NCS Multistage Holdings, Inc. (NCSM) Earnings Call Transcript & Summary

Hi, I am Corey Mergenthaler, an associate on Sean Meakim's Oil Services & Equipment team at JPMorgan. Next up, we're pleased to welcome Robert Nipper, CEO of NCS Multistage. NCS provides completion technologies primarily to the North American onshore market, who also had recent success expanding in international markets as well. Robert co-founded NCS in 2006 and holds a number of patents central to NCS Technologies. Prior to co-founding NCS over 10 years ago, Robert spent almost 20 years with Tri-State Oil Tools and Baker Hughes. Robert, thanks again for being here. And now I'll hand it over to you.

Thank you, Corey. Good afternoon, and thanks to everyone for joining the webcast this afternoon. We're starting on Slide #4, with reference to deck. Over time, NCS has assembled a portfolio of highly differentiated products and services that help our customers operate more efficiently and improve their financial returns. We've been able to leverage that portfolio of products and services to improve our market share across multiple geographies. And we have a capital-light business model that has allowed us to consistently generate free cash flow. On Slide #5, we'll talk a little bit about our leadership positions in these products and services that we have in our portfolio. Pinpoint stimulation, we're a global leader in pinpoint stimulation. We developed that technology and introduced it into the marketplace. We're an innovator in casing buoyancy solutions, which help our customers save money by being able to run their casing strings into their wells faster. We're the leader in tracer diagnostics in North America, and we're one of the top 5 providers of composite frac plugs in the U.S. Composite frac plugs is a consumable item that is used in about 95% places in the U.S. Slide #6. We've been able to leverage that suite of technologies that we've developed to be able to outperform the markets. If you can see on the right side of the slide, in 2019 versus 2018, we outperformed the market in all the geographies that we work in. And the reason that we were able to do that is because we believe that the technology in our products and services is unique, and it is highly differentiated and it does offer savings for our customers. And technologies such as our next-generation sliding sleeves, our PurpleSeal Express, a composite plug system and then tracers for multiple applications. We've been able to, over the last 1.5 years, successfully cross-train our entire sales force to be able to sell all the products and services that we offer, and we continue to grow our international presence. Slide #7, we speak to our ability to generate free cash flow from our capital-light business model. In 2019, we generated $12.9 million of free cash flow and used that to reduce our debt, which allowed us to end up with $2.2 million of net debt at the end of the first quarter. On Slide #8, we talk about pinpoint stimulation. What is that? So pinpoint stimulation is a completions technique that allows us to consistently place the fracs that were designed in the place in the wellbore that the customer would like them. That type of completion system can often offer our customers ability to increase production or reduce their operating costs. On Slide #9, this shows how we do pinpoint stimulation. So we achieve revenue in 2 different ways. We have a consumable item, which is, we call it the Innovus Casing-Installed MultiCycle Sleeve that you see at the top of the page. So these sleeves are sold to the customers and delivered to the location where the drilling rig is completing the well -- completely drilling a well. The customer purchases one sliding sleeve for every frac stage that they want to put in the well. The frac sleeves are installed in a casing that the customer runs in and they're submitted in the wellbore. So they are consumable. You see the bottom of the page, we have our Downhole Frac-Isolation Assembly. Once the well is ready to be completed, we send a technician to the well side with a downhole isolation assembly. That is assembled on to a third-party's coiled tubing unit and run into the wellbore. And it's used to go to the bottom of the well and to locate, set in and open each sleeve, place the frac and then close the sleeve after the frac is done. Then we move up to the next sleeve, and we do that all over again. So it allows the customer near continuous pumping, so it reduces downtime on location. Once all the sleeves have been fracked, we can go back to the bottom of the well and reopen all the sleeves and wells for internal production. Slide #10, talk about our repeat precision joint venture. So this is a joint venture that NCS and our partner owns, and it's primarily used to manufacture and sell directly to the end user, to the E&P companies frac plugs, composite frac plugs, wireline adapter kits and disposable setting tools. So we sell these products either separately or together in what we call the PurpleSeal Express, which is a complete assembly, which includes everything that need -- is required to be able to set a bridge plug in the wellbore, and it's economical and it's disposable. So once the plug has been set and the wireline is removed from the wellbore, everything that was used to run in with the plug is just tossed away. On Slide #11, tracer diagnostics. So we are the leader of tracer diagnostics in the North American market. We have a full suite of different types of chemical and radioactive tracers. We're able to identify oil, formation water, frac fluid, and we use the radioactive tracers as well. We have a very diverse customer base in the U.S. and Canada as well as in Argentina and a growing international business for our tracer diagnostics business. Slide #12, we talk about some of the use cases for tracers and what our customers actually do with tracers. So it's not so much the tracers, it's the information that we are able to obtain by using the tracers. So the customers can use that information to understand well spacing. They understand the effects of inter-well reactions, frac hits so that they can determine the best spacing in different types of formations for a well. You can also use tracers to understand what parts of the wellbore are contributing or not contributing. So we can tell exactly which stages are flowing water and which stages are flowing oil or which stages are following gas -- natural gas. We also use tracers -- radioactive tracers to understand cluster efficiency. So how many clusters in the stage actually were treated during that frac stage. We use tracers to understand if the well is producing -- if the well is not producing as it was expected, when it's turned on to production, customers generally will not know what the reason is. They don't know if maybe there's a blockage in the wellbore or if maybe the formation just was not what they expected or maybe there was a completions problem. So really the only thing that they can do is go in and attempt to clean out the well and make sure there's not an obstruction in place. And that can cost $400,000, $500,000. With our tracers, we can actually tell if there's an obstruction in the wellbore or not and can cause the customer not to have to have a costly intervention. And then finally, customers use tracers to understand waterflood efficiency. So they can use tracers to see how the waterfloods are moving from the injector wells to the producing wells. Slide #13, we talk about our well construction products. It's anchored by what we call AirLock, which is a casing buoyancy system. We are a world leader with casing buoyancy. We developed the technology and introduced it into the marketplace. And casing buoyancy is used for 2 things: one, it aids in being able to run the casing into the wellbore when the well is constructed and the casing system is cemented in place. This allows the casing to be run faster than without the casing buoyancy system. But it also allows for longer laterals so that we can run longer lengths of casing in long laterals, where without casing buoyancy, one might not be able to do that. And what we've been able to recently do is be successful carrying our AirLocks with our liner hangers assemblies and our pressure-activated toe initiation sleeves. So this allows us to sell more products into an individual well. Slide #14, we talk about secondary recovery and EOR solutions. So we have 2 products that we've developed over the last couple of years for enhanced oil recovery. Terrus is a system that's used to basically put a choke in the well when it's time for water injection. So we would run a sleeve in that can be opened and fracked through and then move to a position to be able to produce the hydrocarbons. In the future, when the customer is ready to go to waterflood in that well, they can simply make an intervention into the wellbore and move the sleeve to a position that places a choke, if you will, across the port in the sleeve. So that allows the customer to pump the fluid into the wellbore and get an equal amount of fluid going through every sleeve in the -- for the water injection profile. That is -- it's a very good solution, but it does require an intervention to move positions of the sleeves. So we developed a Qumulus system, which does something very similar. It best allows our customers to compartmentalize their well. So maybe they have a lateral that's a mile long, and then they break it up into 8 different sections. And each section is isolated, and it has a sleeve that is remotely operated from surface, so a single conductor -- electric conductor going down in the well and interfaced into each one of the sleeves in the casing string. As the customer is injecting, they're able to see in real-time what the pressure and temperature is in each one of those compartments. Now that information is transmitted to surface through our data acquisition unit, and then it's moved into the cloud and where a customer can log in from their laptop or their computer or their desktop, in real time, watch the pressure and temperature and understand how their interactions with the well and being able to open and close those sleeves or open them partly and direct water or injection fluid in different places of well, how that affects the injection profile. So in real time, they're able to actually adjust the injection profile in the wells and future applications of the system will include the ability to be able to do the same thing in the producing well and not just the injection well. On Slide #15, you can see that in 2016, we generated about $100 million of revenue and 90% of that revenue came from fracturing systems and about 10% of revenue was in well construction. In 2019, we generated twice as much revenue and we've generated with 4 different product lines with fracturing services being only 45% of the total and repeat precision being 25%. So all of our product categories generated more than 15% or at least 15% of our revenues. Going to Slide #17, talk a little bit about Q1, as if anyone cares. We generated about $54.5 million in revenue, which resulted in $9.2 million of EBITDA, 17% margin. We had a cash balance of $15.5 million at the end of the quarter with total debt of $17.7 million and resulted in about $3.2 million of free cash flow for the quarter. On Slide #18, you can see the breakdown of our revenues by geographies. So in the U.S., we had about 48% of the revenue. Canada was 44% and then 8% internationally. And our product and service revenue was split about 70% of products and 30% revenue -- or the service. In 2016, from a geographical standpoint, we generated about 70% of our revenue in Canada and 23% in the U.S. and 6% international. Moving to the last trailing months and at the end of March, we generated 50% of our revenue in the U.S., with 42% in Canada and growing at 8% in international markets. Slide 20, I'll just direct you to the lower right-hand portion of the slide. So I'll talk about our capital-light business model, which allows us to generate free cash flow throughout the cycle. So as you can see, with the exception of 2018, we've been able to increase free cash flow every year. In 2018, we were negative $1.4 million in cash flow. However, we had some nonrecurring projects. We implemented an ERP system, and we finished the construction on our technology center in Calgary, and that was about $11 million. So we have the ability to generate throughout the cycles, free cash flow. Just summing up, we have assembled a portfolio of highly differentiated products, which we've been able to leverage, to be able to increase our market shares throughout multiple geographies around the world. And our strong balance sheet and capital light business model has allowed us to generate free cash flow and will allow us to continue to generate free cash flow as we come out of the cycles that we're in. So that concludes the presentation for today.

