Ranger Energy Services Q4 2023 Earnings Call Transcript

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Provided by Quartr
March 5, 2024

There are 8 speakers on the call.

Operator

Thank you, and welcome to Ranger Energy Services 4th Quarter and Full Year 2023 Results Conference Call. Ranger has issued a press release summarizing operating and financial results for the 3 12 months ended December 31, 2023. This press release together with accompanying presentation materials are available in the Investor Relations section of our website atwww.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 reports filed with the Securities and Exchange Commission.

Operator

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 to non GAAP measurements are available in our latest quarterly earnings release and conference call presentation. All participants will be in a listen only mode. Please note this event is being recorded.

Operator

With that, I would now like to turn the conference call over to Stuart Doeden, Ranger's CEO and Melissa Kugel, Ranger's CFO, for their prepared remarks.

Speaker 1

Thank you, and good morning, everyone. I'm pleased to welcome you to our 4th quarter and full year 2023 earnings call. 2023 was a year of significant milestones and achievement for Ranger. Before we delve into the specifics of our Q4 and full year 2023 financial and operational performance, I'd like to take a moment to reflect on the journey we've undertaken, the strategic decisions that have shaped our path and a few highlights from the year. In 2023, Renfrew achieved the highest annual earnings in our company's history.

Speaker 1

Despite facing headwinds stemming from macroeconomic conditions and industry wide challenges, which resulted in a 20% decline in drilling rig count, we delivered revenue of $636,600,000 marking a 5% increase from the prior year. This growth trajectory was supported by our unwavering commitment to safety, superior service quality and our production cycle focus, which continues to prove resilient to market fluctuations. Notably, our net income surged to $23,800,000 or $0.95 per fully diluted share, up from $15,100,000 or $0.65 per share in the previous year. Our success in 2023 underscores the strength of our business model and the dedication of our team members. Throughout the year, we remain steadfast in our commitment to maximizing shareholder value guided by our 4 strategic pillars maximizing cash flow, fortifying our balance sheet, returning capital to our shareholders and exploring growth through acquisitions.

Speaker 1

Enter continued to prioritize cash flow generation throughout 2023, leveraging our capital efficient business model and strong operating leverage. We generated $84,400,000 in adjusted EBITDA, reflecting a 6% increase from the prior year. And thanks to consistent price discipline and the pace of activity declines, we achieved free cash flow of $54,300,000 or 64% of adjusted EBITDA. Converting cash at these levels is a market differentiation for Ranger and resulted in free cash flow per share of approximately $2.30 providing for a more than 20% free cash flow yield per share at recent trading levels. Maintaining a robust balance sheet is essential for navigating uncertainties and seizing opportunities in our dynamic industry landscape.

Speaker 1

In the Q2 of 2023, we achieved a significant milestone of effectively becoming debt proof, paying off nearly $80,000,000 since the Q1 of 2022 when our debt peaked after our 2021 string of acquisitions. We have remained debt free and ended 2023 with over $85,000,000 in liquidity. We believe that minimal debt is crucial for maximizing shareholder returns and preserving optionality through cycles, and we remain committed to preserving and growing our balance sheet strength. With our balance sheet targets in place in the first half of the year, we turned our attention to capital returns for our shareholders. In 2023, we announced the company's first dividend and repurchased approximately 1,800,000 shares and those repurchases have continued into 2024.

Speaker 1

As of today, we have now repurchased over 10% of Ranger's outstanding shares. When we discuss acquisitions and strategic opportunities, we are keenly aware that our own stock remains one of the most attractive uses of capital available to us and any M and A must compete against it. When we launched our shareholder returns program in the 2nd quarter, we committed to returning at least 25% of annual cash flows to shareholders through dividends and share repurchases. And I am pleased to report that we far exceeded that commitment in 2023 by returning 40% of free cash flow back to our shareholders, reaffirming our dedication to creating long term value. Delivering meaningful returns to our shareholders will remain a top priority for Ranger.

Speaker 1

We also intend to increase Ranger's size and scale. And throughout 2023, we remain actively engaged in evaluating strategic opportunities for growth through acquisitions. Our disciplined approach ensures that any potential transactions are value creating and accretive for our shareholders. Would we like to do another transformational corporate transaction? Absolutely.

