Ranger Energy Services Q1 2023 Earnings Call Transcript

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May 2, 2023

Key Takeaways

  • Ranger Energy delivered a 27% year‐over‐year revenue increase in Q1 2023 to $157.5 million, driving cost of services down to 83% of revenue and expanding adjusted EBITDA margins by 500 bps to 13%.
  • The company generated $12 million of free cash flow in Q1, achieving a 60% free cash flow conversion and cutting adjusted net debt from $80 million to under $10 million—on track for net‐debt zero by mid-year.
  • Ranger’s board has committed to returning at least 25% of annual cash flows to shareholders via open-market share repurchases (39,400 shares bought in Q1) and a 5% per-share quarterly dividend upon reaching net-debt zero.
  • All three segments posted significant growth—Well Services revenue up 19%, Wireline up 29%, and Processing & Ancillary up 50%—with operational agility offsetting natural gas headwinds and sustaining pricing.
  • Ranger maintains full-year guidance of ~15% revenue growth to $685 – 715 million, >30% adjusted EBITDA growth to $95 – 105 million, and expects to convert ~60% of EBITDA to free cash flow in 2023.
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Earnings Conference Call
Ranger Energy Services Q1 2023
00:00 / 00:00

There are 8 speakers on the call.

Operator

And welcome to the Ranger Energy First Quarter 2023 Conference Call. All participants will be in a listen only mode. After today's presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Shelley Weimer, VP and Financial Reporting.

Operator

Please go ahead.

Speaker 1

Thank you, operator, and welcome to Ranger Energy Services' 1st Quarter 2023 Results Conference Call. Before the market opened today, Ranger issued a press release summarizing operating and financial results for The 3 months ended March 31, 2023. This press release, together with accompanying presentation materials, are available in the Investor Relations section of our website at www.rangerenergy.com. Today's discussion may contain forward looking statements about future business and financial expectations. Actual results may differ significantly from those Projected in today's forward looking statements due to various risks and uncertainties, including the risks described in our periodic report Filed with the Securities and Exchange Commission.

Speaker 1

Except as required by law, we undertake no obligation to update our forward looking statements. Further, please note that non GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP Non GAAP measures are available in our latest quarterly earnings release and conference call presentation. With that, I would like to now turn over the conference call to Stuart Bowden, Ranger's CEO, for his prepared remarks.

Speaker 2

Thank you, Chile. Good morning, everyone. Ranger's performance during the Q1 continued to reinforce the resiliency and attractiveness As a result of the hard work done in 2022 to integrate the basic asset purchase In the Patriot and Pertex acquisitions, our year over year results demonstrate the leverage and growth potential of the business. Despite challenges in the natural gas markets, we achieved significant year over year growth across each of our business segments. And I would like to share with you Some of the highlights in this quarter as compared to the Q1 of 2022.

Speaker 2

Total company revenue increased 27% $157,500,000 with growth rates between segments ranging from nearly 20% to 50% as compared to the Q1 of 2022. I Specification Rigs revenue grew 19% year over year division grew revenue by 29% year over year with increasing activity levels in our production business where we have a focused growth effort And incremental pricing improvements across completions, productions and pump down service lines. Finally, Ranger's Processing and Ancillary Services segment increased revenue by 50% year over year. The operating leverage and synergies from our integration efforts We're also well demonstrated with cost of services improving 400 basis points to 83% of revenue as compared to 87% in the prior period Prior year period, we achieved 109% increase in adjusted EBITDA and a 500 point expansion in margin from 8% to 13%. The Ranger team is proud of the traction we have found with the combined businesses and feel these results continue to reinforce our strong position in the marketplace and our ability to continue growing.

Speaker 2

Our business also continues to generate substantial free cash flow with $12,000,000 reported in the Q1 of this year, Further demonstrating the value of our strategy and the modest capital investments required to maintain our industry leading fleet. We believe our 60% free cash flow conversion rate distinguishes Ranger amongst oilfield service providers and gives us a strategic advantage going forward. Case in point, the cash flows generated over the last 12 months Enable us to rapidly reduce our adjusted net debt balance from $80,000,000 this time last year to less than $10,000,000 of adjusted net debt At quarter end, very close to our stated goal of being net debt 0. Why are we so focused on debt reduction? As we believe that balance sheet strength, Particularly in a sector known for its cyclicality, it's critical to building a business that consistently performs for the benefit of shareholders.

