Darron Anderson – Chief Executive Officer Brandon Blossman – Chief Financial Officer.

John Daniel – Simmons & Company Daniel Burke – Johnson Rice Jim Wicklund – Credit Suisse.

Good morning, and welcome to the Ranger Energy Services Second Quarter 2018 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Darron Anderson, CEO. Mr. Anderson, please go ahead..

Thank you, operator. Good morning, and welcome to Ranger Energy Services second quarter 2018 earnings conference call. I’d first like to introduce Brandon Blossman to you as our new CFO, who will be providing his comments on the quarter momentarily. Brandon has been announced as an addition to our team, and I’m proud to be working alongside him.

In addition to Brandon, I also want to thank our entire workforce for their commitment to our values, for their great work every day and for delivering the results that we are here to discuss. Last quarter, I opened up the call by describing our performance task, improving metrics across the board.

The best way to describe this quarter is the momentum continues. Revenue for the quarter increased 17% to $73 million from $63 million in Q1. All segments within our business experienced sequential quarterly revenue growth.

This improving top line performance was a result of high utilization, improved pricing and select asset additions across the board, specifically, within our Well Services segment. Our high-spec rig experienced a 5% increase in rates and a 4% increase in rig hours.

While we are pleased with this progress, we continue to focus on operational execution, targeting 24-hour completion work and positioning our assets in the highest demand basins across our strong, diverse geographic footprint.

These areas of focus, combined with our high-quality rig fleet, have attracted our existing client base and we believe will lead to a growing list of additional high-quality customers. Also, within our Well Services segment, our Mallard-branded wireline completions business continues to produce market-leading results.

We entered the second quarter with six completion wireline units and exited with eight. All of our units are working on a dedicated basis across a diverse set of blue chip Permian customers.

Our operational execution is allowing us to pair with a top performing frac fleets within our customers’ operations, resulting in some of the highest completion efficiency numbers in the basin and delivering a 44% sequential revenue increase for our Mallard team. Rounding out our top line performance.

Our Processing Solutions group delivered a very nice quarter as well. The combination of higher MRU utilization, improved pricing on expiring contracts and ancillary asset additions, all led to a 36% sequential revenue increase.

Repeating my comment from last quarter as well, while I’m proud of the top line growth, I believe our earnings growth is the real success of the period. For the quarter, our adjusted EBITDA increased 87% to $9.7 million from $5.2 million in Q1.

We expect that the margins would benefit if we grew revenue while maintaining our fixed costs, show continued variable cost discipline and focus on price increases that outpace labor cost inflation. While we have made stride in each of these areas, I’ll be the first to say there is still more work to be done.

However, our Q2 results do reflect our measure of success today. Another positive for the quarter was our move – was moving our liquidity to a position of strength. Brandon will provide more details in a moment, but our new $40 million facility allows us to comfortably respond to market needs and capital asset additions.

In summary, a very solid quarter with continued positive momentum. I will now turn the call over to Brandon to discuss our financials in detail..

Thanks, Darron, and thank you very much for the kind words. I am very excited to be a new member of the Ranger team and definitely looking forward to our continued work together. Right. Now for all of the numbers, for organizational purposes, I am going to just run through the income statement. I’m going to recap the high-level numbers Darron provided.

I’ll provide incremental detail along the way, starting with revenue and ending with net income. And at the end, I’ll follow with a few comments on cash flow, liquidity and CapEx and turn it back to Darron for his closing comments. All right. Let’s start with revenue at the segment reporting level.

Consolidated revenue was up sequentially 17%, with both of our reporting segments contributing to that growth. So first, our smaller Processing Solutions segment, revenues were up 36% or $1 million off of a $3 million Q1 base.

This sequential revenue increase was largely driven by Q2’s full quarter contribution of assets previously placed in the service late Q1. And also, though to a lesser extent, this growth was supported by contracts rolling off to higher current market rates and a small handful of ancillary asset additions. Turning to the Well Service segment.

Well Services segment, revenue was up 16% or $9 million off of a $60 million Q1 base [indiscernible] into a couple parts. On the rig side of the business, revenues were up 9% or $3 million off of a $36 million Q1 base.

And the growth here in the rig part of the business was a mix of rate and utilization gains, along with a couple of average rig additions. So breaking that further down, average hourly rates were up quarter-over-quarter by 5% to – sorry, to $513 an hour from $487 an hour in Q1.

Rig hours for the quarter were up 4% from approximately 73,600 to 76,200 in Q2. Rig utilization in terms of hours per rig month increased from 184 hours in Q1 to 187 hours in Q2. On a full quarter average basis, we’re up, too. Again, average rigs in the fleet moving from an average of 134 rigs in Q1 to an average of 136 rigs in Q2.