Speaker 1

But we are committed to maximizing value and we will not overpay. As a result of the unfavorable bid ask spread in 2023, we pivoted to evaluating smaller asset acquisitions that folded into our current operations portfolio. In the Q3, we successfully closed a modest acquisition of pump down assets and support equipment, further enhancing our operational capabilities. We have the balance sheet and the resources to execute quickly on these types of opportunities and we will continue to be nimble in evaluating both large and small deals on behalf of our shareholders. While our full year results demonstrated our resilience and growth trajectory, the 4th quarter did present some unique challenges.

Speaker 1

We experienced the impact of falling oil prices, customer budget exhaustion and early weather shutdowns in addition to our typical holiday slowdown. Despite these headwinds, our high specification rigs business demonstrated stability, reflecting its production cycle focus, which is less tied to the ups and downs of U. S. Land rig count, not to mention our ongoing dedication to service quality and strong customer relationships. Our wireline segment faced more significant weakness than expected in Q4, driven by frac slowdowns and seasonal factors, particularly in the northern region where our business is strongest.

Speaker 1

Finally, our processing solutions and ancillary services segment increased revenues year over year in most business lines, but adjusted EBITDA declined due to higher operating costs and operational and scheduling inefficiencies that the Q1 has started slower than we planned, similar to many of our peers. Given macro uncertainties and continued pressure in gas markets, our E and P customers have been cautious with our activity levels to start the year. We have also experienced customer driven shutdowns this quarter related to a safety incident of other service providers that caused stand downs across all service providers. On the positive side, we are already seeing activity levels pick back up in the back half of February paving the way for a stronger second quarter. Regarding full year 2024, we built a budget assuming slight year over year improvement underpinned by relatively stable customer demand.

Speaker 1

Given the puts and takes I mentioned at the start of the year, we expect demand to be stronger in the second half of the year and we remain optimistic about our ability to grow our business in the medium and long term. We are encouraged as the well services space has already shown resilience to weaker activity levels, providing a reliable floor to our business. We also feel there are upsides to the year that are not fully yet realized, such as the extended work associated with the key customer agreement we signed in 2023. We think this is a model for future customer relationships and continue to have encouraging conversations with our customers. We continue to be encouraged that our highest quality customers are willing to commit additional operating dollars to Ranger.

Speaker 1

We fully stand behind our ability to convert approximately 60% of our EBITDA to free cash flow even under flattish conditions and have shown diligence in deploying these cash flows in the most accretive way possible for our shareholders. To date, we have spent more than $25,000,000 of our original $35,000,000 of repurchase authorization announced 1 year ago, which has resulted in the repurchase of over 10% of the company's outstanding shares. Given our belief in the underlying value of our stock and our continued commitment to returning capital in the most efficient way possible, the Board has increased our share repurchase authorization by an additional $50,000,000 resulting in total share repurchase capacity of $85,000,000 Along with all of the notable financial achievements, the entire Ranger team is proud to announce the release of our first ever sustainability report. This report reflects our commitment to operating responsibly and underscores our efforts to promote environmental, social and governance initiatives. We remain dedicated to fostering a culture of safety and sustainability across all aspects of our operations.

Speaker 1

As we embark on the New Year, Ranger is well positioned for continued strong performance and value creation. Our strategic priorities for 2024 centerline driving toward growth, the challenging market conditions and targeted acquisitions. We will focus on high quality and safe execution to differentiate ourselves with a relentless commitment to customer satisfaction, all the while remaining fully committed to providing meaningful capital returns to our shareholders. Our acquisition strategy will be complemented by ongoing dividends and share our dedicated team members whose hard work and dedication have been instrumental in our success. As we navigate the year ahead, I am confident in Ranger's ability to deliver sustainable growth and value for our shareholders.

Speaker 1

With that, let me turn the call over to Melissa to review our key financial results.