Speaker 2

It gives us flexibility to adapt to changing market conditions, strategically seize opportunities as they present themselves and provide a programmatic return of capital to our shareholders. Consistent free cash flow and a fortified balance has increased our confidence in the underlying strength of our business and provided us the opportunity to focus on maximizing total shareholder returns. As announced last quarter, the Ranger Board has committed to returning at least 25% of our annual cash flows to investors through a combination of share repurchases And a 5% per share quarterly dividend that will commence upon achieving our net debt zero target. When it comes to capital allocation and shareholder returns, both the Board and management are taking a disciplined approach to evaluating the best available options to maximize As such, late in Q1, we began repurchasing shares of our common stock on the open market. Given the value of our shares, We believe the repurchase offers the greatest return on capital available to us at this time.

Speaker 2

We continue to actively evaluate our capital deployment options, including potential acquisitions and will remain diligent in prioritizing shareholder returns as we proceed. Before I turn the call over to Melissa, Let me share my thoughts related to the macro environment and the expected impacts to our segments as well as the way we are responding. While commodity price volatility in the Q1, Particularly in natural gas has presented a challenge, it has not dampened our view that the supply demand fundamentals for oil and gas and our services remain constructive. While natural gas prices are depressed relative to 1 year ago, remember that significant LNG export capacity It's expected to come online by 2025, increasing demand and relieving bottlenecks that have dampened prices. As a result of the falling gas prices in the Q1, Ranger has seen activity changes and felt the impact of these declines And Natural Gas Basins, although there are nuances to be appreciated between our segments.

Speaker 2

In our Well Services segment, Although some rigs were idle during the quarter, there was more than enough demand for our rigs from other customers or in other basins, Which virtually offset all negative effects, save for nominal logistics costs. We relocated some assets and crews from the Haynesville to the Permian and We're able to hold pricing and asset utilization steady. A huge credit to our operational teams who hustled hard this quarter to hold utilization through these changes And we are very pleased with the results thus far and feel our growth prospects for the year remain very encouraging. In our wireline segment, our Northern Wireline region, which represents the bulk of our wireline business, continues to outperform And we feel confident in its upward trajectory as we move into the warmer summer months. However, despite no meaningful exposure to gas Our wireline operations in the Permian have felt the collateral effects of the market pullback as assets have been shifted into the basin by some of our competitors, Disrupting the supply demand balance.

Speaker 2

We have also seen pricing softness creep in recently with pricing concessions being offered by others despite pricing Having not yet recovered to pre COVID levels. We have been transparent about our work to transform our operations in this region, and we remain focused and committed to that transformation As evidenced by our year over year improvement. Although certain of our segments may experience more muted growth this year, We do believe that oil and gas prices are set for a multiyear upcycle and are confident that the services we provide will continue to be in high demand. We are unique to many of our peers that have more drilling or completion only service lines, which predominantly rely on operators' CapEx budgets, Whereas Ranger's exposure is more weighted to customers' operating expense budgets through our production services. Let me summarize by saying we are very confident in the fundamentals We continue to believe that Ranger is positioned to thrive in an upcycle environment and thanks to its balance Chief strength and business line diversity is uniquely situated to weather slowdowns when they occur.

Speaker 2

Fundamentally, we are focused on capital efficiency and capitalizing on our considerable operating leverage to drive returns through cycles and maximize returns to shareholders. Given our in line Q1 performance and visibility into the remainder of the year, we continue to expect revenue growth of approximately 15% Landing between $685,000,000 $715,000,000 for the year and growth of adjusted EBITDA by over 30% at the midpoint to between $95,000,000 $105,000,000 Importantly, as mentioned earlier and as demonstrated in the Q1, We expect to convert approximately 60% of that adjusted EBITDA to free cash flow, providing the company with the ability to carry out a robust Thank you for their dedication and commitment to excellence. We are a services business with a high performance culture and we depend on our employees to I hope the mission and values of our organization each and every day to be successful. I'm proud of the work they do and our results are a direct reflection of their efforts. I will now turn over the call to Melissa.

