Good morning, and welcome to the Ranger Energy Second Quarter 2019 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded.I would now like to turn the conference over to Mr.

Darron Anderson, Chief Executive Officer. Please go ahead, sir..

Thank you, operator. Good morning, everyone and welcome to Ranger Energy Services Second Quarter 2019 Earnings Conference Call. Joining me today is Brandon Blossman, our CFO, who will offer his comment in a moment.On our last call I, highlighted the Q1 headwinds of the pressed commodity prices in difficult weather.

But at the same time, I pointed out how our strong portfolio of diversified services and geographical regions allowed us to overcome those headwinds producing our sixth quarter in a row of increasing revenue and EBITDA.As we move into Q2 our optimism is high and frankly continues to be at high or higher today.

While our quality growth took a pause in Q2, I want to share with you the reasons for that pause and also explain the rationale behind my high level of optimism with our business.I would like to start off this morning by calling your attention to some of the more significant events of this quarter.

First, outperforming Wireline business proactively made the decision to reposition its core set of assets. This decision was driven by degradation and KPIs for particular customer, which yielded an opportunity for high grading.

We therefore chose a temporary interruption in our previous consistently high Wireline utilization to reduce business risk and further improve this already high-quality business.Next, improving metrics across all other areas of our business. Operationally, EBITDA was up across all service lines with another exception of Wireline.

Our High-Spec Rigs, the remainder of our Completion and Other Services and our Processing Solutions all delivered improved results driven by mild increases in pricing and utilization.

This performance has continued into Q3 and combined with Wireline returning to normalized performance levels, our confidence is high despite the backdrop of a challenged U.S land services market.And finally, we continue to be well-positioned moving forward. Free cash flow remains our top priority for the year.

Our maintenance CapEx levels continued to be one of the lowest in the industry due to our high-quality asset base.

Our growth capital for the quarter continues its sharp downward trend funding the tail-end of previous late 2018 commitments as well as small incremental investments for high-return ancillary assets required to satisfy recent contract awards.Brandon will discuss a couple of working capital items that depleted our cash for this quarter, but as these items work through our system and combined with continued strong performance of the business our free cash flow expectations will surely be met.Now to give you a little more details on the quarter.

Total revenue for the quarter decreased 5% to $84 million from $88 million in Q1. While our Wireline experienced a revenue decline that decline was partially offset by revenue increases across other areas of our business.Specifically, within our High-Spec Rigs, we experienced a revenue increase of 4%.

This increase was driven by 3% uptick in rig hour and a 2% improvement in hourly rates. 10 of our 11 High-Spec Rig locations experienced a growth in rig hours.The one location that did not experience growth was the result of a customer slowdown that utilized two of our 24-hour rigs.

While the reduction of two 24-hour rigs was impactful we more than offset that reduction with upticks in 24-hour completion work across other districts along with the ongoing ramp of our multiyear Permian Basin contract we discussed on last quarter's call.On this contract for the quarter, we averaged five effective rigs and continue to be excited for the potential for incremental market share and pull-through service opportunities with this customer.

Importantly, we continue to pursue similar stock contracts and other basis which strategically aligns plans.In regards to 24-hour work, our sequential rig hour increase was largely driven by an increase in our completion-related hours.

We are very pleased to see a month-over-month upward trend in our 24-hour rig count across Q2.Moving on to our Completion and Other Services segment. Our Mallard-branded Wireline business averaged 11 Wireline units working for the quarter down from 13 in Q1.

As I mentioned in my opening comments, we proactively made the decision to move a core set of asset consistent with two Wireline shuts and two pump-down spreads to alternative clients that are better aligned with our strategies and goals.This position had a few short- and long-term impacts on our business.

First, it caused exemplary disruption in the continuity of our Wireline activity in this segment's results. Second, it highlighted the strength of our team and historical performance as this disruption was truly temporary.