Speaker 2

Good morning, everyone, and thank you for joining us today. I'm pleased to provide an overview of our financial performance for the full year 2023 and the Q4 specifically. Let's start with a summary of our full year 2023 financial results. Overall, we achieved year over year growth and made substantial progress across key financial metrics. Our revenue for the full year totaled $636,600,000 marking a 5% increase from $608,500,000 in 2022.

Speaker 2

This growth was primarily driven by our continued growth based on service quality, effectively managing white space in the calendar and operational efficiency despite encountering challenges in customer activity that dampened our full year performance. Moving on to profitability. Our net income for the full year stood at $23,800,000 or $0.95 per fully diluted share. This represents a substantial improvement from the previous year's net income of $15,100,000 or $0.65 per share. Our ability to deliver higher earnings reflects the effectiveness of our business model and underscores its resilience in the face of declining market conditions.

Speaker 2

Adjusted EBITDA also saw a notable uptick, reaching $84,400,000 for the full year compared to $79,500,000 in the prior year. This 6% increase demonstrates our ability to generate strong operating cash flows and underscores our commitment to maximizing shareholder value. Furthermore, we are incredibly proud to have achieved free cash flow for the year of $54,300,000 representing over 60% of adjusted EBITDA. This robust free cash flow generation reflects our disciplined approach to capital allocation and underscores our financial strength. Now let's delve into the financial performance for the Q4 of 2023.

Speaker 2

Despite encountering headwinds during this period, we maintained our focus on operational excellence and remained agile in responding to market dynamics. For the Q4, our net income totaled $2,100,000 or $0.09 per fully diluted share. While this represents a decrease from the prior year, it's important again to note the broader market challenges in the 4th quarter, the customer budget exhaustion and a notable holiday slowdown during this period. Despite these challenges, we remain resilient and focused on optimizing our operations. Adjusted EBITDA for the Q4 was $18,400,000 with the lion's share of the year's free cash flow coming in and totaling $29,100,000 Turning to our balance sheet and liquidity position.

Speaker 2

I'm pleased to report that Ranger's balance sheet strength continues to improve. We ended the year with $85,100,000 in liquidity, consisting of $69,400,000 of capacity on our revolving credit facility and $15,700,000 of cash on units. This represents a significant improvement from the previous year, underscoring our commitment to financial discipline and prudent capital management. We would call attention to what we expect will be our typical first quarter decline in cash flows, largely due to compensation commitments at the start of every year. Our total debt at the end of December was virtually 0 to reflect our commitment to maintaining the highest degree of financial flexibility to seize on opportunities in the future.

Speaker 2

Our ability to achieve these results amidst a challenging operating environment highlights the effectiveness of our strategic initiatives and underscores our commitment to creating long term value for our shareholders. In conclusion, I'd like to reiterate that despite the challenges we faced in 2023 that have continued into 2024, we remain confident in not only the resilience and strength of our business, but also the longevity of the U. S. Onshore market and Ranger's ability to provide through cycle returns in its backdrop. We will continue to focus on executing our strategic priorities, driving operational excellence and delivering value for our shareholders.

Speaker 2

Thank you for your attention. And I will now turn the call back over to the operator

Speaker 1

for the question and answer session.

Operator

And our first question comes from Luke Lamoine of Piper Sandler. Please go ahead.

Speaker 3

Hey, good morning.

Speaker 1

Good morning, Lou.

Speaker 3

Hi. Hey, good morning. Stuart, all the large operator and market consolidation should really help you guys. On the high spec, we're excited with your focus on safety relative to smaller peers. I know this doesn't kick up in a linear manner and there might be some pauses as operators kind of determine and sort out plans.

Speaker 3

But could you just speak to the change in the operator market structure and how this could benefit you probably in the back part of the year?

Speaker 1

Sure. Thanks for the question, Luke. We do think it has helped us and will continue to help us because of our focus on, as you said, maintaining equipment, training crews and on safety as well. So we do think it's going to help us. Think we're conscious that sometimes when the E and Ps consolidate 1 plus 1 doesn't equal 2, it equals 1.7.

Speaker 1

And so sometimes that could be a negative. But what we are seeing right now in the conversations we are having with the largest players, we certainly think it's going to benefit us that we think that we will get additional work and we think that it will start to shake itself out as the year progresses.