Speaker 3

Thank you, Stuart, and good morning, everyone. I am pleased to report that for the Q1 of 2023, Our revenue increased by 27 percent to $157,500,000 compared to 123 $6,000,000 in the Q1 of 2022. The increase in revenue was driven by activity and pricing improvements across all three of our Quarter over quarter revenue was relatively flat as we continue to deal with winter conditions in our Northern business and shifting assets in the South due to recent pressure on gas As Stuart mentioned, a real priority for us last year was integrating our businesses to improve margins. In the Q1, our gross margins were 15.9 percent of net sales compared to 12.6% in the Q1 of last year. This improvement was due in large to maximizing our operating leverage through fully integrating our businesses, reducing the number of operating facilities and increasing collaboration across regions.

Speaker 3

Margin expansion was also facilitated by pricing improvements made in 2022. As part of our 2023 initiatives, We intend to continue streamlining operations and incrementally strengthen margins. Net income for the quarter was $200,000 or $0.25 per fully diluted share compared to a net loss of $5,700,000 The quarter during the Q1 that affected EPS by $0.07 The company does not anticipate incurring material cash taxes during the current fiscal year. Adjusted EBITDA for the Q1 of 2023 was $20,100,000 more than double that of the Q1 of 2022. 1st quarter adjusted EBITDA did carry additional payroll taxes and labor costs associated with incentive compensation programs during the quarter as relative to Q4 of 2022.

Speaker 3

Turning now to the financial performance of our business segments. First, our High Specification Rates segment revenue was $77,500,000 for the Q1, A 19% increase over the Q1 of 2022. We are pleased to report hourly rig rates of $6.89 per hour as compared to $5.77 per hour last year, demonstrating that we have been able to sustain pricing power while providing outstanding service As Stuart mentioned, our operations teams successfully redeployed assets during the quarter and improved rig scheduling. For the quarter, operating income was up 55% year over year to $11,900,000 while adjusted EBITDA was up 23% to $17,400,000 Next in our Wireline Services segment, revenue was $49,900,000 in the Q1 of 23, a 29% increase from $38,600,000 in the Q1 of 2022. As a result of growing this business, Operating income was $1,800,000 while adjusted EBITDA was $4,200,000 up meaningfully from the losses incurred during the first Quarter of 2022.

Speaker 3

Lastly, in our Processing and Ancillary Services segment, revenue was $30,100,000 in the 1st quarter, Up 50% from $20,100,000 in the Q1 of 2022. Operating income was $3,400,000 An increase of 162 percent from $1,300,000 in the Q1 of 2022. Adjusted EBITDA also increased to $5,000,000 up from $3,300,000 a year ago. Switching to G and A, we continued our year over year improvements $8,400,000 of expense as compared to $10,200,000 last year as we continue to recognize less acquisition and integration costs. G and A costs during the Q1 were affected by payroll taxes and associated labor costs as well as additional professional fees in connection with our year end audit That we do not expect to reoccur during the Q2.

Speaker 3

And finally, we are proud of the strides we have made to build a best in class balance sheet. As Stuart noted earlier, we paid off our credit facility during the quarter and reduced our adjusted net debt balance to $9,300,000 Our leverage levels position the company to act assertively in pursuing strategic opportunities in the future. The company spent $5,400,000 of CapEx during the quarter. We would also call attention to the ability of Ranger to continue to monetize idle assets With proceeds of $4,300,000 of asset sales during the quarter. Although we anticipate these sales to decline in the future, We remain vigilant and looking for opportunities to optimize our asset base.

Speaker 3

Finally, and as Stuart mentioned, Ranger share repurchase program the last few days of the quarter, settling purchases of 39,400 shares during the Q1. With that, Stuart and I would like to thank you for your time this morning. And we will now turn the call over to the operator for Q and A. Operator?

Operator

Thank you. We will now begin the question and answer session. And you would like to withdraw your question. Our first question comes from Luc Des Moines with Piper Sandler. Please go ahead.

Speaker 4

Hey, good morning.

Speaker 2

Good morning. Good morning, Stuart.

Speaker 4

Hey, good morning. Stuart, you had

Speaker 5

a nice improvement in high spec rigs in 1Q, even with some of the moves from the Haynesville to the Permian. But could you talk a little more about how you expect the market structure to unfold in the coming quarters?

