NPK International Inc. (NPKI) Earnings Call Transcript & Summary

Hello, everyone. I'm Corey Mergenthaler, an associate on Sean Meakim's oil services and equipment team at JPMorgan. Up next, we're happy to host a presentation with Newpark Resources, one of the largest global providers of drilling fluids to the upstream. The company has a long-standing leadership position in fluids and also offers matting solutions and wellsite construction services and industrial minerals as part of its portfolio. It's my pleasure to welcome Newpark's President and CEO, Paul Howes. Paul has served as CEO since 2006 and led the company through a significant period of growth and evolution since then. Paul's prior experience spans the defense industry, chemicals, plastics and packaging. Paul, the floor is all yours, and we can open it to Q&A at the end.

Thank you, Corey. Good morning, everyone. I'd like to welcome you to the Newpark Resources presentation. I'm Paul Howes, President and Chief Executive Officer. I appreciate the opportunity to provide an update on Newpark, including the strategic transformation that has been underway in recent years, and how these efforts have enhanced our ability to navigate through the volatile oil and gas market primarily on U.S. land. We have diversified our revenue streams, maintained a strong balance sheet and communicated a clear value proposition to our customers. That value proposition includes differentiated technology, which helps our customers reduce their total cost, while simultaneously having a positive impact on the environment. Sustainability has always been at the forefront of our business, whether through our composite mats or our water-based fluids technology. Newpark has always strived to help our customers achieve their environmental goals. Now, more than ever, it's our hope that our customers will accelerate the transition to technology that works in harmony with the environment. Moving to Slide 4. As a brief introduction, Newpark is a focused provider of manufactured product and related services, serving diversified end markets around the world. We have 2 operating segments, including Fluids Systems, which stands as the third largest global provider of drilling and completion fluid chemistry; and our Mats and Integrated Services business, which is the leading provider of composite access solutions, serving a multitude of different industries. Our Fluids Systems business contributes to the majority of our global revenues, generating $620 million in 2019. In recent years, we've expanded our fluid business geographically, including meaningful expansions into the Middle East and the Gulf of Mexico. We've also expanded our product offering into adjacent fluid chemistries, building on what we call the total fluid solution. These efforts are reducing our dependency on U.S. land drilling. Our second operating segment, Mats and Integrated Services, has been a smaller contributor to our revenues historically, but a very important contributor to our consolidated EBITDA and cash generation. Until just a few years ago, our Mats business was heavily focused on the oil and gas market. Over the past few years, our Mats business has expanded beyond the oil patch, moving aggressively into several non-E&P markets that require temporary access solutions. The most notable of these markets is the utility industry, where our matting systems are being used during the construction and maintenance of high-voltage electrical transmission and distribution lines. Our market offering includes both the sale of matting products as well as project-specific rentals and associated work site services. Our superior work surface and enhanced environmental protection are hallmarks of our technology. And as we expand into the utility space, we are finding that these customers have a particular environmental sensitivities, which we believe will create additional opportunities for us to showcase the benefits of our technology. In 2019, our Mats business generated revenues of $200 million, of which $110 million was derived from energy infrastructure and other non-E&P end markets. This end market diversification has driven a meaningful shift in our business. Now turning to Slide 5. Before getting into the details of our operating segments, I wanted to take a moment to provide an overview of our approach to ESG. This is an interesting topic for Newpark. While the focus on ESG has sharpened greatly over the past few years, the underlying tenets are simply the way we have done business at Newpark since I joined the company in 2006. Long before ESG was at the forefront of discussions, Newpark had earned a reputation among investors for our focus on providing customers with environmentally friendly technology. In the Mats business, we've