Speaker 3

Okay. And then on your share repurchases, I mean, Stuart, you kind of outlined what you did in 2023 as far as paying down debt and then you bought back about 10% of shares so far. I think with the remaining authorization you have a little over 20% of your market cap that's available. Could you just talk about and a lot of free cash flow coming this year too. Could you just talk about how aggressive you would like to

Speaker 4

be with that buyback? I mean, I know you

Speaker 3

have the goal of returning at least 25 percent of free cash flow, but you exceeded that in 'twenty three and I'm kind of guessing you'll probably exceed that this year as well?

Speaker 1

Again, thanks for the question, Luke. Certainly, we're committed to returning at least 25% of cash flow at a minimum back to shareholders. I think what we saw in 2023 and I think we will take the same stance in 2024 was, as the stock price came under pressure, we felt like it was a great buying opportunity. So our intention is to kind of take that same stance as we go forward. Again, I think that we do want to grow the company.

Speaker 1

We want to preserve capital to be able to do that. But we know that anything we do have to compete with our own shares and what we saw was the value of our own shares was incredibly attractive with no integration risk. So again, I think going forward, you could expect us to take a pretty similar stance that if we see an opportunity, we will get pretty aggressive and the Board is very supportive of that stance as well.

Operator

The next question comes from Don Crist of Johnson Rice. Please go ahead.

Speaker 5

Good morning, guys.

Speaker 1

Good morning, Dan.

Speaker 5

I wanted to ask a question on pricing. The per hour rate on the workover rigs and per stage on the wireline really kind of surprised me this quarter. Is there anything there? Is it more bundling or just not chasing kind

Speaker 1

the It's mainly not chasing unprofitable work. I think that's the first part I'd highlight. And then I would say that there is some bundling, meaning more ancillary equipment going out with some of the rigs, which tends to increase kind of the revenue the overall average revenue per hour.

Speaker 2

Yes. The other thing, Don, to probably call attention to is when you look at, I think Stuart's comments apply really strongly to high spec rigs. One of the dynamics we had in wireline, although challenged as far as a quarter, there were a few jobs that were really productive jobs. So overall activity depressed, but the jobs we had were really, really productive jobs, which I think kind of drove that stage count pricing up. I think you'll probably see that's probably not going to stay there in the Q1.

Speaker 2

We'll see how the year shakes out as kind of frackers kind of go back to work in the coming months. But I think that will you'll see that cool off here in the Q1 from a wireline pricing perspective, I think.

Speaker 5

Okay. And just two quick modeling questions for me. CapEx this year, I'm assuming with kind of flat activity, CapEx will come in a little bit from last year?

Speaker 2

A little bit. We had kind of suggested last year we were putting a little bit of dollars behind the customer contracts. There's still a few of those kind of falling through. So I think we think of it mostly as a flattish year as much as a pullback year, but sort of remains to be seen, I think, as we get into the year. Fair enough?

Speaker 5

Yes. And I'm assuming that the second and third quarters will be the highest growth quarters and highest EBITDA quarters with the first little bit light and the 4th kind of in the middle. Is that the right way to think about it as well?

Speaker 3

Yes. That's the way we're seeing

Speaker 2

it, Bob.

Speaker 1

Yes, exactly.

Speaker 5

Okay. I appreciate it. I'll turn it back.

Speaker 1

All right. Thanks, Don.

Speaker 2

Thank you.

Operator

The next question comes from Derek Podhauser of Barclays. Please go ahead.

Speaker 4

Hey, maybe just sticking on the wireline theme. Can you talk about maybe the interplay between the different services under that brand? I know you have the completions focus work, you have production focus work and then the pump down work. I know there's different margin profiles. And did that affect some of the per stage pricing that we're seeing, but just thinking about it more from those different verticals under wireline?

Speaker 1

Yes. Thanks for the question, Derek. On the 1st stage pricing, that really is just tied specifically to the plug and perf business or the completions business. So it's not really impacted by either the pump down or the production side. I think as we have kind of talked about in the past on the completion side, it's been a pretty challenging market.

