Service & Supply | Quarterly / Earnings Reports | Oilfield Services | Second Quarter (2Q) Update | Financial Results | Capital Markets | Drilling Activity

Seventy Seven Sees Dip in 2Q Results Due to Strained Market

Email    |    Print    |    Bookmark

You Need to login first

   |    Wednesday,July 29,2015

Seventy Seven Energy Inc. reported financial and operational results for the second quarter of 2015.

Highlights:

• Consolidated Adjusted EBITDA of $44.3 million and Hydraulic Fracturing Adjusted EBITDA of $18.2 million
• Positive free cash flow for the quarter of $82.0 million
• Exercised $100 million accordion feature under its Term Loan
• Repurchased and cancelled $40.0 million in aggregate principal amount of its 6.5% Senior Notes due 2022

Chief Executive Officer Jerry Winchester said: "Given the challenging market environment, we are pleased with our financial and operational results this quarter. Despite decreasing activity levels from our customers and further pricing pressure, we executed several strategic initiatives that strengthen our ability to weather this downturn. By exercising the $100 million accordion feature under our Term Loan and divesting our drilling rig relocation and logistics business and water hauling assets, we have enhanced our liquidity and streamlined our business to focus on the best returning assets in our portfolio.

"The success of our customer diversification strategy across all of our business segments is evident in our quarterly numbers. In addition to an experienced management team, we have a modern, high-quality asset base and diversified footprint that will continue to provide a strong foundation from which our business can grow."

Segment Results

Drilling

SSE’s drilling segment contributed revenues of $100.4 million and adjusted EBITDA of $38.3 million during the second quarter of 2015, compared to revenues of $166.1 million and adjusted EBITDA of $64.0 million for the first quarter of 2015 and revenues of $189.2 million and adjusted EBITDA of $68.9 million for the second quarter of 2014. The decrease in revenues for the second quarter of 2015 compared to the first quarter of 2015 was primarily due to a 51% decline in revenue days associated with additional contracted rigs being idled during the quarter due to the reduction in U.S. drilling activity.

The percentage of revenues from non-CHK customers declined during the quarter, decreasing from 41% to 36% of total segment revenues for the second quarter of 2015 compared to the first quarter of 2015. As of June 30, 2015, approximately 44% of our active rigs were contracted by non-CHK customers and we had a total drilling revenue backlog of $574.3 million with an average duration of 17 months.

Operating costs were $57.1 million during the second quarter of 2015, compared to $98.1 million for the first quarter of 2015 and $118.4 million for the second quarter of 2014. Average operating costs per revenue day in the second quarter of 2015 increased 17% from the first quarter of 2015, which was primarily driven by a 24% increase in labor-related costs per revenue day due to the rapid pace at which drilling rigs were idled during the quarter. As a percentage of drilling revenues, drilling operating costs were 57% for the second quarter of 2015, 59% for the first quarter of 2015 and 63% for the second quarter of 2014.

As of June 30, 2015, the Company’s marketed fleet consisted of 28 Tier 1 rigs, including 18 PeakeRigs™, 57 Tier 2 rigs and three Tier 3 rigs. Additionally, 74% of the Company’s marketed fleet are multi-well pad capable rigs. SSE currently has seven additional contracted PeakeRigs™ under construction scheduled to be delivered over the next eight months. At quarter end, 51 rigs were under contract, of which 24 were idle.

Hydraulic Fracturing

SSE’s hydraulic fracturing segment contributed revenues of $163.4 million and adjusted EBITDA of $18.2 million during the second quarter of 2015, compared to revenues of $202.0 million and adjusted EBITDA of $26.3 million for the first quarter of 2015 and revenues of $226.1 million and adjusted EBITDA of $41.7 million for the second quarter of 2014. The decrease in revenues from the first quarter of 2015 to the second quarter of 2015 was primarily due to a 16% decrease in revenue per stage. Revenues from non-CHK customers as a percentage of total segment revenues increased from 7% in the first quarter of 2015 to 21% in the second quarter of 2015. As of June 30, 2015, our hydraulic fracturing revenue backlog, based on then current market prices, was $560.3 million with an average duration of 14 months.

Average operating costs per stage in the second quarter decreased 15% from the first quarter of 2015. The decrease in average operating costs per stage for the second quarter of 2015 compared to the first quarter of 2015 was primarily due to a 19% decline in product costs, which is the result of leveraging our logistics infrastructure advantage and closely managing our supply chain. As a percentage of hydraulic fracturing revenues, hydraulic fracturing operating costs were 86% for the second quarter of 2015, 85% for the first quarter of 2015 and 79% for the second quarter of 2014.

As of June 30, 2015, SSE owned 10 hydraulic fracturing fleets with an aggregate of 400,000 horsepower, and seven of these fleets were contracted by CHK in the Anadarko Basin and the Eagle Ford and Utica shales.

Oilfield Rentals

SSE’s oilfield rentals segment contributed revenues of $17.8 million and adjusted EBITDA of ($4.1) million during the second quarter of 2015, compared to revenues of $32.5 million and adjusted EBITDA of $7.8 million for the first quarter of 2015 and revenues of $39.0 million and adjusted EBITDA of $13.8 million for the second quarter of 2014. Revenues from non-CHK customers as a percentage of total segment revenues increased from 44% in the first quarter of 2015 to 62% in the second quarter of 2015. Revenues during the quarter were negatively impacted by the rapid pace at which CHK reduced their capital spending coupled with the reduction in U.S. drilling and completions activity.