been manufacturing our fully recyclable DURA-BASE matting systems for more than 20 years, helping to eliminate deforestation associated with competitive wood products, while also reducing carbon emissions associated with transportation due to the product's lower weight. Similarly, in our Fluids business, we launched Evolution, our flagship water-based drilling fluid system, more than a decade ago, providing E&P customers with an environmentally sensitive and high-performing alternative to traditional oil-based mud systems, which contain volatile organic compounds, or VOCs. We also maintain high social and ethical standards, both in terms of how we treat our global employees and suppliers as well as how we support our local communities. Evidence of these standards can be measured in a number of ways, including our outstanding safety performance, which we publish on our website. We have consistently received high marks year after year from independent proxy advisory firms from our robust governance and compensation practices, which reflect our focus on corporate governance and compliance. Each year, we strive to achieve continuous improvement in these areas through our investor outreach efforts, where we seek to engage with and solicit valuable feedback from institutional shareholders who collectively hold more than 80% of our outstanding shares. Now turning to Slide 6. Before turning to the specifics of the business level strategies, I think it's important to take a moment to discuss the impact that COVID-19 pandemic has had on our business. With both segments considered essential services, the vast majority of our employees around the world have been able to continue to support our customers. That said, the logistical restrictions and limitations associated with government-led shutdowns around the world have had a meaningful impact on commercial activity. As we highlighted on our earnings call last month, the most immediate impact was seen in the Mats business, where several customers put orders on hold due to COVID uncertainty. And as we progress through the second quarter, we are seeing an elevated impact from COVID, most notably within the EMEA region of our Fluids business, where restrictions on movements of personnel, quarantines of staff and logistical limitations within a number of countries are causing activity disruptions and project delays. Our Mats business has also experienced elevated impact from COVID in the second quarter, but in other ways. For instance, our customers in the utility markets are seeing delays in the issuance of government permits as well as supply chain and logistical restrictions, which are resulting in project delays. Fortunately, with the ongoing lifting of government-imposed restrictions across the country and around the globe, we're starting to see signs of a post-COVID recovery and are optimistic that we'll see improvements over the coming months. Now moving to Slide 7. Let me talk a bit more about our Fluids business. As I touched on earlier, we stand as the third largest provider of drilling and completion fluids chemistry in the world, behind Schlumberger and Halliburton, according to Spears & Associates. We provide our customers with a total fluid solution, including drilling, completion and stimulation chemistry. As we navigate the unprecedented collapse in the U.S. land market, it's important to put our global footprint in perspective. Through the execution of our long-term strategy, we've intentionally grown our presence outside of the U.S. land and expanded our share with international and national oil companies around the world, which now represents roughly 40% of our total Fluids revenue. Looking at our Fluids revenue geographically, contribution from U.S. land has been reduced to 43%. As we experienced in the 2015 and 2016 cycle, this geographic diversification is meaningful as we navigate the challenges posed by the current downturn. On Slide 8, I'd like to take a moment to cover our North American fluids market in a little more detail. Obviously, managing this region through the ongoing market collapse represents our greatest challenge. And while there is no feasible way to avoid operating losses in the short term, we remain committed to rightsizing [ up ] our cost structure for the much lower market expectation over the next several years. We are taking swift actions to reduce our cost structures in regions that are burning cash, while also modifying our central support groups. Year-to-date, we have reduced our U.S. Fluids workforce by nearly 40%, while also implementing furloughs, salary reductions, the suspension of 401(k) matching and a complete moratorium on noncritical capital expenditures. In addition, in light of the sharp declines in demands for oilfield products, we