricing pressure across all of our businesses in 2015." Winchester formerly was chief at well control company Boots & Coots, acquired by Halliburton Co. in 2010 (see Daily GPI,April 13, 2010).

SSE debuted on the New York Stock Exchange last summer (see Daily GPI,July 1, 2014). The customer base then and now is heavily weighted to Chesapeake, which contributed about 56% of total revenues in the final period. Chesapeake, like its exploration and production (E&P) peers, is dialing back its business and has cut its 2015 capital expenditures (capex) by more than one-third (see Shale Daily,Feb. 25). The producer's rig count has been cut to the lowest level in 11 years, and it has taken a toll on SSE, the CEO said.

SSE owned 10 frack fleets at the end of last year with an aggregate of 400,000 hp. Seven of the the fleets were contracted by Chesapeake for the Anadarko Basin and Eagle Ford and Utica shales.

However, said Winchester, the Oklahoma City-based operator has "an experienced team that has managed through many oilfield services business cycles. Right now we are very focused on the things we can control to enhance our liquidity in 2015," which includes the capex shift and headcount reductions. Total capex this year is set at $225 million, half of what it was in 2014.

Most of the spending this year is to target "geographic expansion, vertical integration and asset additions. Once SSE has completed its planned growth capital expenditures, it intends to shift its focus toward using excess cash flows from operations to reduce outstanding long-term debt."

During 4Q2014, SSE lost $9.4 million net (minus 20 cents/share), versus a year-ago loss of $1.8 million (minus 4 cents). Adjusted earnings were $107 million, down sequentially from $132.8 million but higher than year-ago profits of $103.9 million. Total revenues in 4Q2014 were $494.9 million, off 6% sequentially and from 4Q2013's  $510.85 million. SSE lost $8 million net (minus 17 cents/share) in 2014, versus a net loss in 2013 of $19.7 million (minus 42 cents). Adjusted revenues for 2014 were $1.98 billion, nearly flat year/year.

Revenue days improved during the quarter, as the number of average utilized rigs increased by four to 84, and average day rate improvement because of the delivery of six new proprietary PeakeRigs. Revenue days were 7,991, higher from 3Q2014's 7,772 and from a year-ago, when it had 6,984.

The customer base also expanded, with revenues from non-Chesapeake customers increasing to $10.3 million from the third quarter to 40% of total segment revenues. At the end of December, 44% of the active rigs were contracted by non-Chesapeake customers, including a revenue backlog of $197.6 million with an average duration of seven months.

The revenue backlog with Chesapeake was $810.1 million at the end of the year, with an average duration of 22 months. The total drilling contract early termination value related to the drilling backlog was $476.1 million.

SSE's average revenue/day in 4Q2014 was $24,262, higher sequentially and from a year ago when revenue/day was $23,586. As a percentage of drilling revenues, drilling operating costs were 60% in 4Q2014, 66% for 3Q2014 and 65% in the year-ago period.

The marketed fleet at year's end consisted of 26 tier one rigs, including 16 PeakeRigs, 57 tier two rigs and seven tier three rigs. SSE currently has 10 additional contracted PeakeRigs under construction that are scheduled to be delivered over the next 14 months.

The fracking segment contributed $213 million of revenues during 4Q2014. Adjusted earnings of $26.2 million, down sequentially from revenues of $245 million and earnings of $56.5 million, but higher year/year. Utilization rose 2% because of the delivery of the 10th frack fleet. The fracking segment's backlog at the end of 2014, based at the time on current market prices, was $1 billion with an average duration of 20 months. Average operating costs per stage fell 3% from the third quarter, primarily because of lower product costs associated with a frack design change requested by Chesapeake.

SSE at the end of 2014 had $50.5 million in borrowing capacity under its $275 million bank facility.

Wunderlich Securities Inc. analyst Jason Wangler revised the outlook down for SSE on lower than expected utilizations and pricing pressures, "but we feel Seventy Seven can weather this storm with prudent financial practices and a focus on returns." There may be opportunities for SSE's high-spec rig fleet once the rig count bottoms, he wrote. As more contracts roll off and as producers "look to add rigs, we think SSE could see a nice uptick in work as E&Ps search for the best rigs in the oilfield."

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