Speaker 1

It remains pretty challenging. There are some, I would say, some kind of deals being shopped that might potentially help on the consolidation side. We will see if they come to fruition or not. But again, I think on the plug and perf side, we've seen the market remain pretty challenged. And truthfully, some of the E and P operators are kind of rebidding a lot of that work to see if they can lock in lower prices.

Speaker 1

And as we've again, as we've said, as a result, we're really been kind of focusing our attention more on the more resilient through cycle production type work on the wireline side.

Speaker 2

And it's probably worth mentioning, Garik, we have talked a bit in the past about shifting that focus over. I think what you saw in the Q4 and what's continued and we've talked about previously, Stuart made a comment about the North region. Remembering the North region really is the bigger business and it has a really outsized sort of weather impact. So they start to see significant declines in November and it doesn't really start to pick back up until late March. We see that phenomenon again this year.

Speaker 2

And so we do feel strongly we are going to be pursuing the pivot. I think that's that much more difficult to do in the middle of winter. So I think you had sort of an outsized effect, if you will, because you had us sort of think we're not chasing the unproductive completions work. And as we're trying to sort of pivot over to production and pump down, we're kind of doing it as we only had a couple of months sort of start at that before we really start to see some winter. So we're optimistic this year.

Speaker 2

It will probably take a little bit to get off the ground. It be fair to say we probably expect to press the results off of wireline again in Q1. But I think we really are expecting that to pick up here in

Speaker 1

Q2. Yes, for sure. I'd agree with that.

Speaker 4

And then, I mean, on the margin profile, obviously, it's bounced around quite a bit over the last few years. I mean, is there do you have a gauge on what you

Speaker 6

think kind of through

Speaker 4

cycle margins could look like for this business? I mean I know there's just been a lot of volatility, but as far as the cost addressing the cost structure, addressing the right mix of work under the wireline brand, just in order to help us gauge what we how we should think about margin profile over the next couple of years for wireline?

Speaker 1

How we think about it internally, Derek, is certainly we think it's kind of north of 15% business is what it ought to be. That's kind of how we're modeling it kind of recycle. Obviously, a little bit of work to do still to get there, but that's how we're thinking about it.

Speaker 2

And that's really a blend. I know we've probably talked offline. Production and pump down is closer to 20. Completions are arguably right now. So the other wildcard in that mix is completions is arguably 10 or some months less.

Speaker 2

But when you get high productive jobs, you can raise 10% even in completions. We're just not seeing that lately given the market dynamics. But I think to Stuart's point, our growth is to kind of get continuously above 10 every month. And then we'll be stretching as we get more and more of our footing and our foundation set on the production business. I think you'll see that.

Speaker 2

It might take us a couple of years, but I think you'll see that start to get more resilient and see that there.

Speaker 7

Got it. That's helpful.

Speaker 4

Just a final one for me. The outlook for 2024 seems to be softening quite a bit, primarily driven from the weakness in the natural gas basins. But any initial high level takes on how we should think about top line 2024 and EBITDA, just where you guys are thinking right now?

Speaker 1

I think we're thinking about a pretty similar year or 2024 being a pretty similar year in total to 2023. As I said in my earlier remarks, Q1 kind of got off to a slow start, but we do have some things in place and we are kind of optimistic on how things will kind of come together in the back half of the year. So again, I mean, I think kind of year over year it feels 2024 feels pretty similar to 2023, but again Q1 is going to be also a bit of a slow start.

Speaker 2

It's probably also worth it to mention this year. What Ranger has been able to do in pullback times, the last time we saw that in 2021, we pulled off 3 acquisitions. So I think that that's getting to be higher on our radar screen as well this year. So we'll see anybody's guess, but I think that's something that's certainly on our radar screen as well.

Operator

The next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

Speaker 6

Good morning, Stuart and Melissa.

Speaker 1

How are you? Hey, John. How are you?

Speaker 6

I am well. My first question is, how would you characterize seller expectations today just kind of given natural gas weakness and figures of more E and P consolidation and the impact on the business? Have you seen a change today versus maybe a year ago?

Speaker 1

I think we've definitely seen a change. We're taking more inbounds than we have in the past. I think we feel like the bid ask is narrowing. I'm not sure it's all the way there yet, but it does feel like it's starting to narrow.