We had most of the assets redeployed by mid-June and I'm very happy to say 100% redeployed by the start of Q3.And finally, this decision supports that strategy of high grading and diversifying our customer base as these assets are now redistributed across three high-quality publicly traded plan.The temporary reduction in revenue associated with these assets were partially offset by an increase in activity and revenue from our remaining services captured within the reporting segment.

The net effect of these operational movements was a 10% sequential decline in revenue.Given that all 13 wireline units and pump-down spreads are back working on dedicated basis, and we continue to experience solid performance from our other completion services, we see this segment, Q2 performance as transitory in nature.And finally, our Processing Solutions segment continues to perform solidly.

A change in accounting that Brandon will detail in a minute pushed reported numbers down to roughly flat sequentially though operationally, we saw upticks in both installation and average unit deployed.In my opening comments, I mentioned this core of growth capital funding of previous commitments.

In late Q4, we committed to the construction of additional gas coolers for our Processing Solutions segment.

We began accepting delivery of these units at the end of Q2 and will continue through Q3.Upon delivery, we immediately began deploying these assets towards first-time global integrated customer placing 18 of these units with them, again sticking with our strategy of high quality customers.Moving on to consolidated earnings.

Adjusted EBITDA decreased 8% to $13 million from $14.2 million in Q1 while margins decreased from 16% to 15%. Brandon will give you more detail by segment in a moment.In summary, while our Q2 results are off trend, we fully expect this to be a one quarter event.

And despite the continued challenging industry backdrop, we have exited Q2 back on trend and plan to be there for the balance of the year.I will now turn the call over to Brandon..

Thanks, Darron, and good morning to everybody on the call. Good to be here. So let's go ahead and get started with the full walk through of numbers for the quarter. As Darron mentioned on a consolidated basis, overall revenue moved down sequentially 5% or $4 million from $88 million to $84 million.

EBITDA moved down 8% from $14.2 million to $13 million flat while resulting adjusted EBITDA margins ticked down slightly from 16% to 15%.Now moving on to the details and starting with revenue by segment.

At the segment level, the sequential revenue decline was driven by a decrease in Completion and Other Services, which was partially offset by growth in High Spec Rigs.Specifically in Completion and Other Services segment, revenue was down 10% or $5.3 million.

The segment revenue decline was the result of the transition of two wireline trucks and two pump-down spreads that Darron talked about from a single customer to a less concentrated customer base, which resulted in little contribution from these transitioning assets during the quarter.As Darron noted these assets started back to work late Q2 and are currently fully deployed.

Offsetting the drop in wireline revenue were sequential increases in nearly all of the individual business lines in the balance of the segment.In our High Spec Rigs segment, revenue was up 4% or $1.4 million driven by a 3% increase in period revenue hours along with a 2% increase in hourly rig rates.

Specifically revenue hours went from 60,100 to 62,200 hours and hourly rig rates went from $522 per hour to $530 per hour.The increase in period hours was driven by an increase in 24-hour work but the 24-hour rig count moving from an average of nine rigs in Q1 to 13 rigs in Q2.

The increase in period hours are Q1 utilization, metric moved from 62% up to 63% in Q2.For the quarter, our average rig count was unchanged at 141 rigs. As we mentioned previously, we took delivery of the last revenue build rigs late last year and we continue to have no plans to organically increase this fleet size.Moving on to Processing Solutions.

Here revenues were down slightly from $5 million to $4.9 million for the quarter.

However, I would like to note here that starting this quarter and going forward, installation revenue for this segment will be recognized over the life of the rental contract rather than at the completion of installation as we've done in the past.This change in our revenue recognition accounting policy had the effect of reduce in Q2 revenue by $300,000.

Operationally the quarter saw an average of four additional gas coolers deployed an increase in MRU utilization from 76% to 78% and a 9% sequential increase in installation activity.