Okay. Great. Thank you for that, Robert. So I have a few questions for you here. If maybe first, we take a look at one of the more immediate issues on hand, and that's COVID-19. So if you can talk a little bit to some of the impacts you've experienced thus far, both in terms of any sort of activity limitations or anything on the supply chain and how you've been able to address those?

Sure. So I'll start from the macro impacts, we have been impacted as a company, but we've been able to deal with it. First, I'd say, in Mexico, we had to close both of our manufacturing facilities for some period of time. We've got one that's fully open now and another one that's about to open, but we were down for about a month. However, we did anticipate that happening, and we ramped up production over about a 3-week period prior to being shut down in Mexico. So we're able to build enough inventory to make it through a lot longer than we were actually shut down. Some of our tracer chemicals come from China. So China was closed for some period of time, and we were not able to get orders of tracers out of China. However, we do keep enough of an inventory surplus that we were able to get through without any problems there, without any disruption to all of our customers. In our manufacturing facility in Houston, we did close for about 2 weeks. We had multiple cases of COVID-19 employees. Fortunately, there were none that got sick. They tested positive. I think one had a temperature for -- a fever for about 4 hours. So luckily, no one got sick, but as a caution, we've closed the facility. We hired third parties to come in and clean up and disinfect the facility. So we're back up and operational there now. So we have had a few issues that we had to deal with as a result of the COVID pandemic, but we've -- it didn't really affect our business.

Right. Okay. And I know visibility has been a challenge, but just curious what you're seeing currently trends in Canada and the United States and sort of what your expectations are there on the completions front, the remainder of the year?

Yes. At a high level, I'll tell you that we don't have a crystal ball, but the way we're thinking about it is that we hope that we bottomed out. We planned for something a little bit worse than what we've seen as the bottom so far. And we're -- the cost reduction efforts that we're taking, that we've taken and that we'll continue to take, they're focused around something a little bit worse than where we are right now. It sort of appears that maybe -- we might have bottomed out, and we may grow. But if we do grow, it's going to be at a slow rate, I think, in terms of completions activity and drilling activity. I don't expect any significant improvement at all this year, either in Canada or in the U.S., except for the seasonal improvements that we will see in Canada toward the end of the year. Going into 2021, I mean, I think it's more of the same, a pretty depressed first half of the year. Maybe start to see a little bit of improvement later in the year. But those are the things we're planning for, something that's a more grim outlook. That's what we sized the business for. And the nice thing about our business is that we can flex it pretty fast, 3x over the time that since I started NCS, we've been able to double the size of the business year-on-year. So we know how to take down costs, and we know how to bring it back when the time is right.

