Service & Supply | Quarterly / Earnings Reports | Oilfield Services | Third Quarter (3Q) Update
Seventy Seven's Hydraulic Fracturing Segment Top Performer in 3Q
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Seventy Seven Energy Inc. reported financial and operational results for the third quarter of 2014.
Highlights:
- Total Revenue was $526.8 million
- Adjusted EBITDA was $132.8 million
- Net loss per fully diluted share was ($0.04), Adjusted net income per fully diluted share was $0.18
- Revenue diversity increased 6% from the second quarter of 2014 to the third quarter of 2014 to 21% of consolidated revenues
SSE reported total revenues of $526.8 million for the third quarter of 2014, a 6% increase compared to adjusted revenues of $497.7 million for the second quarter of 2014 and $496.7 million for the third quarter of 2013. As part of the spin-off, SSE distributed its compression unit manufacturing business and its geosteering business to Chesapeake and sold its crude hauling assets to a third party. SSE’s adjusted revenues assume these transactions occurred on June 30, 2013. Adjusted EBITDA for the third quarter of 2014 was $132.8 million, compared to $120.9 million for the second quarter of 2014 and $97.3 million for the third quarter of 2013.
Net loss for the third quarter of 2014 was ($1.8) million, or ($0.04) per fully diluted share, compared to net income of $21.7 million, or $0.46 per fully diluted share, for the second quarter of 2014 and net loss of ($18.7) million, or ($0.40) per fully diluted share, for the third quarter of 2013. Adjusted net income, which excludes non-recurring stock compensation expense related to the spin-off from Chesapeake and impairments and other, was $8.5 million, or $0.18 per fully diluted share. Adjusted revenues, adjusted operating costs, adjusted EBITDA and adjusted net income are non-GAAP financial measures. Reconciliations of these measures to comparable financial measures calculated in accordance with generally accepted accounting principles (GAAP) are provided on pages 8 - 13 of this release.
Chief Executive Officer Jerry Winchester commented, "We are pleased with our third quarter results which reflect our strong focus on operational costs and commitment to service quality as we continue to diversify our customer base. Both total revenue and EBITDA continue to trend upward as does our percent of non-Chesapeake revenue. With a substantial backlog of work contracted through 2015, we are well positioned in many of the most active oil and natural gas plays in the U.S. to maximize returns for our shareholders."
Drilling
SSE’s drilling segment contributed revenues of $200.4 million and Adjusted EBITDA of $82.4 million during the third quarter of 2014, compared to $189.2 million of revenues and Adjusted EBITDA of $68.9 million for the second quarter of 2014 and revenues of $188.0 million and Adjusted EBITDA of $65.2 million for the third quarter of 2013. The increase in revenues for the third quarter of 2014 compared to the second quarter of 2014 was due to an increase in revenue days partially aided by two new proprietary PeakeRigsTM delivered during the third quarter of 2014.
Revenue days for the third quarter of 2014 were 7,772 compared to 7,396 and 7,095 for the second quarter of 2014 and the third quarter of 2013, respectively. Revenues from non-Chesapeake customers increased $11.2 million from the second quarter of 2014 to 35% of total segment revenues for the third quarter of 2014. As of September 30, 2014, approximately 42% of our active rigs were contracted by non-Chesapeake customers including a drilling backlog of $265.2 million with an average duration of nine months. As of September 30, 2014, our drilling backlog with Chesapeake was $925.6 million with an average duration of 27 months.
Average revenue per revenue day for the third quarter of 2014 was $23,776, up from $23,219 in the second quarter of 2014 and $23,632 in the third quarter of 2013, due to an increase in dayrates and delivery of two new PeakeRigsTM during the third quarter of 2014. Adjusted average operating costs per revenue day in the third quarter of 2014 were $14,272, an increase of $470 per day from $13,802 in the second quarter of 2014. The increase in average operating costs per revenue day was due primarily to an increase in rig mobilization costs due to the delivery of two new PeakeRigsTM during the third quarter of 2014. As a percentage of drilling revenues, drilling operating costs were 66% for the third quarter of 2014, 63% for the second quarter of 2014 and 75% for the third quarter of 2013.
As of September 30, 2014, the company’s marketed fleet consisted of 22 Tier 1 rigs, including 12 PeakeRigs™, 57 Tier 2 rigs and eight Tier 3 rigs. SSE currently has 14 additional contracted PeakeRigs™ under construction. PeakeRigs™ are designed for long lateral drilling of multiple wells from a single location, which makes them well suited for unconventional resource development. The company is aggressively pursuing a strategy of upgrading its fleet to better align with the market’s demand for multi-well pad drilling. Accordingly, SSE plans to upgrade or sell all of the Tier 3 rigs that it owns, and expects that its fleet will primarily include only Tier 1 and Tier 2 rigs by the end of 2014.
