Ranger Energy Services, Inc. (RNGR) Earnings Call Transcript & Summary

Good morning, and welcome to the Ranger Energy Services to outline the Basic asset acquisition conference call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Stuart Bodden, Chief Executive Officer. Please go ahead.

Thank you, operator. Good morning, everyone, and thanks for joining us for the Ranger Energy Services conference call to outline the Basic asset acquisition. My name is Stuart Bodden, I'm Ranger's new President and CEO. I'm excited to be here, and I look forward to interacting with you over the coming months and quarters. I'm joined today by our CFO, Brandon Blossman, and we are here today to outline in more detail the key elements of our recently closed transaction with Basic and the related equity raise. Before we begin, I would like to quickly welcome the more than 700 Basic field personnel managers and administrative staff that have recently joined the Ranger family. In addition to assets, the Basic transaction has given Ranger access to a large number of very talented employees. We are glad that many have decided to join us. Also, I would like to express my sincere thanks and appreciation to the Ranger team, who have worked tirelessly to lay the foundation for a successful integration. What they have accomplished over the last 2 weeks has been nothing short of amazing. It's an incredibly exciting time at Ranger. We've completed 3 significant transactions over the last several months, which include the Patriot, PerfX and Basic asset acquisitions. These transactions have positioned the company for meaningful growth and cash flow generation in the quarters and years ahead. We posted a few slides on the Ranger website that explained the Basic transaction, and our intention is to go through those slides and then open it up for any questions you might have. Beginning on what is Page 4 in the deck. I would like to talk about Ranger's strategic intent and several key elements of our strategy. You will notice, this is very consistent with the strategic direction of Ranger over the last several years. Our goal, simply put, is to build the leading completions and production-oriented service company that generates sustainable cash flow through cycle. We believe having exposure to both production and completions will enable Ranger to benefit from increases in CapEx-related completions activity while also providing consistent OpEx-related production work. There are 3 supporting elements to our strategy: first, to create leading positions in selected basins to promote in-basin scale. Our goal is to be the #1 or #2 player in the basins and business lines in which we compete; the second is to build efficient field operations and back-office functions to cost-effectively deliver world-class customer service. In onshore U.S. oilfield services, one cannot afford to be anything but ruthlessly efficient. For Ranger, that means focusing on what matters, such as customer service, and eliminating what doesn't. We will also leverage technology to streamline processes and maximize efficiency; the third element of our strategy is to maintain a conservative balance sheet to promote financial resilience and enable opportunistic M&A. Starting with a clean, simple balance sheet, allows the flexibility to be able to move quickly when strategic opportunities arise. Also, we feel it is imperative that we remain financially resilient, the cost and distraction of financial distress, as we all know, can be debilitating. The Basic transaction that we are talking about today is a perfect example of rec of Ranger executing its strategy. In a very short period of time, Ranger was able to diligence this transaction and raise more than enough capital to finance it. It's very unusual for a public company to be involved as a buyer in a Chapter 11 Section 363 auction, but we are quite pleased with the results. So moving to Page 5 to talk a little bit about the transaction itself. On the assets that we purchased, Ranger has acquired from Basic Energy Services, Inc. substantially all of its assets, other than those related to California and the Water Logistics business. This also includes many legacy C&J assets. It includes well service facilities in Texas, New Mexico, Oklahoma and North Dakota, and it includes assets associated with well servicing, P&A, coiled tubing, cementing, rental and fishing tools and wireline assets. The projected 2022 revenue associated with these assets is approximately $162 million. And including synergies, EBITDA of approximately $30 million. The transaction also includes an estimated of $15 million or more in excess assets, including real estate, light-duty vehicles, tractors and rig components that we can sell to offset the purchase price. We paid $36.65 million in cash in a competitive process. To pay for it, we issued $42 million of newly -- or of a new Series A convertible preferred stock that will convert into 6 million shares of Class A common shares, which we expect to be fully registered by mid-December. On Page 6, just a few highlights of the transaction. In the upper left net purchase price, so net of asset sales, of $15 million. And as I said, we think that number could be potentially higher. That would suggest $22 million of net -- of a purchase price, net of asset sales. That's an implied purchase price of $182,000 per active rig compared with a new build value of $1.25 million. This ignores the balance of rigs in the Basic fleet that have mast height greater than 102 feet that aren't currently working. We think we got a very attractive multiple on this. So based on our projections, including synergies, that would suggest a 1.2x EBITDA multiple after asset sales that would drop to 0.7. Finally, we've improved our liquidity position. We upsized our revolving credit facility, and we refinanced our existing term debt. With that, I'll turn it over to Brandon to discuss in more detail the improvements to our capital structure.

