Lower 48 wellsite services expert Basic Energy Services Inc. has seen a “more challenging” environment than expected in the first nine months of this year, and it’s unlikely to reverse heading into 2020, the CEO said last week.
During a conference call to discuss third quarter performance, outgoing CEO Roe Patterson said crude pricing sentiment remains “bearish on weaker global demand expectations. As these softer crude prices have persisted, the third quarter saw a continued decline in activity, with the impact largest on our completion-related services.”
The outlook is “unlikely to change in the fourth quarter,” as many “upstream customers have pointed to exhaustion in their gross capital expenditure budgets,” with exploration and production companies continuing to preserve liquidity and operate within cash flow.
“With the active U.S. joint rig count reaching its lowest level since April 2017, a challenging environment has been created for oilfield services as we enter 2020,” Patterson told analysts.
Basic, which is searching for a CEO after Patterson announced in September he would step down, last year began a strategic overhaul to relocate assets, close yards and sell some businesses to rightsize the corporate footprint.
The effort is not complete, Patterson said, but Well Services and the growing Water Logistics business now make up 59% of total revenue, versus 50% a year ago.
During 3Q2019, margins remained relatively stable sequentially, “with September marketing some of the softest revenue levels we've seen this year,” Patterson said.
“The softest part of that business” is in completions services, including for fracturing. While utilization has been strong, “pricing has been the toughest thing... We've got some of our larger peers out there just dropping prices below what we think are really breakeven returns at the field level. When we pass on that work, we won’t even try for it” as “we can't make a decent cash return at the field level.”
Reducing prices below sustainable levels is “not something we're interested in participating in.” When competitors reduce prices to get customers, “they bring the whole tide down, so it makes things tougher in that business.” Through the end of the year, he expects completions to continue to be “the softest piece” for earnings.
Direct margins were flat sequentially at 24.6, adjusted for a $3.9 million writedown, with the Well Servicing segment increasing by 120 basis points (bps) from 2Q2019 to 23.8% on a revenue decrease of 2%.
Completion and Remedial revenues decreased by 10% from 2Q2019 mostly because of declines in fracture activity. Still, the segment maintained margins of 23.1%, down 50 bps from the second quarter.
In the Well Services segment, Basic marketed an average of 307 rigs in the latest period, of which 272 were high-spec rigs. Average rig utilization was 68%, with well servicing rig hours of 149,000 versus 155,000 in 2Q2019.
“Of the average 24-hour rig count of 19 for the third quarter, 15 of these large packages are on multi-year, dedicated customer agreements,” the CEO said. “These agreements cover broad multi-well development projects with large operators, and they are concentrated in the Permian Basin.”
At the end of September, Basic had 479,000 hydraulic horsepower (hhp), flat sequentially but down from 516,000 year/year as it re-purposed 17 pumps to well service operations. Weighted average hhp in 3Q2019 fell to 479,000 from 486,000 in 2Q2019.
Basic marketed nine drilling rigs during the second and third quarters of 2019. Revenue per drilling day averaged $26,900 in 3Q2019, up 8% sequentially but down 3% from a year ago. Contract drilling stand-alone margins were 28%, up from 24% year/year and from 20% sequentially.
Rig operating days increased by 2% from the second quarter to 92, resulting in rig utilization of 11% year/year in both 2Q2019 and 3Q2019. In 3Q2018, rig operating days were 129, resulting in a utilization rate of 9% on 11 rigs.
Water Logistics revenue declined 5% sequentially to $48.5 million, with margins down 220 bps. Negatively impacting 3Q2019 revenue and margins was lower completion activity, which resulted in lower flowback volumes. Severe weather also impacted revenues more than in the second quarter.
A bright spot was growth from subsidiary Agua Libre Midstream, which has 39 produced water pipelines and 83 saltwater disposal wells across key onshore basins.
In the Agua Libre unit specifically, saltwater disposal volumes grew sequentially to 10.8 million barrels, a company record, with 35% from pipelines and 13% from third-party trucks. In the Permian, where Basic has 33 saltwater disposal wells, 63% of the volumes were from pipe, up from 58% in 2Q2019.
On the water hauling side, the total number of Basic trucks declined to 795, off 5% year-to-date, off from a peak of 1,000-plus. The decline has slowed recently as the company optimizes use of its fluid handling fleet.
“As we look forward to 2020, we plan to again invest the majority of our expansion capital in the Permian-focused water infrastructure by way of Agua Libre Midstream,” Patterson said. “We did not anticipate the unstacking of fracture equipment in the near term, but an eventual increase in well completions could represent the source of significant upside.”
Heading into the winter months, customers are expected to continue to focus on returns and free cash flow generation, he said. For the oilfield services industry as a whole, the CEO said, “now, more than ever, we feel consolidation is critical to our space.”
As well completions reactivate, likely when producers reset their capital budgets for 2020, Basic expects the postponed completions/fractures will increase.
“We think that flowback barrels are going to pick back up in the first quarter,” Patterson said. “That's going to add tremendous support to margins in the fluids business in the first quarter. We could get a nice surprise in that business with flowback barrels…Flowback barrels are usually by the hour, not so much by the barrel. Margins are higher...so it's a good time when we're working around the clock doing flowback.”
With range-bound oil prices, customers likely will maintain lower levels of capital spending through 1Q2020. “As our customers continue to work toward operating within their own cash flow, these suppressed market conditions will persist,” Patterseon said. “We expect typical seasonality in the fourth quarter potentially exacerbating disruptions in utilization.”
The 2019 capital spending plan of $58 million is unchanged, but it could be modified as the market outlook is refined.
Basic reported a 3Q2019 net loss of $38.9 million (minus $1.52/share), compared with a year-ago net loss of $27.34 million (minus $1.03). In 3Q2019 Basic had a 28 cent/share impairment on its contract drilling assets and manufacturing inventory.
Revenue decreased to $178.4 million, down 6% sequentially and from $246.3 million in 3Q2018.
The Fort Worth, TX-based operator last Friday reported that it has been notified by the New York Stock Exchange that the average closing price of the common stock had fallen below $1.00/share over 30 consecutive trading days, which is the minimum average share price for continued listing. Basic has been given six months to regain compliance.