Aggregate realized MRU rental rate saw a slight 3% decrease, which was offset by a 5% increase in the average gas cooler rental rate.Moving on to EBITDA and margins by segment. Overall consolidated segment level adjusted EBITDA before corporate G&A saw declines of $2.1 million quarter-over-quarter or 10%.

Here similar to the Q2 revenue dynamics, sequential adjusted EBITDA gains in High Spec Rigs and Processing Solutions were more than offset by decline from the Completions and Other Services segment.

This decline was driven by, as we've mentioned, the Wireline customer transition that we have been discussing at length.Before we go into the segment details, let me take a quick sidebar here, and point out a material sequential increase in insurance cost, which impacted each of our segments to some extent.Relative to Q1, which was similar to our historic run rate, our medical benefit costs were up $1 million.

We self-insured for medical, so we do expect some volatility period-to-period. However, we consider this quarter's volatility to be unusual.There was no one single line item that explains this change rather it was the aggregate of many small sequential increases.

While even with this uptick, we continue to benchmark favorably for medical expenses against our peer group, despite this quarter has focused our efforts at optimizing on this front, and we will do so going forward.That sidebar out of the way, let's go down to the segment details for EBITDA and margin.

For the quarter, Completion and Other Services saw an EBITDA decrease of $2.4 million, which was only partially offset by growth of around $100,000 in High Spec Rigs and around $200,000 in Processing Solutions.On the margin front, consolidated segment margins, again, before corporate G&A, were down from 23.7% to 22.1%.

However, I do want to note that the increase in medical expense explains the majority 1.2% of the 2 point -- I’m sorry 1.2% of 1.6% drop in this margin.

So backing out, the change in medical expense would have got us about flat on a quarter-over-quarter basis for consolidated segment margins.Disaggregating the 22% reported Q2 margin down to the segment level, in Completions and Other Services margins were down from 27% to 24%.

Here, that change in decline in margin was driven solely by fixed cost absorption on a lower revenue that we saw quarter-over-quarter.The High Spec Rigs, margin saw a slight decrease from 13.8% to 13.3%. Though, again, we note that the majority of the increased medical expense hit this particular segment.

If medical expense had held flat Q2, the margin in the segment would've come in over 15%. So it would have been an increase from quarter-to-quarter adjusting for medical expense.In Processing Solutions segment margins moved up from 57% to 61%.

Here, the increase in margin is primarily attributable to a decrease in field level expenses.Moving down to adjusted G&A expense.

We saw that drop quarter-over-quarter $900,000 with roughly equal contributions to the decline coming from a reduction in corporate and bonus accrual, lower professional fees quarter-over-quarter, and a reduction of corporate salary expense.The reduction in bonus accrual was driven by the below expectation performance of Q2, lowering that bonus accrual for the quarter.

And importantly, the lower corporate salary expense for G&A.As a structural change, the result of further enhanced automation and efficiency increases in one of our core administrative functions. We saw limited adjustments to the G&A line in this quarter.

The $100,000 adjustment was reflecting a small gain on the sale of some miscellaneous equipment.Moving down to net income. For Q2, we reported net income of $1.8 million, a decrease from Q1's $3.6 million.

The sequential decrease here is as with EBITDA driven by a decrease in segment earnings partially offset by the reduction in G&A expense.With that out of the way, let's move down to -- or over to the balance sheet. So first CapEx. CapEx recorded for the quarter was $5.4 million.

That $5.4 million breaks down into $1 million related to our Completion and Other Services segment. So, it's largely associated with our Wireline business within that segment, and includes items related to a new leaseless Wireline highs for a specific customer.Of that $5.4 million less than $1 million was related to High-Spec Rigs.

All of this less than $1 million is associated with gearing up for a new large integrated customer.

$2.4 million, the largest portion of the CapEx was spent in our Processing Solutions segments.As Darron pointed out, this is tied to late in the quarter gas cooler manufacturing and those gas coolers continued to be manufactured and released out into the market.