Great. Maybe just a follow-up there. So it's been a difficult stretch with some difficult decisions that needed to be made. If you could maybe just highlight some of those cost reduction efforts and again, maybe how you start to think about positioning for an eventual recovery?

Yes. So I think, at least for us, we think about the eventual recovery as we're thinking about how to size the business going forward. So we have made significant cuts. There's more cost-cutting that probably will have to occur. But the way we try to lead the business is a way that we can flex back up quickly. So we take people that are in certain positions and there are certain -- the business is about the people. And so there's -- we try to keep our whole people. They may be doing a different role, but they are still employed. Hence, we try to make sure that even though we may be slowing down some product deliveries in some countries, we want to make sure that we maintain at least the presence so that we know when the market is coming back. So we continue its headcount productions. We're looking at every dollar that we're spending on anything in the company and looking for value in it, see if it needs to continue, and we'll continue doing that. And just like with every downturn that I've been through, we find there's things that we're doing that we don't need to do in the future. They cost money. And we're finding them now, and we'll find more. And it will help us become more efficient coming out the other side, but it's still fun getting there.

Right. Right. So I was just curious to get a sense for how -- if operators have changed their thinking at all around technology at a time like this. And so specifically, I'm thinking about maybe the tracers product line, but even just the broader portfolio in general, if folks start to think about sort of the nice to have products versus the core products, and if you've seen any change there?

Yes. So our tracers business certainly has been impacted through the downturn. There is some part of that business that is discretionary spend for the customers. So it would go away when the customers are tightening up budgets, but there's also the part that where the science is important to a development. And I would say that new development, the curtailment of new developments is probably impacting that business more than just the discretionary spend in the budget. As an example, if customers continue to step out into new areas where they're going to do pad completions, they need that information that they get from tracers. I talked about the wellbore clearance benefit from using tracers, I mean, that's real money savings for customers. So there are applications for tracers where customers need tracers, they add value directly. But certainly, there is some discretionary spend there. Technology, in general, the cost for our customers around technology is, I think, some people think about technology wrong, not necessarily our customers, but customers don't try technology just to try technology. Technology is solving a problem of some sort. And if there's value in the solving of that problem, the customers will adopt technology. Some customers are less likely to be the first ones, but there's always customers out there that will be the first ones if you're trying to solve a problem that can help them. So as we think about our technology road maps and what we're working on in engineering and research and development, we have to think about what problems are we solving, and are they significant enough for customers to want to use it. A great example is our -- the 2 EOR products that I talked about earlier. In this market, there's not a lot of application for that type of technology because waterfloods are expensive, and those are some of the first wells that are not completed or they get shut in. But as prices begin to recover, that type of technology is important in those types of developments. So it's really about -- if your technology adds value and how quickly the customer can actually seek benefit from it, that's how it get adopted.

Great. Great. Okay. That was very helpful. And so I want to move on maybe to the pricing side. So we saw the headlines initially about operators asking for something in the 20% to 30% range. You also had a lot of volume coming out as well. And so I'm just curious how some of those pricing conversations have evolved through the quarter and if you think they're going to persist through the rest of the year?

Well, I think the conversations will persist. It certainly has slowed down. And from talking to some of my counterparts, I'm hearing a pretty consistent message that we're all going back to the customers and saying, you got all of it already. But what we've been able to do because we have -- we continue to introduce new products into the marketplace. We use those conversations to talk about how we can become more efficient and pass on some of the savings from being more efficient for our customers. As an example, if we can package together the entire shoe track or the wellbore, so as to supply the float equipment, the toe valve, the casing buoyancy system and the liner hanger, we can help the customers a little bit with price and grow our market share. So we're using those conversations to try to help continue to grow our business in certain areas.

Okay. Great. Maybe a follow-up. I know there had been a focus sort of pulling that cross-selling function that had worked very well in Canada sort of pulling that into the United States as well. If maybe you could just talk about how that's worked so far?