Speaker 2

Thanks for the question, Luke. I think right now we are actually quite optimistic about how things are unfolding. We don't really have a lot of closure to the gas stations, so in the North Texas and Haynesville, but certainly we have some. And as we noted, most of those Rigs and crews have already been kind of redeployed. We're finding demand in the oilier basins for our services to continue to be very, very strong.

Speaker 2

So Right now, we're pretty optimistic going forward.

Speaker 5

Okay. Got it. Thanks, Stuart.

Operator

Next question comes from Derek Boseijer with Barclays. Please go ahead.

Speaker 6

Hey, good morning, everyone. So I want to get your thoughts

Speaker 4

on the hey, Thoughts on the Permian wireline completions market. So we're seeing the increasing trend from pressure pumpers to integrate around the frac site, So which includes wireline, optimizing revenue per frac job, which could come at the expense of pure wireline pricing. Obviously, it's been pretty volatile segment for you guys in terms of the margin. You've mentioned Northern operations are performing well. But what are your current thoughts Your long term position in the Permian completions market, are you going to keep trying to consolidate the fragmented market or could this potentially actually be an exit for you guys So those who are integrating around the frac value chain.

Speaker 4

Thanks for

Speaker 2

the question, Derek. So at this point, we don't have any intention to Exit the position in the Permian. Obviously, we are always looking at alternatives, but we don't have any intention to exit. And I think as you said in the Permian, we are seeing pricing pressure. There is some bundling, but a lot of the pricing pressure we're seeing is actually not From the bundled services, but it's from other players.

Speaker 2

And we have seen people bring in trucks from South Texas and the Haynesville into the Permian.

Speaker 4

Got it. Okay. That's helpful. And then just talking about the Haynesville, I guess this is more of a high spec rig question. So are your Haynesville customers telling me about activity levels for the rest of the year?

Speaker 4

I know you said you redeployed your assets out of the basin, but have they indicated a timeline when they would want you to return to the basin? Just any Color around timing as far as activity would be helpful.

Speaker 2

Thanks for that, Eric. I should probably clarify, we have not exited The Haynesville Basin, there have been some assets that we redeployed when customers laid down those rigs. But we have another customer We're about to go put a 24 hour drill out rig out in the next 2 weeks. So we are still active in the basin. Most of what our customers Our saying is after kind of some of the initial softness, we're not seeing kind of big movements one way or the other at this point Is what I would say.

Speaker 2

And then I think I would also just say and this is really across all basins, Derek, we are seeing a trend that as the E and Ps consolidate, They're starting to consolidate their vendor lists. And so we're active in a number of conversations with particularly larger players, And this is across service lines. We're trying to streamline their vendor lists and really focus on players With outstanding service quality and we think that really plays to our strengths.

Speaker 4

All right, great. Appreciate the color. I'll turn it back.

Speaker 2

Yes. Thanks, Derek.

Operator

Next question comes from Don Chris with Johnson Rice. Please go ahead.

Speaker 6

Good morning, guys. How are you all today? Good.

Speaker 2

How are you, Don?

Speaker 6

Doing well. Obviously, we've been focused on the rig count and a lot of kind of new drill Drill outs for you all, but given your exposure to the workover community and With oil kind of moving up to that mid-70s level, although it's down a little bit today, can you talk about the demand For workover rigs in particular on the kind of workover side, it seems like you saw a pretty good pickup in pricing Fraction there in the Q1, just your thoughts around that?

Speaker 2

Yes. Thanks for the questions Don. I would say particularly on The work over and the production related work, we're really not seeing any kind of slowdown at all. We did see some slowdown, again, kind of specifically Some of the Gasser basins, but I would say with oil prices holding steady and then kind of increasing recently on the well servicing side, the production side, Particularly, the Permian, the Bakken has been demand has been very, very strong.

Speaker 6

Okay. And just one further one for me. I know in the past you Talked about being a natural consolidator and there being a little bit of pickup in M and A talks anyway. Has that bid ask spread Come in any given the perceived weakness in service demand over the past, call it, 3 to 4 months?

Speaker 2

I'll let Melissa kind of weigh in as well. But I think we feel like it is starting to close. I think that we obviously don't have a deal to announce, but I do feel like conversations are just becoming a lot more realistic About where kind of the market is trading. So I do think it's starting to close.