Speaker 6

Okay. And then when you I thought the commentary in the release day and on the prepared remarks was helpful. But as you look at the difference between smaller bolt ons versus the larger deals? I mean, again, very general question, but how would you who's more realistic in their expectations and if you could just opine on that, if that makes any sense?

Speaker 1

Yes. I think what I would say is we are probably more focused on the bigger transactions than the smaller ones. And part of that, John, is that, I think on the smaller ones, unless it's really tied to a specific region that we are not in, right, so it's a geographic expansion or perhaps they have a a sort of indefensible position, I think those are interesting to us. But in general, a lot of the smaller players, we feel like we have equipment and a lot of the smaller players don't really they don't give us a lot, whereas I think we feel like with some of the bigger ones, we can really kind of continue the consolidation theme that we've been pursuing. So I think we're more focused on the bigger ones.

Speaker 1

Big one.

Speaker 6

Fair enough. And then the last for me is just on coiled tubing. I know it's not the biggest of your businesses, but just your thoughts on what you're seeing there. And then just as laterals are getting longer in the Permian, sort of separately, any difference in demand for stick pipe versus coil? I know just some thoughts would be helpful on the operations side.

Speaker 1

Yes. I'll start off on the first one on the coil. And again, the coil business for us is in the Rockies. I think what we are seeing is even there with the longer laterals, we are seeing demand for kind of again sort of more capable equipment. So we are starting to see that and we do have some investments that are planned for the year to satisfy that demand.

Speaker 1

I think if you look at on the drill out space for us in 2023, even with the slowdown in frac that kind of happened through the year, our 24 hour space or our drill out space was very, very consistent through the year. And so it's I wouldn't say it's a huge shift, but again, I think we're seeing demand hold up pretty well. It was a little slower in January, but we're kind of back off to the races on that.

Speaker 6

Okay. Thank you for including me.

Speaker 1

You bet. Thanks. Appreciate it.

Operator

The next question comes from William Kim of Presidio Asset Management. Please go ahead.

Speaker 7

Hey, Stuart and Melissa. Thank you for taking the call. I guess, it looks great that Ranger is in a great financial position to be able to repurchase shares being debt free compared to your competitors. I think your shares have been reflecting that versus the other guys. But my question relates more to the shareholder dynamics today.

Speaker 7

I know that your largest shareholder has distributed shares to their limited partners partially, but I know there's also a large chunk left. Do you have any color on what the exit strategy may be in the coming

Speaker 1

year? Sure. Thanks for the question, William. I know in the distribution that happened in the fall, that was related to End of Fund. So our shares were in 2 separate funds for that shareholder per CSO.

Speaker 1

And the first fund timed out and so that's why those shares were distributed to LPs. Beyond that, we don't have a lot of clarity on Fund II. We do know that CSL has been very supportive of the business, constructive of the business. So we don't anticipate any near term. But truthfully, I don't think we know for certain.

Speaker 1

But again, they've been pretty supportive and constructive.

Speaker 7

Got it. Would you do you think that there'd be maybe an opportunity to repurchase a large chunk of those shares? Or is that kind of not in discussion or on the table?

Speaker 2

Yes. I mean, I guess, I'll take a step at that to say, our best understanding right now is those are not available to be purchased. One thing Stuart did mention is there was some selling on the back of the distribution of Fund 1. We understood that to be some small rebalancing. So it's not our understanding at this point that those shares are available and they're interested in actually hitting the market.

Speaker 2

I think if we were to become aware that there was and there was a distribution plan or there was a need to sell further, the funds our Board member is pretty keenly aware of our desire to repurchase. We have very active dialogue around that. So we would be very interested in engaging in that discussion. As best we know now, those shares are not coming up.

Speaker 7

Got it. Thank you so much and keep up the great work.

Speaker 1

Thanks, William. Appreciate it.

Operator

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

Speaker 1

Thanks Andrea. Thanks everybody for joining the call. Thanks for your interest in Ranger. Pretty much appreciate it And I hope everyone has a great day.

Operator

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

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Earnings Conference Call
Ranger Energy Services Q4 2023
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