Thank you, Stuart, and I am absolutely excited to talk about all of the cleanup that we were able to do in conjunction or alongside of this particular acquisition. So these are things that were long-standing goals of the organization. And again, really appreciate the fact that we were able to get it done while we were doing quite a heavy lift on a lot of other things related to Basic. So here we go. Big picture here. The goal is to streamline, simplify and have a balance sheet that is explainable and in 1 sentence. That isn't exactly the case now or wasn't before this transaction. Hopefully, as we move forward, that will be the case. So I'm going to go down the bullet list of what we actually got done here. We did the equity raise, as Stuart noted, $42 million, which overequitized this deal by a bit. I'll give you some more detail in a second on that. We converted all of our Class B shares to Class A shares. So we have a single share class once we get rid of the preferreds, and I'll talk about that again in a second. We terminated our tax receivable agreement. This was an IPO, private equity sponsor legacy agreement that has not come up very much in conversations with analysts or investors, largely because we have not had any taxable cash tax obligations to date. That would change as we move forward. Again, I'll talk about that in some more detail. We pushed our revolving credit facility maturity out to late 2025. I'll note that we were inside the 12-month window on the expiration of our current revolving credit facility. So that is a nice add to push that maturity out 4 years from today. We refinanced the small equipment note that we had on our balance sheet. And then incremental to that, we added a $15 million note linked to excess asset sales. And so those are all the bullets. Those are all the things we got done in the last month or so. Let's talk about the details here. So the equity raise. So we were very pleased to have more than enough interest in placing incremental range or equity. We did choose to slightly over equitize the purchase price. [Technical Difficulty]

This is the operator. I currently do not hear the speaker line right now.

The obligation on our side is to turn that into common stock as soon as we can get that fully registered. And that process is underway. Just a side note here that we did not have a current shelf registration, which is what required us to produce this particular type of equity, this particular structure. But again, we will take care of all the administrative pieces that are necessary to get this all registered as Class A common. It converts on a one-one basis and it will be 6 million shares incremental to our current share count, and that is as simple as you can get. Again, the process to get there is a little challenging, but the end result will be as simple as possible. We had a bifurcated share structure at IPO, again, largely associated with our private equity sponsor at the IPO. So he had B shares, B units and a Class A common. We are classing all of that into Class A common. So there will be no more B shares as we move forward from this point in time. Associated with those Class B units was a tax receivable agreement between Ranger and the Class B shareholders, that tax receivable agreement had us paying 85% of our cash tax obligation going forward back to the Class B shareholders. Fairly complex agreement, the calculations on the value also very complex. Well, let me just take it that at face value. The only place that I can point to you in public disclosures outside of the S-1, which describes this in detail, is our 10-K every year, discloses the tax receivable agreement and its economic implications. I'll note that on the 2020 10-K, we suggested or we calculated the early termination value of this particular agreement at $10 million. That is tied 1:1 to our stock price. At today's stock price, that early termination value would be well north of $20 million. So the ultimate obligation here was quite sizable, and we satisfied that obligation and terminated this agreement for just under 400,000 shares of stock. So that will also increase our cash-based share count by, again, a little bit less than 400,000, but we avoid a very ugly, I would say, technical term, ugly obligation as we move to a cash taxpayer in future periods. So that is probably a lengthy conversation around B to As and the TRA. I'll move on to the revolver extension. This is pretty straightforward. We termed out for another 4 years. moving from a different provider. This is a sole source provider for the revolver as opposed to a syndicated deal. The negative and probably the only negative here is that the interest rate is up from L plus 2 to L plus 5. But the good news is that we got this extension done in a fairly challenging oilfield service credit environment. So there should be no incremental concerns or worries about that. The size of the revolver is actually the same as our outgoing revolver at a $50 million base with a $25 million accordion feature if we do need it. we don't actually anticipate meeting it today given our current liquidity position in our forecast, but it is very available for us if we do need it. On the Term Loan A, that is a refi and extension of our existing Encina term loan. We talk about that every quarter. That was originally a $40 million piece of credit. We have paid that down to $10 million, and we are refinancing it with a $12.5 million piece of paper. The amortization schedule changes quite dramatically from a $10 million a year amortization in the old piece of paper to a $2.5 million amortization schedule with this new one. Interest rate stays the same at L plus 8. And then finally, it's a little bit more challenging to describe, but we have a Term Loan B that's a $15 million piece of paper. That cash was funded at the close of the Basic transaction, and it is tied to our projected expected asset sales and the excess assets that Stuart referred to that are coming with this Basic transaction. Those are assets in excess of what we're currently modeling in terms of what we need to run the business as we talk about the time to go forward projections. That is a 12-month piece of paper, it's expensive at L plus 12%, but we expect to have that easily fully paid off by the end of that 12-month term. And I will note that we have actually inked a couple of deals already to start paying that down in terms of excess asset sales. So that's it for my comments on the balance sheet. I hand it back over to Stuart.