Speaker 3

Yes. I think Stuart said it well. I think the conversations have picked up certainly in number of frequency, number of outreaches. I think there's So maybe some underlying differentials, if you will, but the conversations are progressing to a more meaningful level. And I think people are starting to

Speaker 6

Okay. And if I could sneak in just one more. It looks like you're on track to be net debt free, Call it by the end of the second quarter or so. Am I correct in thinking that the dividend that you all announced last quarter Could come into play in the Q3. Is that kind of the right way of thinking about it?

Speaker 3

Yes. I think that's the

Speaker 4

right way to think about it.

Speaker 2

I

Speaker 3

think The capital allocation between the repurchase program and the dividend, as we kind of navigate working And the ramp here over the next quarter, a little bit of puts and takes, but I think that that's very realistic

Speaker 4

and on our side. Yes.

Speaker 6

Okay. I appreciate the color. Thanks a lot.

Speaker 2

Thank you, Don.

Operator

Next question comes from John Daniel with Daniel Partners. Please go ahead.

Speaker 7

Hey, thank you. Just a first an operational question for you all. As you look back the last several quarters, there have been a bunch of E and P companies increasingly Chatting about refracs and the opportunities for them. This is probably a dumb question, but can you remind me what your opportunity set is With refracs and what maybe you've done thus far? Just some color would be helpful.

Speaker 2

So I don't think that well, I mean, a refrac for us would be pretty similar to the exposure that we have both in our current well services and wireline operations, I I think we are seeing, as you said, kind of increasing demand for refracs. And so we're certainly active in those conversations.

Speaker 3

Would it just be

Speaker 7

the same as any completion, just a normal drill out and stuff like that? Or is there any I was curious if there's anything different or if there's another subset of demand that you see coming from that?

Speaker 2

There's nothing different than what we're currently offering, but I think that we are seeing sort of increasing demand from what we offer just based

Speaker 7

Got it. Okay. And then a question on M and A. With respect to some of the smaller, call it, bolt on transactions where you all Where Ranger passes on them. Can you say, I don't know, when that decision is made today, is it Valuation driven, is it equipment quality driven?

Speaker 7

What's typically making you say no most of the time?

Speaker 2

Yes. So I'd say 1st and foremost, at times it's valuation, right, sort of the consideration. I think that's one. Probably at this point, we've seen We've been very open about the fact that we do have assets that we could invest in and redeploy. So asset quality has to be Yes, pretty high for us.

Speaker 2

Otherwise, we're just buying customers, right? Right. So I mean, I'd say that I would say what we've looked at, I don't feel like we've seen a bunch of companies with bad assets necessarily. It's been more on the valuation side.

Speaker 5

Yes. I mean, I might add a little bit of

Speaker 3

color there, John, to say, when it's smaller and more bolt awning or string of pearls, if you will, I would say, our threshold is higher. It would be fair to say. And so I actually think that To Stuart's point, the valuation is not being the issue, but it ends up being a valuation because if it's a smaller Sort of onesie, twosie type company, then we need to have that much more opportunity set. So it's typically a conversation that ends in, hey, we would be willing to entertain this, but here's Our valuation and the guide then you're back to the bid ask. And we would tell you that's kind of so it's valuation, but it's more We're not willing to pay as much for it unless it can actually move the needle more meaningfully for us.

Speaker 3

And on a smaller basis, that sort of that criteria is higher and we're more

Speaker 7

Got it. Okay. One final one for me, again, sort of an operations question. But there's always been talk over the years about Do we ever build an electric rig for workover and it's always been cost and so forth. I'm just curious, In your lifetime, Stuart, do you expect to ever see an electric work of a rig?

Speaker 2

I think in my lifetime, I think a new build Sure. Electric rig feels like a pretty long cut. I think there have been some we are having conversations with some players About potentially refurbishing some of our rigs and even if they are not fully electric potentially putting on battery packs so that they could Looking to full power on location. So I wouldn't be surprised if we see kind of a refer. Okay.

Speaker 2

It's built from scratch feels like a long At least for me.

Speaker 4

Fair enough. Okay. That's all I got. Thank you.

Speaker 2

All right. Thanks, John.

Operator

This concludes our question and answer session. I would like to turn the conference back over to Stuart Boden, CEO for closing remarks.

Speaker 2

Thank you, operator. Quickly thank you everyone for your interest in Ranger and participating in the call. And I hope everyone has a great week.

Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

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