The balance of operations in the Well Services segment, the non-rigs operations saw revenue increase 26% or $6 million off of a $24 million Q1 base. This increase was largely driven by additional wireline assets placed into service in Q2.

Our completions, focused wireline fleet exited Q2 at 8 units, averaged 7 units during the quarter, and that was up 2 units from Q1’s average of 5 units. Right. Now moving to margins at the segment level. Overall, consolidated gross margins, and this is before corporate G&A, moved up 18% to 21% for this quarter.

Both segments moved in the right direction with Well Services margins up from 16% to 19%, and the Processing Solutions segment margins up slightly, moving from 51% to 52%. Now as we move down towards the bottom line, stop at G&A real quickly here. On an adjusted basis, our core G&A expense was down for the quarter 10% sequentially.

That’s moving from Q1’s $6.1 million to this quarter’s $5.5 million. This sequential improvement was largely in the back of the tapering off of expenses associated with year-end 2017 reporting activities, so those expenses that happened or showed up in Q1 didn’t show up again in Q2.

The $5.5 million, again, core G&A expense should be our run rate for the balance of the year with maybe some small tweaks here and there. But that should be expected on a go-forward basis.

Q2 adjustments, bridging adjusted EBITDA and largely included in the reported G&A expense line include $600,000 of severance expenses, along with a smaller prior period acquisition expense that we went ahead and expensed in this quarter.

$200,000 of the adjustments were several partially offsetting gains, losses and fees associated with a handful of idle asset monetizations and the exit from a couple of small legacy field offices. And finally, there was an $800,000 adjustment. This is the stock-based compensation add back.

It is up from Q1 on the approval of 2018’s long-term incentive program. Altogether, adjusted EBITDA was up 87% to $9.7 million from the $5.2 million reported in Q1. Consolidated EBITDA margins moved up to 13% or actually just above 13% this quarter from 8% in Q1. And moving on to net income.

For the second quarter, we reported a net loss of – sorry, $1.2 million, which was a $9.1 million improvement from Q1’s loss of $10.3 million. However, we did take a $9 million goodwill impairment in Q1. So adjusting for that, there was just limited sequential change on the net income line.

The largest offsets to Q2’s quarter-over-quarter margin gains were the change from a net gain – tax gain position in Q1 to a tax expense position in Q2 and higher depreciation expense on asset additions, along with increased stock comp expense, which we talked about just before this section.

Cash flow from operations for Q2 was a nice $13.2 million, with some effort put against our working capital management driving better than EBITDA operating cash flows. CapEx spend for the quarter was $22 million.

Half of that or $11 million was related to our high-spec rig fleet, which included three new rigs being delivered during the quarter, along with make-ready costs for those three rigs and previously delivered rigs. There was a handful of ancillary equipment also included in that $11 million.

$4 million went to wireline that included two new wireline units and a set of pump-down pumps. And then the majority of the remaining $7 million were non-cash capital additions associated with new truck leases. And then finally, liquidity.

As mentioned earlier, we did enhance our liquidity profile with the addition of $40 million of secured debt capacity. We have borrowed $22 million against that facility. And on the initial draw, used those proceeds to pay down a portion of the draw on our revolver at the time.

At the end of the second quarter, we had $11 million of cash on hand, $16 million of availability against our $32 million at the time of revolver capacity and $18 million of incremental draws available on our new $40 million secured debt facility.

These balances, plus expected second half 2018 operating cash flows, will easily allow us to pay the $23 million remaining NOV high-spec rig obligation while still leaving plenty of flexibility to deploy incremental growth capital as market opportunities arise. That’s it for me..

Thank you, Brandon. So what do we expect over the coming quarters? It’s really not much different than our experience during Q2. We’ll continue to focus on horizontal completion activity within our Well Services segment.

For Q3, our high-spec rigs will benefit from the planned deployment of incremental rigs, plus select ancillary equipment to support 24-hour operations. Our Mallard wireline business will benefit from a full quarter of 8 units and has received a ninth unit thus far in this period.

Also, driven by customer demand and the desire for further efficiency gains, we recently deployed our first set of pump-down trucks in conjunction with one of our dedicated wireline units.

Within our Processing Solutions group, we expect another strong quarter of performance similar to Q2, plus the addition of four MRUs to come online in late Q3 and into Q4. While there are positive top line opportunities heading into third quarter, we are not naive to potential headwinds.

Labor, particularly on the rig side, continues to be tight and adding to wage cost pressure. Just as we’ve historically done, we’ll continue to work with our client base to achieve the pricing levels required to ensure their serviceability and protect our profitability.

As we get to the second half of the year, history is likely to repeat itself, and some customers will have budgets fatigue. Our strategically designed, diverse footprint and customer base allows us to reallocate resources to basins of clients with the highest demand.