This quarter, we had 10 of the contracted gas coolers coming out, and we expect this to be fully deployed as we move into Q3.Additionally, we had some small progress payments on for previously committed mechanical refrigeration units.

Also, in much smaller magnitude, new leased vehicles totaled $300,000 for the quarter, and right at $1 million of maintenance CapEx given for the quarter. That is a bit higher than the $700,000 we saw in Q1, but still fully in line with our full year $4 million maintenance CapEx budget.Moving on to debt.

Our term debt is – as per our amortization schedule moving down, we dropped $2.5 million from that headline number each and every quarter.

So Q2 ending balance here was $32.7 million balance on that initial $40 million draw on that term debt.Liquidity, we ended Q2 with $16 million of liquidity that was down $7 million from Q1 and that is due to a combination of a slight reduction in our borrowing base and a lower quarter-over-quarter in cash balance.

Specifically, at quarter end our cash balance was down $4 million from $6 million to $2 million and we had $26 million drawn on our revolving credit facility. That's the level very similar to the Q1 ending balance.

Our borrowing base was down $3 million from $43 million to $40 million on a slight reduction in eligible receivables.Cash flow, for the quarter, we saw our working capital build with a cash flow falling well short of our expectations.

By far the most significant driver of the short fall in cash flow with two receivable balances that moved out of period. In general, receivables actually performed quite well for the quarter. Excluding these two balances that moved out of period, our day sales outstanding dropped four days from Q1 ending 64 days to Q2 ending 60 days number.

Unfortunately, the combination of these two stale receivable balances totaled $7 million at quarter end dollars that should have been collected during Q2.Also contributing to our lack of cash build during the quarter was the spike in Wireline gun inventory which peaked during Q2 at a number $4 million higher than our historical run rate.

This spike in inventory was driven by the temporary reduction in Wireline utilization that we detailed earlier. These three items two AR and one inventory negatively impacted Q2 cash flow by a combined $11 million.

The current cash impact of these items has moved down from $11 million at quarter end to $8 million today and we fully expect continued progress on this catch-up task as we move further through Q3.And to close out my prepared comments a housekeeping item. We announced a small $5 million stock buyback program at the end of the quarter.

This was not intended to signal a capital allocation decision, but rather this is a small program that will allow us to have the option to offset any equity issuance dilution going forward when, and if it makes sense. To-date, we have not repurchased any shares.And with that, I will hand it back over to Darron..

Thank you, Brandon. Looking forward, I believe both Brandon and my comments today have provided clarity on few one-time issues that made a significant impact on our quarter's performance.

The high level of optimism that maintains our business looking forward is not only because this one-time issue is now behind us, but equally for the opportunities that lie ahead of us.As we've entered Q3, all of our metrics are pointing in the right direction.

Our High-Spec Rigs segment continues to show modest gains in pricing against an oversupply of rig market.

This indicates our current and new clients continue to reward us for the high-quality asset base and operation performance that we are providing to them.Additionally, this segment has potential for new contract awards and market share gains as we continue our efforts of high grading our customer base.

Similar to our Permian Basin and multiyear contracts, we currently have several other contractual opportunities at various stages of development.

Within our Completions and Other Services segment our Wireline business is back to full deployment on a dedicated basis with an even stronger Permian Basin client list.Our Other service lines within the segment continued a positive trend having delivered three quarters in a row of improved performance.

Additional rig contract rewards will also benefit our Other Services segment as they give us the opportunity to pull-through some of our complementary service lines.

Within the Processing Solution segment, I will characterize our business as stable with near-term upside from the new gas cooler deployment to a first-time global integrated customer.Looking at this business over the next few quarters, our team is strategically reviewing growth opportunity that could drive even greater demand for our existing asset base.