Hydraulic Fracturing
SSE’s hydraulic fracturing segment contributed $245.1 million of revenues and Adjusted EBITDA of $56.5 million during the third quarter of 2014, compared to $226.1 million of revenues and Adjusted EBITDA of $41.7 million for the second quarter of 2014 and revenues of $226.9 million and Adjusted EBITDA of $20.7 million for the third quarter of 2013.
Revenues increased quarter over quarter due to higher utilization as SSE completed 2,270 fracturing stages during the third quarter of 2014, compared to 2,054 fracturing stages for the second quarter of 2014 and 1,959 fracturing stages for the third quarter of 2013. As of September 30, 2014, the company’s hydraulic fracturing backlog was $1.4 billion with an average duration of 23 months. Average revenue per stage for the third quarter of 2014 was $107,986, down from $110,084 in the second quarter of 2014 and $115,836 in the third quarter of 2013. Average revenue per stage decreased from the second quarter of 2014 primarily due to the geographic relocation of our equipment. The decrease from the third quarter of 2013 was due to industry-wide pricing pressure.
Average operating costs per stage in the third quarter were $84,022, a decrease of $3,263 per stage from $87,285 in the second quarter of 2014. The decrease in average operating costs per stage was primarily due to lower product costs associated with geographic mix. As a percentage of hydraulic fracturing revenues, hydraulic fracturing operating costs were 78% for the third quarter of 2014, 79% for the second quarter of 2014 and 89% for the third quarter of 2013. As a percentage of hydraulic fracturing revenues, hydraulic fracturing operating costs were down due to lower product costs and maintenance and supplies expense, partially offset by non-recurring stock compensation expense.
As of September 30, 2014, SSE owned nine hydraulic fracturing fleets with an aggregate of 360,000 horsepower, and eight of these fleets were contracted by Chesapeake in the Anadarko Basin and the Eagle Ford and Utica Shales. SSE currently expects its tenth fleet to begin operating later in the fourth quarter of 2014.
Oilfield Rentals
SSE’s oilfield rentals segment contributed $38.9 million of revenues and Adjusted EBITDA of $13.7 million during the third quarter of 2014, compared to $39.0 million of revenues and Adjusted EBITDA of $13.8 million for the second quarter of 2014 and $35.8 million of revenues and Adjusted EBITDA of $11.8 million for the third quarter of 2013. Revenues from non-Chesapeake customers as a percentage of total segment revenues increased from 16% in the second quarter of 2014 to 20% in the third quarter of 2014.
Operating costs were $27.0 million during the third quarter of 2014, compared to $24.5 million for the second quarter of 2014 and $24.1 million for the third quarter of 2013. The increase in operating costs was due to higher labor-related costs, which was primarily attributable to non-recurring stock compensation expense.
Oilfield Trucking
SSE’s oilfield trucking segment contributed $41.2 million of revenues and Adjusted EBITDA of $3.8 million during the third quarter of 2014, compared to $55.5 million of revenues and Adjusted EBITDA of $6.0 million for the second quarter of 2014 and $63.3 million of revenues and Adjusted EBITDA of $5.4 million for the third quarter of 2013. The decrease in revenues was primarily due to the sale of our crude hauling assets to a third party during the second quarter of 2014.
Liquidity
As of September 30, 2014, SSE had $43.6 million in borrowings outstanding under its $275.0 million revolving bank credit facility. The increase in borrowings outstanding was primarily attributable to an increase in accounts receivable of approximately $122.3 million due to changes in invoice processing procedures at the time of the spin-off that delayed payment of certain invoices resulting in an increase in our days sales outstanding to 87 days at September 30, 2014 from 69 days at June 30, 2014. As of October 28, 2014, availability under our revolving bank credit facility was $251.8 million. Capital expenditures totaled $56.7 million during the third quarter of 2014, which primarily consisted of investment in new PeakeRigs™ and the purchase of certain leased drilling rigs. SSE currently expects its aggregate growth capital expenditures to be approximately $450.0 million for 2014 and 2015, and that these expenditures will target the development of high margin service offerings through geographic expansion, vertical integration and asset additions. The company also expects that its growth capital expenditures will be funded by cash flow from operations and borrowings under its revolving bank credit facility. Once SSE has completed its planned growth capital expenditures through 2015, it intends to shift its focus toward using excess cash flows from operations to reduce outstanding long-term debt.