We will continue our diligent efforts of reviewing and adjusting our cost structure outside of our labor, while remaining focused on day-to-day execution and efficiency gains. I would like to note, the drilling market historically measured their time efficiency by footage drilled versus days on location.

Today, the completion side is largely measured through stages completed per day or frac fleets drilled per hour for our rig. While there has been much discussion around the takeaway headwinds at the Permian, completions will, of course, continue in this basin.

Service companies who have constantly demonstrated their ability to execute safe and efficient operations will gain market share and maintain activity levels even in the face of a basin growth pause. We firmly believe Ranger is in this position. Operator, this now concludes our prepared remarks, and we’ll open the call for questions..

Thank you. [Operator Instructions] The first question today comes from John Daniel with Simmons & Company. Please go ahead..

Hi, guys. Darron, I want to focus on well servicing for a moment. If you recall, in 2015, 2016, sort of the big players in the industry, it was all about market share slashing prices to maintain utilization. And then for a while, it seemed that the rate recovery lagged.

But within the last several months, it feels like there’s a vigor, an unfolding vigor, if you will, by the larger players to raise rates.

And I’m just curious if you could speak to what you’re seeing in terms of leading-edge pricing from your competition and the path forward for potential further increases from here, particularly as it seems like there’s a shift by some E&Ps that want to use more workover rigs for drill-outs would seem like that would be a nice little catalyst.

So your thoughts..

Sure. So I’ll first talk about Ranger, and I’ll go all the way back to basically Q3 of 2017 when we really started to get pricing up. And over the last few quarters, as we’ve reported, just continuous improvement that we’ve had in that area.

I would say, in the early part of 2018 was where we actually started to see some of the large competitors, I think, get a little more pricing discipline than what we’ve seen in the past and starting to shore pricing. I think that will continue. It’s going to be on a basin-by-basin analysis, though.

I won’t say that every basin is giving the same level of price increases, that what you’re achieving in North Dakota may compare to what you’re achieving in a Midcon or gassy region versus the Eagle Ford, Permian or all at different levels. So again, we have to get higher pricing across the board as an industry.

I think the pricing levels have been materially low for what you say, from a market share standpoint. As we go into more of the completion activity and driving demand for the 24-hour work, that is a driver forward. As we look at rising labor costs, I think you probably heard on other calls of our large competitors. The labor constraints are real.

So we have a lot of catalysts to continue to push pricing, and I think, as an industry, we have to keep that discipline because we need it in our – within our sector..

Okay. Do you think the whole concept to the Permian differentials puts a bit of a pause on pricing or can it still continue? Because it’s not like the Well Service business is over earning here, right? And I don’t mean that to be rude, but it’s just….

No. That’s not – actually, our sector needs it. I think, and specifically for the Permian, when you think about the Permian completion activity, when you think about the type of rigs that are needed for that work when – the ancillary needed, all of that creates a specialized demand, which leads to an advantage from a pricing standpoint.

So I think, for those of us who have those types of asset base are in a good position to maintain and command a stable, good pricing, even improving pricing. I think from a production-oriented standpoint, the Permian, as actually on many calls, with the last vertical, that production market has been a difficult market. It still is to date.

When you look at our rig hours, Q1 compared to Q2, I know I mentioned on the last call, we dropped five rigs for a particular customer because the production rates we were getting just wasn’t worth it. And we continue to shift that workforce to completion-driven 24-hour type work.

So in the current market, the takeaway constraint is going to hinder, I think, pricing efforts on the production side. The operators with the right asset from the completion side, I think, will have definitely a level of insulation there..

Got it. And last one for me is more of a technical question. But on the wireline business, well, first of all, you’re doing a good job in terms of growing market share here. With each unit, are you going to have pump-down services so that – and you’re marketing those together.

Is it two pump-down units per wireline unit? Just help me understand what that package looks like, if you will..

So the package looks like a, of course, the wireline unit that we have today, and as we’ve added the pump-down assets, we’re talking about 2,500 horsepower pumps. Two pumps go out on a location. So when we say we have added two pumps, that is one job capability. So we have one of our dedicated wireline trucks outfitted with one set of pump.

We will continue to look at investment opportunities around additional pump-down units. This is not a build it and they will come. This is our customers driving the efficiencies. From a technical standpoint, when you’re actually pumping down the gun, the pump operator and the wireline operator are in constant communication.

It’s a synchronized operation, and the operator is looking for that to be deployed as one seamless service. And so this is a customer-driven expansion that we’ve had and we’re seeing some early success with our current investment, and we’ll look at additional investment opportunities in the future..

Okay, great. Thanks for your time..