Operating costs were $20.2 million during the second quarter of 2015, compared to $23.6 million for the first quarter of 2015 and $24.5 million for the second quarter of 2014. As a percentage of oilfield rental revenues, operating costs were 114% for the second quarter of 2015, 73% for the first quarter of 2015 and 63% for the second quarter of 2014. Labor-related costs as a percentage of revenues increased by 50% during the second quarter of 2015 due to the rapid pace at which CHK reduced its capital spending coupled with the broader reduction in U.S. drilling and completions activity.

Former Oilfield Trucking

During the second quarter of 2015, SSE sold Hodges Trucking Company, L.L.C. to a wholly-owned subsidiary of Aveda Transportation and Energy Services Inc. for aggregate consideration of $42.0 million, subject to a customary post-closing working capital adjustment, consisting of $15.0 million in cash and a $27.0 million secured promissory note due June 15, 2020 (the “Note Receivable”). The Note Receivable bears a fixed interest rate of 9.00% per annum, which is payable quarterly in arrears beginning on June 30, 2015. Aveda can, at any time, make prepayments of principal before the maturity date without premium or penalty. At the time of the sale, Hodges provided drilling rig relocation and logistics services, operating 270 rig relocation trucks and 65 cranes and forklifts. The sale did not include the land and buildings used in Hodges’ operations. SSE recognized a loss of $35.0 million on the sale.

SSE also sold its water hauling assets during the second quarter of 2015 for $6.5 million. As of June 30, 2015, there were no remaining assets or operations in the oilfield trucking segment.

SSE’s oilfield trucking segment contributed revenues of $13.5 million during the second quarter of 2015, compared to revenues of $29.2 million for the first quarter of 2015 and revenues of $55.5 million for the second quarter of 2014. Operating costs were $18.4 million during the second quarter of 2015, compared to $36.3 million for the first quarter of 2015 and $51.5 million for the second quarter of 2014.

General and Administrative Expenses

General and administrative expenses were $34.8 million in the second quarter of 2015, compared to $33.9 million in the first quarter of 2015 and $19.4 million in the second quarter of 2014. General and administrative expenses include non-cash compensation of $8.6 million and $9.5 million, charges of $2.7 million and $5.6 million for services provided by CHK pursuant to the transition services agreement, and severance-related costs of $3.1 million and $1.4 million for the second quarter of 2015 and the first quarter of 2015, respectively. Included in the non-cash compensation expenses and severance-related costs for the second quarter of 2015 are $2.1 million and $0.6 million, respectively, related to the sale of Hodges. During the second quarter of 2015, SSE terminated all remaining services being provided by CHK under the transition services agreement with CHK. During the first and second quarter of 2014, we were a wholly-owned subsidiary of CHK and the majority of our general and administrative expense was recognized on an allocated basis.

Liquidity

During the Current Quarter, SSE entered into an incremental $100.0 million junior lien financing under its term loan facility and received net proceeds of $94.5 million. Additionally, SSE repurchased and cancelled $40.0 million in aggregate principal amount of its 6.5% Senior Notes due 2022 in multiple transactions for $26.4 million. SSE recognized a gain on extinguishment of debt of $13.1 million, which includes accelerated amortization of deferred financing costs of $0.5 million.

As of June 30, 2015, SSE had no borrowings outstanding under its $275.0 million revolving bank credit facility. As of July 27, 2015, we had availability of $188.1 million which included no borrowings and $10.2 million for letters of credit and had cash of $117.5 million. Capital expenditures totaled $50.1 million during the second quarter of 2015, which primarily consisted of investment in new PeakeRigs™. SSE currently expects its total capital expenditures to be approximately $200.0 million for 2015. Once SSE has completed its planned growth capital expenditures, it intends to shift its focus toward using excess cash flows from operations to reduce outstanding long-term debt.

Financial Results

SSE reported total revenues of $295.1 million for the second quarter of 2015, a 31% decrease compared to revenues of $429.8 million for the first quarter of 2015, and a 46% decrease compared to revenues of $549.5 million for the second quarter of 2014. During the second quarter of 2015, SSE sold its drilling rig relocation and logistics business (Hodges Trucking Company, L.L.C.) and water hauling assets. Assuming these transactions occurred on January 1, 2014, SSE’s adjusted revenues were $281.6 million and adjusted EBITDA was $44.3 million for the second quarter of 2015, compared to adjusted revenues of $400.6 million and adjusted EBITDA of $93.3 million for the first quarter of 2015 and adjusted revenues of $452.7 million and adjusted EBITDA of $114.8 million for the second quarter of 2014.

Adjusted net loss, which excludes impairments, gains or losses on sales of property and equipment, severance-related costs, loss on sale of the drilling rig relocation and logistics business, and gains on debt extinguishment, was ($46.8) million, or ($0.93) per fully diluted share. Net loss for the second quarter of 2015 was ($74.7) million, or ($1.50) per fully diluted share, compared to net loss of ($37.6) million, or ($0.78) per fully diluted share, for the first quarter of 2015 and net income of $21.7 million, or $0.46 per fully diluted share, for the second quarter of 2014.