And finally, as we continue to execute, and further deleverage one of the cleaner balance sheets amongst our peers, strategic opportunities will develop. I think we all agree that consolidation is needed amongst U.S.

land services, but the reality of mini hurdles exist.We feel that, our continued capital discipline line-of-sight cash flow, high-quality assets, good operations, and efficient processes are key attributes that allow us to execute on strategic options when others cannot another reason for my high-level optimism going forward.This concludes our prepared remarks.

And operator, we'll now open the call for questions..

Thank you. We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from John Daniel from Simmons & Company. Please go ahead..

Thank you. Hey, Darron and Brandon great, I really appreciate the granularity this quarter. Not many companies do that. So it's appreciated..

Thank you..

Brandon, my first question is on the -- that $7 million AR number that you referenced, is that potentially the same customers, that you took the wireline units away from? And if so, is there a risk on that receivable?.

So, the answer is yes. It is potentially one of the same customers. The risk on the receivable, certainly there is a risk there. I don't want to sugarcoat it….

…Right..

But the good news is that they have been paying down their balance fairly regularly. And we expect them to continue to do so..

…Okay..

So the number looks bad but it is lower than it has been. And we continue to expect that they can go lower throughout the quarter..

Fair enough. Appreciate that. And then -- well I got two more. Just on the CapEx. On the last call you had sort of referenced slowing the growth CapEx cadence.

Can you speak to what growth CapEx might be in the second half, and then, just early thoughts on, 2020 growth CapEx?.

Yeah. So, again we're getting it all done quickly here. There's a couple items. One, the preprogram 2018, full year CapEx program, we still have a $1 million left on that. And that is all….

…Okay..

… in Processing Solutions. So that is the -- what we have approved in totality is $1 million. Maintenance CapEx should continue at that million or sub-million dollar per quarter cadence.And then, I'll let Darron speak to any incremental CapEx that may come up that is not currently approved..

Yeah. Any incremental CapEx really doesn't have to be tied to contract awards. Most likely tied to potential longer-term drill on contract awards where we may need 10K BOPs or something of that nature. So, as far as permit program there's nothing else additional from a growth CapEx except for again new contract awards John..

Okay. I got two quick ones here. And then, I'll turn it over. Again, I know you guys don't like giving specific financial guidance next call. But, I mean, just hearing the commentary or everything you walk through it does feel like Q3 -- your expectation is a bit better than Q2.

Is that a fair assessment?.

Yeah John, that's very fair assessment. I mean our exit run rate coming out of Q2, the last month was much stronger than the previous two months within a quarter. So, in Q3 was a high level of optimism come again to -- Q3 we call it optimism. I think as we continue to sit here with the one month behind us that hasn't changed..

Okay. And then the last one, just a chance for you to kind of sit up on the poll button pretty sure. But with respect to consolidation obviously everyone has talked about it, everyone knows it's needed.

But it just doesn't ever seem to happen.Do you think there's any hope for the well service sector, if we don't see consequential consolidation, notwithstanding, your business is doing okay on a relative basis?.

Well, you'll hate if that happens.

Go ahead, I'm sorry?.

And do you think it actually happens, I guess?.

Well, for years we've been saying, it's got to happen and it has not happened. If ever going to happen now's the time that it does need to happen.

But as I've said John, they are horrible.And when you look -- I know we've had these conversations before, on the type of wells that have been working on a day, it's a different type of asset base that's needed. So, yes while consolidation is needed. Yes there's lot of assets out there that can be attained.

It's what the future viability of those assets.So, I can't predict the future. And I'm not going to start trying now…..

…Yeah..

We have put ourselves in this position and we didn't get here by accident. This was by strategy of execution, specific targeted growth, conservative balance sheet, line of sight for free cash flow. And we took care of those things right after alternatives presented themselves we want to participate in those opportunities..

Okay. Again I appreciate your time. And thank you for the granularity in this quarter..

Thank you..

Thanks, John..

Our next question comes from Daniel Burke from Johnson Rice. Please go ahead, sir..