Thank you, John for the questions..

The next question comes from Daniel Burke with Johnson Rice. Please go ahead..

Yes, good morning guys. .

Good morning, Daniel..

A question on monthly rig hours moving from 184 to 187. I wanted to talk about that in the context of 24-hour rigs. The pretty nominal step-up would seem to suggest a pretty flattish count of 24-hour rigs quarter-over-quarter, but maybe there are some other dynamics at play.

So I wanted to address the appetite for incremental 24-hour rig work that you’re seeing out there..

Yes. I think what you saw is – your assessment isn’t a nominal step-up, but it was a shift mix within our activity from a rig standpoint. So we saw an increase of our 24-hour rigs go from averaging, call it, 13 in Q1 to 22 in Q2.

And so also, in addition with the tight labor market, we shifted a lot of the labor force who were working on some of these production rigs, i.e., we laid down 5, I just mentioned to John Daniels, in Q1 and shifting that work force to 24-hour work in Q2.

Historically, I’ve talked about additional ancillary equipment coming on to support that 24-hour work. We do have additional asset coming on here in the second half.

So while we’ve gained the market share on the 24-hour work adding the ancillary equipment to those specific operations, it will increase profitability in the blended rates we’re receiving on that 24-hour work as well..

Okay, great. Darron, that’s a helpful answer and I appreciate the quantification of the 24-hour packs there. Maybe the only other one I had on the Mallard front.

Can you remind me what the committed newbuild trajectory looks like at this point? Do you have commitments beyond your ninth unit?.

Well, I won’t go on too much detail about our future investment opportunities. Again, you’re right, we’re at 9. We took delivery and just put the ninth one into service on August 6 on a dedicated basis. And so I think when we look at the returns that we’re getting on that business, it definitely justifies incremental investment into the business.

But we continue to work with our client base to ensure that we will have the sustained activity levels at the pricing that we are requiring to deliver the returns. And as we work through that, we will have additional asset come online. But definitely, I don’t want to get into details as far as timing on that right now..

Fair enough. All right, guys I appreciate it. I’ll leave it there. Thank you..

Thank you..

[Operator Instructions] The next question comes from Jim Wicklund with Credit Suisse. Please go ahead..

Good morning, guys. Daniel sold my good question. Good job, Daniel. That was my first one. On the number of rigs you have working 24-hours, I think that’s clearly a positive. You talked about the rigs that you have left to be delivered from NOV. I think you said you own $23 million left on the NOV high-spec rig obligation.

How many rigs are left to be delivered from NOV and can you tell us the cadence of that?.

So we had four rigs left to be delivered. Two of those four we swapped for a larger rig, so now it’s three some ancillary equipment. The cadence, we should have all of those rigs delivered around the end of the year or before. And we still have – out of those three, we still have three that have been delivered and not fully rigged up.

So you should expect an incremental six to be deployed or sent out to work between now and the end of the year..

Okay. That’s helpful. And by the way, Brandon, welcome and congratulations. Getting out of our business and into the corporate world here, smart guy.

Darron, the balance between your organic growth, I mean, clearly, the benefit from the cementing trucks, the pump-down equipment and these additional high-spec rigs from NOV, balanced against the potential for M&A, I know when you guys first were coming public, part of the idea was to use a public currency to try and consolidate the market.

Can you tell us just your thinking, your philosophy in balancing between organic growth and potential M&A?.

Yes. It’s a great question. And just for clarifying point, you said cementing trucks. We have no cementing trucks. Our pump-down is all pump-down for wireline….

I’m sorry, wireline. Wireline, I’m sorry. I apologize, I’m sorry..

But to your question, organic versus M&A, I think as you can see the wireline and ancillary rig equipment, even the Processing Solutions, we’re getting good returns on that. So organic will be part of our future. I think, from an organizational standpoint, and you look at our stock price, and I mentioned last quarter, we’re focused on execution.

And we think execution will lead to an improving stock price, which will allow to use our stock as a commodity for some type of transactions. So we continue to look at opportunities.

We will be acquisitive, but we’re going to continue our discipline of execution, delivering to our customers, delivering improving financial performance, getting the stock price up and when the time is correct, we will execute on M&A. So it’s not a situation where we’re not going down that path, but we are focused on execution currently..

Perfect, that’s helpful. Thanks, guys. Appreciate it..

Thank you..

This concludes our question-and-answer session. I would now like to turn the conference back over to Darron Anderson for any closing remarks..

I just want to thank everyone for listening to the call today and support of the company. And in conclusion, just thank again our workforce who’s delivering these excellent results. And we look forward to visiting next quarter. Thank you very much, operator. .

This conference has now concluded. Thank you for attending today’s presentation. You may now disconnect..