All right. Thanks, Brandon -- thanks, Brandon. I appreciate that. Again, we're very pleased with the transaction, both the purchase price and also what we were able to do to streamline the capital structure. And this concludes our prepared remarks, and we'll open it up for Q&A.

[Operator Instructions] The first question comes from John Daniel of Simmons.

A couple of -- Guys, congratulations on the deal. It sounds very attractive on all the metrics you put out. I've got a couple of questions tied to this and then one that's sort of business related. Stuart, I think you mentioned a desire is to be sort of #1 or #2 market position on the businesses that are the areas that you operate at? I think that's what you said. If I heard that correctly, does that apply to all of your product lines, the wireline and service? And just speak to us about what the next deal might be and the timing if you could?

Sure, John. I really think that the point of the comment is what I don't think we want to be as Ranger is to have locations scattered all over the U.S. I'm a firm believer in having meaningful positions in the basins you operate. So that's really the intention of that comment.

Fair enough. On the asset sales, the -- and I don't think you can answer this, but are there any rigs contemplated in that? Or is it sort of noncore stock?

I see that question.

Yes. So I'll start and Brandon can chime in. So obviously, there are noncore assets that don't include rigs that would be a part of that. I think on the rig side, our intention is to, as we go through the fleet of rigs, there are obviously parts. We build some inventory, spare parts inventory off those rigs. We think a lot of them have usable engine cores and transmission cores, which we'll take out. But I think importantly, we have no intention of selling working rigs or rigs that could be very easily brought back into service into the market. As a stand, we would rather cut those rigs up and put them back into the market.

Okay. Good. Well, then that was a great answer, by the way. All right. The last one, if you don't mind, and I know we're -- the quarter is not over, but can you just opine a little bit about how that quarter played out, just what you're seeing from an activity standpoint? Just any market color would be appreciated.

Yes. So I guess I'll give this blanket statement that we're really not planning on much the way of third quarter slide back. But I think the third quarter has played out pretty much as expected. The big heavy lift in the third quarter, and that obviously continues today and will continue for the foreseeable future is getting price increases. So that has been across the board, every service line, every customer has been talking -- we've been in dialogue with. And now as we sit here today, including the Basic assets and the crews and the rigs in dialogue with those customers about what the trajectory of price increases looks like. I'll say, on the wireline side, we've been successful. We continue to push pricing there. Even with some success on the wireline side, there's still a lot of room to move up. A lot of ways to go just for the industry in general. And as we talked about in the second quarter, on the rig side of the business, it's better. It didn't trough as hard. It came back faster than wireline. But again, to heal the industry, there is still quite a ways to go. And I think that's the biggest variable as we talked about the second -- sorry, the third quarter and moving into the fourth quarter. And just to fully round out, John, I think you probably talked about -- asked about other asset sales. So specifically about the rigs -- But when we talked about the asset sales broadly with this Basic portfolio, we'll note that we acquired 25 owned service locations, and you can double check that and to Stuart's comments about we don't intend to operate dozens and dozens of individual locations. So there's a lot of operating in this portfolio. And then there's a lot of light-duty vehicles and over road tractors that are accessed to how we are planning on running this business. So those are very fungible assets that can move into other markets and easily sellable.

Our next question comes from John Fichthorn of Dialectic Capital.