are leveraging our chemical blending capabilities to diversify our revenues into disinfectants and cleaning products market. Although this new revenue stream is not expected to offset the collapse of the U.S. land market, it does illustrate our flexibility as a company and provides us the opportunity to increase the plant utilization and generate a reasonable return on capital with this facility. I'd also like to highlight the meaningful growth that we've seen over the past 2 years in the Gulf of Mexico, which is illustrated in the lower bar graph. As the graph reflects, we are on pace for healthy year-over-year growth in 2020, which benefits in part from our product line expansion into completion and reservoir fluids. Our market penetration in the Gulf clearly demonstrates our ability to compete head-to-head against the largest oilfield service companies in the world and win. And with the heavy IOC concentration in the Gulf, we anticipate market activity will remain more stable relative to U.S. land for the remainder of the year. Moving to the international Fluids business on Slide 9. As I touched on earlier, our international presence has long been a key element of our strategy at Newpark, dating back to the acquisition of our Italian business unit completed nearly 20 years ago, which established our presence in the EMEA region. While not insulated from the market volatility driven by the price of oil, international markets tend to be more stable than North America as IOCs and NOCs generally continue to execute on the long-term drilling programs. So although we are facing near-term COVID-related headwinds, which are causing disruptions and delays within a number of countries, we anticipate that these COVID restrictions will subside, and our international business will remain more stable than the U.S. land market. It's also worth noting that despite all of the market headwinds we are facing, we were awarded 2 new international contracts in 2020 that are helping to provide additional stability to our international Fluids revenue. As we touched on in our last quarterly call, we were recently awarded a contract extending our supply of patented breaker technology into Saudi Arabia for the next 2 years. In addition, I'm very pleased to announce that we also recently received a multiyear contract award from Wintershall, the largest German E&P company, to provide fluids and related services in support of their onshore and offshore projects. This contract, which includes a 5-year -- I'm sorry, which includes our first ever award in the North Sea, is expected to generate roughly $15 million in total revenues over a 3-year term, with the projects scheduled to begin within the next few months. Unlike the U.S. land market, where there's a large number of competitors in the fluid space, international market has historically been served by primarily the big 3 service companies. As demonstrated by our success in the Gulf of Mexico and the EMEA region, we understand how to compete and win against the big 3. Building on these successes, we plan to remain focused on the international fluid space and particularly the key markets within the EMEA region that are expected to demonstrate greater long-term stability. Now turning our attention to the Mats and Integrated Services segment on Slide 10. As I touched on earlier, while historically representing only a small portion of our consolidated revenues, our Mats business has been the primary contributor to our consolidated earnings in recent years, and we expect this trend to continue in 2020. Although our Mats segment was originally built to service the oil patch, the business has transformed in recent years and is now serving various end markets and regions. The largest growth area in recent years has been the utility transmission and distribution sector, which represents a multibillion-dollar addressable market opportunity for Newpark. Through our market diversification efforts, 60% of our Mats revenues are now derived from non-E&P end customers. And with the energy infrastructure market remaining a high priority for us, we anticipate our Mats business will continue to become less tied to the oil and gas industry and the associated market volatility. I'd also like to take a moment to provide some specifics regarding the positive impact that our Mats business are having on our customers' ability to reduce their environmental impact, as illustrated on Slide 11. As I said earlier, we have been providing sustainable solutions to our customers long before the recent push for ESG. In fact, we've been manufacturing our DURA-BASE mats for over 20 years, which provides the market with a fully recyclable alternative to wood mats. We estimate that over this time frame, we have saved more than 360,000 