It's proceeding just as it did in Canada. So we're about a year ahead in Canada, and it's going very, very well there. In the U.S., we're seeing success. We were starting to see quite a bit of success before the downturn, but we're still having conversations with customers albeit it's on phone and over soon, but I'm very optimistic about when we get some activity coming back in about that project.

Okay. And so maybe shifting gears a little bit to focus on the international side. And so I just want to get your sense on what you're seeing in some of the areas currently, if there have been impacts in North Sea from COVID or something like Argentina, that's always been sort of challenged lately, just what you're seeing currently?

Sure. So it's better. I'll start with Argentina. So Argentina did close the country down. So we weren't able to move people back and forth. And in fact, the operations that we were on, we were on 2 separate operations in Argentina when they shut the country down and they just stopped those operations at the frac stages we were on. So we were down for approximately a month in Argentina. I believe it was last week that we restarted operations there. In the North Sea, that was probably one of the first places that we were operating that got impacted significantly, well, other than China, and the challenges we had there, we move U.S. workers to Norway to do jobs. We take Canadian workers to Norway. And at one time, the platform we were working on was shut completely down because there was a confirmed case of COVID on the platform. So our personnel came out, they were quarantined for 2 weeks, then they were allowed to leave the country. And they were quarantined for another 2 weeks when they got into Canada or into the U.S. and we had a couple of hitches where we had that issue. Norway did close -- they closed the borders, and we weren't allowed to travel in for just a very few days. Our customer there was able to work with the government and get the ability to let us win our working back and forth. So now it's not back to normal, but we're not -- we don't have the 2-week periods that we had before. We still have a quarantine period, but it's not 2 weeks and so it's getting better. And then finally, China, we were not able to go back and forth in China for some period of time, but that's opening back up again now. So I would say places that we were operating outside in a couple of countries in the Mid East and that we're back to being wholly operational.

Okay. And so maybe if we move past COVID, which I know is a bit of a leap here, but if we move past COVID, what are some of the regions that you're the most excited about from a demand perspective, both on the fracturing side and tracers and sort of if there's any competitive landscape advantage there as well?

Yes. I'm just excited about moving past COVID and getting some demand back in the market. But where I would see us coming back the quickest, I think, the U.S. will come back slow and steady. And I am excited about the U.S. in that we do have this new bundling project that really hadn't gotten started great before activity started to decline. So I'm really looking forward to being able to push that out in the market in the U.S. as well as some other new products that we've developed that haven't come out yet, but they will -- they should be out at the time things start to improve in the U.S. I see Canada is improving, but I think we'll have potentially an okay winter season this year. But coming out in the next 1.5 years to 2 years, hopefully, you can see some improvement in Canadian market as we're working on some of the issues with pipeline capacity. Probably the most excited I am about anything is international opportunities. And there's a number of them. Now one of the largest opportunities for us is Norway now. We do have an ongoing project for a customer there under contract. That project is going very well. Significant amounts of savings that they're realizing by using our technology. I mean, just as an example, it takes them using their provisional technology, 2 to 3 days to complete a single frac stage. Well, with our technology, we're able to do it in hours and not days. And so what that's done is it's opened up more areas that are now -- they compete for the capital dollars where they couldn't compete before, and it's been opening up new -- or it is already opening up new developments. And the other customers will see -- or seeing what Aker BP is doing, and it's generated a lot of interest for them. So we're having conversations about taking this technology and applying it to other areas of North Sea. And we're also having conversations about how to modify this technology to work in some different types of areas that we're seeing. We're seeing -- we're getting job awards in places in the Middle East and in Kazakhstan and some of these opportunities, if they go into development, they could be substantial. And finally, in Saudi Arabia and some of the other Middle East countries, where we're finally starting to get some traction and some commitments. So and it's with single products in most places. So we have an opportunity to bring in some of the other products that we have once those relationships develop. So aside from the near term, which is 1- to 2-year outlook, I'm pretty excited about where the business is going.

Great. So that about wraps it up. Robert, before we close out, do you have any final remarks that you want to add?

Just thank you guys for giving us opportunity to present today and stay safe.

Great. Thank you. And on behalf of the JPMorgan Energy team, thanks again for joining us this year.

Thank you.