Congratulations on the deal. If you would, could you talk about what is priced in to kind of your outlook? And what some of the upsides are either in terms of revenue synergies or expense synergies, pricing opportunities, whatever it might be as you look forward, things that -- things that you'll be shooting for that either are or aren't in your guidance?

Yes, right. John, I'll start, and I'll kind of turn it over to Brandon as well. So I would start at the high level, I think on asset sales. We mentioned $15 million. We do think that there is some upside to that as well. As Brandon mentioned, there's a huge -- real property portfolio, and there's a lot of properties that we don't intend to use going forward. So I think that's 1 thing. And again, there's a large fleet that really hasn't been rationalized. So asset sales would be one. On pricing, what I would say is that, in general, if Basic had an MSA with a company and Ranger did. Because this is an asset sale, we are now running under the Ranger MSAs and also the Ranger price books. Generally, the Ranger of pricing was better than Basic pricing. Obviously, a lot of customer conversations about that. But we do think that this is just a sector that just needs to be healthy and pricing needs to reflect that like for us to earn a fair rate of return. So I think there is some pricing upside as well. I'll let you kind of talk about sort of the number of rigs and...

Yes. John, this is Brandon. So relative to the very skinny forecast that we gave, I'll note that I think we all believe that, that is a conservative forecast. So relative to the assumptions underneath that number, we certainly have pricing upside. We may be realizing that pricing upside already to Stuart's point, that we're moving customers over to our price book when we had overlapping customers. We should be able to cleanly beat the cost expectations embedded in that. I will note that for at least a quarter and maybe 2 quarters, we will be running more costs than we expect on a steady-state run rate. And that will all be associated with essentially standing up north of 700, almost 800 new field employees. We're moving over to our systems day 1. So October 1, we were running the Basic assets on our systems and processes. So that was quite a heavy lift. We will have some incremental support expense associated with that heavy lift, but then again, we'll move back to our normal run rate in our systems and processes and the people associated with that over time. It may be a quarter or maybe 2 quarters. So we think that we'll have upside on the expense. And then I'll note that, that forecast largely just includes running the Basic service rigs. We have several of our service lines that we have stood up and are running today, and we will evaluate the profitability of those service lines, the incremental to the high-spec rig business. But early indications are that those are all very nice service lines. They have, in some cases, recently stood back up and are showing positive field level and location level margins that we think we can even do better with on a go-forward basis. But those were not modeled in the forecast that we're presenting here today, so that would be all incremental. So revenue, top line rates. Expenses, lower than we expect in these incremental service lines that we -- when we first cut this did not think that we'd be running and has subsequently at least decided to evaluate them on a go-forward basis.

That's great. Is this kind of like you guys are at scale? Or are there more opportunities out there, you think, for M&A or similar type purchases?

Yes. No. So I guess, First, on the scale part, we are now currently the largest active operator of well servicing rigs. Just to put a number on it, I think as of this morning, we have across the Basic and Ranger fleet, 176 well servicing rigs that are active. So we are quite sizable. That said, there are obviously opportunities coming down the pipe. I think there are some processes that we are aware of that are kicking off that we are told that those sellers would like to finish by end of the year. So there's definitely a step more coming.

Great. And my last question, I'll get back in line, is if you guys hit this model or do better, there's going to be sizable free cash flow. What is the general philosophy these days in terms of what you might do with said free cash flow, either dividends, share buybacks, reinvestment? What are your thoughts?

Yes. So the first thing, and I think kind of alluded to my early comments was if there is any kind of debt drawn, our intention would be to pay that off. We do intend to maintain a conservative balance sheet sort of through it. We think it's important. Other than that, I think it's -- the answer is it's kind of all up to be decided. I don't think we have a strong opinion if it would be a special dividend or a share buyback or what it might be. So I think that would -- is still kind of an open question.

[Operator Instructions]

Well, if no one else does have a question while we're waiting for them to come in. Again, I just wanted to thank everybody for calling in. Look, I think as you can see, we're quite excited about it. We're very pleased with the purchase price. We're very happy with what we were able to do on the capital structure, and please watch us. We're looking forward to it.

I'm showing no further questions. So this concludes our question-and-answer session as well as the conference call. Thank you for attending today's presentation. You may now disconnect.

Thanks.