old-growth trees from being cut down. How did that happen? Simply put, by replacing mats made from wood with other -- with the composite matting technology. In addition to reducing deforestation, our composite matting products are significantly lighter than wood mats, meaning that fewer trucks are required to transport the products from site to site. As a result, millions of truck miles are eliminated each year, resulting in a meaningful reduction in CO2 emissions and fewer trucks on the road causing traffic and noise pollution in local communities. These are just a few tangible ways that Newpark is helping our customers strive to achieve their ESG goals. Now moving to Slide 12. As we look across the primary end markets for our Mats business, it's important to note that our value proposition plays out consistently across all markets. It's built upon our ability to derisk and lower total project costs for our customers through improved operating efficiency, enhanced safety and reduced environmental impact. On this slide, the photos help to get a sense of the critical role that our matting systems play for our customers. As I touched on a moment ago, the non-E&P markets highlighted on the top row, and then particularly the utility T&D in the upper left, represent our largest growth opportunity and our primary focus going forward. Despite our growth -- our strong growth in recent years, our shares in these markets remain in the single-digit range, thus providing significant opportunities for continued growth. Our goal, which is similar to what we accomplished in the oil patch, is to convert the utilities industry to composite matting solutions. As we continue to advance our end-market strategies, we expect our expanding geographical reach and improving brand identity will create additional growth opportunities, which should help improve financial stability in our Mats business. Finally, let me talk for a moment about our liquidity and capital structure, as illustrated on Slide 13. At Newpark, we're always -- we've always maintained a disciplined approach to balance sheet management, carrying a modest debt load to ensure that we can successfully navigate the volatile oil and gas industry. Historically, we've consistently generated free cash flow in difficult periods, which is due in part to the countercyclical nature of our working capital investments. More specifically, during periods of growth, working capital consumes cash as we fund receivables and inventories associated with growing revenues. Conversely, working capital provides a tailwind to free cash flow generation during periods of market contraction, fueled by a reduction in working capital. As of the end of Q1, we had roughly $280 million of net working capital, which we expect to provide a tailwind to cash flow generation in the near term. In addition, it's worth noting that aside from periods of expansion in our mats rental business, our capital needs within both segments are very modest. This can be seen in the performance over the past 2 quarters, in which our net capital investments over the 6-month period totaled only $5 million. And unlike many assets traditionally used in the oilfield, like pressure pumping equipment, where capital investments are required to keep the assets running and generating revenues, our mats rental fleet requires minimal maintenance capital. As for our debt structure, we have 2 key components: $71 million of outstanding convertible bonds that are due in December of 2021; and $83 million of borrowings under our asset-based loan facility, which runs to March of 2024. As illustrated in the lower graph on Slide 13, we've taken meaningful steps to address the 2021 maturity, purchasing 29% of the outstanding bonds in the open market this year. As we look ahead, we have specific plans in place to settle the remaining $71 million balance, which includes cash generated from operations, continued repatriation of excess foreign cash, and along with variable borrowing -- available borrowing capacity under our ABL facility. As we noted in the past, it remains our intention to fund the maturity without having to access the public capital markets. And with that, I'd like to close by noting that although we've never experienced the specific set of circumstances that we're facing today, with the one-two punch of COVID-19 and the collapse of the oil and gas industry, we've been through downturns before, and we're very clear on the levers that need to be pulled. And while the actions required are difficult, we are confident that we will emerge a leaner company with a more diversified and stable revenue base, well positioned to capitalize on future market opportunities and generate consistent free cash flow for our shareholders. Thank you very much.

Okay. Great. Thank you, Paul. So it looks like we have a few minutes left for Q&A. I think I want to start on ESG. So I know ESG has been gaining momentum recently, and this is certainly nothing new for you. But I wanted to maybe hear your sense around what you're seeing from just in terms of maybe the rate of change more recently from both investors and operators in terms of accepting ESG. And maybe just as a quick follow-up, if what we're seeing right now in the current environment is having any impact primarily on the operator side?

Certainly, we're seeing more, I think, pressure from investors to be focused on ESG. I think, globally, that's the case. From our benefit and our perspective, Newpark has always been focused on providing environmentally friendly solutions. And so as we dialogue more with investors, we're seeing ESG come up in that conversation more frequently. With respect to customers, certainly, we've seen a lot of customers putting out sustainability reports. And our hope is, eventually, they'll start to trickle that down, where they're searching from their supply base for more environmentally friendly solutions.

Right. Okay. And then maybe just in terms of sort of the downturn playbook from here. So you highlighted cash generation, the balance sheet. But how do you think about some of the opportunities on the offensive side coming out of this? And if there are any areas, in particular, that's sort of shifting further away from oil and gas as maybe an option? Or sort of how you think about the other side of this downturn?

Yes. So the other side of the downturn, obviously, we're doing what's necessary to rightsize our organization and focused on regions who are burning cash and eliminating the cost in those regions. As the cycle comes out, I think we're going to be in a very good position to capitalize on growth here in U.S. land. But I also would say, internationally, in our Fluids business in the EMEA region, as you start to come out of this cycle, we think we'll see some real strength there. And then in our Mats and Integrated Services business, as soon as the COVID cloud passes, we expect there's going to be a pretty good-sized list of projects that have been delayed that will need to be done to -- for the maintenance perspective on the high-voltage transmission line. So we feel pretty good about, as the cycle turns back out, that both in the oil patch as well as in the utility sector, we'll see quite a few growth opportunities.

Great. Okay. And then maybe if you could elaborate a little more on the cost reduction side, if let's say we do end up in the sort of lower-for-longer scenario, could you maybe highlight any of the additional levers you have available should we find ourselves there?

Well, that's currently our approach right now is that we're removing costs from our system with the thought that it is going to be lower for longer. We're not going to plan on a recovery occurring in 2020, although some of the current indicators may say we'd see some uplift in the back half of this year and early into next year. We are in the process right now of rightsizing it for a much lower environment longer term.

Right. Okay. And then, additionally, maybe if you could touch on -- I know you've mentioned this in the 1Q call, but some of the other liquidity options that are available from securitizations or real estate or anything along those lines?

Yes. Certainly. And I've covered a few of those in my prepared remarks, the repatriation of excess cash from our foreign operations, probably the biggest cash generator we're going to see as we draw down working capital, both inventory and receivables. But there certainly are other options in terms of leaseback of -- sale-leaseback options on some facilities we own, et cetera. But we feel we're in a very good position to handle the debt maturity in December of 2021.

Okay. Great. And I guess maybe a little bit on sort of what you're seeing competitively. And I'm just wondering, with the downturn, or as we progress through this downturn, do you expect to see any change on sort of the bundling element, both in terms of the drilling and completions loop? But then, even when we think about folks that are able to offer the chemistry and the horsepower, if that's something that becomes a little more relevant in a downturn environment? Or if you still think sort of the current trends will continue?

I think the current trends will continue. I mean, we've been very successful in dealing and competing against the big 3 service companies that have all the full bundles, right? I think the best example of that is the fact that in 2020, in the Gulf of Mexico, we're growing significantly, right? And that's because our chemistry is truly value-added and providing, really, some pretty significant cost savings for our operators, so on a total value or total cost basis, so revenue in terms of NPT, et cetera. So I think the larger operators are still going to continue to focus on best-in-class products, and we think that's where we're uniquely positioned in the Fluids business. In our utility sector, that's different. And we are the market leader, we think, in composite access solutions. And we believe that, that position will strengthen as we move into 2021.

Great. Great. Okay. And I guess if we think about -- and I'm going to give you an opportunity to sort of touch on maybe the international or the geographic diversification here. But if we think about sort of how this downturn is shaping in comparison to the previous downturns, sort of how do you see those in comparison to the prior downturns? And then, specifically, where do you feel Newpark is positioned relative to where we've been historically?

So prior downturns, obviously, the '15, '16 cycle being the last in the oil and gas industry, we've got COVID on top of this, right? And so we're seeing a lot of demand destruction on U.S. land, the rig counts, maybe dropping as low as 250 or lower. Where we really see the opportunities in the international market, if you looked at our '15, '16 cycle performance in our EMEA region, '15 grew over '14, and '16 grew over '15, if you put currency fluctuations aside. I don't think you're going to see that strong a performance in the international regions this cycle, and that's driven predominantly by the COVID issue right now. But once COVID gets behind us, I think you'll see the -- our EMEA region bounce back quicker than the U.S. land market.

Great. Great. Okay. So it looks like we just have a minute or 2 left. Paul, is there anything else you want to make sure you got across here and some closing remarks?

No, I'm fine. I just want to thank everybody for listening in today. Thank JPMorgan. And Corey, thank you very much for the introduction and the Q&As. Have a great day.

Yes, absolutely. Absolutely. On behalf of JPMorgan energy team, thank you for joining us again this year.