Yeah, good morning, guys..

Good morning, Daniel..

Maybe just to -- a pen one to John's question, Darron you mentioned June was much stronger than the prior two months.

I was just curious is that simply because of the return of the Wireline units to active service? Or did you really observe a stronger June across your broader service portfolio?.

No. I think it was the combination of both. Definitely the return coming back on was a contributor.

But the rest of our business as well too as I mentioned, even within our others services captured in that Completion and Other Services those service line we've had three quarters in a row of improving performance there.Rigs continue to hang in there well for the month of June too.

So across the portfolio, we saw upticks but also definitely a contribution from the assets that were laid down earlier in the quarter on the Wireline side..

Okay. All right. That's helpful. And then maybe just one other one and I'll ask it on your smallest segment, but it has attracted a decent amount of growth capital this year.

I mean, what is the opportunity set for Processing Solutions? How large a capital allocation could that business be in line for in a 2020 environment? Just trying to scale what level of growth could be possible there the next couple of years?.

We like that business. It's been a good performer for us. You see the margins that the business throws off. It's predictable. A stable business for us. So all great attributes. Yes, we think growth CapEx across 2018 and into 2019, as we wind down the spread and said this last $1 million is really geared towards that.

That's pretty much it for that segment for 2019. As we roll in 2020, I think there are going to be opportunities there. But again, we are going to stay conservatively I think across the entire portfolio even entering to 2020. We have utilization that can still be built in on the rig side and some of our other services.

So while 2020, we will turn back on the growth CapEx it will be on a conservative basis..

Got it. I'll live it there guys. Thank you for the time..

Thanks, Daniel..

Our next question comes from Thomas Curran from B. Riley FBR. Please go ahead, sir..

Good morning, guys..

Good morning..

Hi, Tom..

Darron, now that Mallard has returned to full utilization with all 13 units working, how many different customers are those 13 working for at this point?.

Oh gosh, I would say there's not any customer with more than three units working for them today. So you're probably talking five to six customers. I can count real quick here, but I'd say five to six customers..

And when I think of some of the companies that emerged and have remained -- emerged as early fans and have remained active users of yours, Pioneer, Concho these are among the most blue-chip established high-quality operators out there.

Are the two that you upgraded with, are they both incremental? Are they both new customers?.

What we upgrade to was two of our existing customer base of similar blue-chip soft customers that you just described..

Okay.

So you did have additional units go to existing blue-chip operators?.

We gained market share with our existing blue-chip customer base, yes, sir..

Great. Turning to the ongoing M&A effort you have underway.

I'd be curious to know when it comes to the pipeline of PE sponsored prospects or family-owned private companies, how have valuation expectations evolved since the spring? And specifically have you seen any encouraging signs of a continued openness to accepting equity as part of consideration?.

So good question. Your description of our M&A processes I wouldn't exactly describe those M&A processes right now. But what I would say is that yes, when you think about the PE, when you think about the private, I think valuation expectations are becoming more into reality. I think that the U.S.

land service market has been a tough market for a lot of people out there and it continues to be a difficult market. And I think as a result of that, you have parties who are looking at options. I think that Ranger we're a viable option.I think we've proven to the market that we not execute that we're going to be disciplined.

All the attributes that we have for authorization and still the level of imbalance that we've gotten over the last few months continue to increase.

So while I won't say that we're actively trying to execute something I would say that our phone rings more a lot on the curve and we want to get ourselves in this position from the authorization of a balance sheet standpoint and we're here. So we have opportunities ahead of us and strategically we'll figure out what the right thing is to do.

Whether that's from selling being acquired all the options there are many that's going to present come to us..

Okay. Good to hear.

And then on -- Brandon, on the well service rig side would you update us for 2Q? What percentage of revenues came from completion-related work?.

Let's see if we can -- completion versus production. I have to give that for you off-line Tom, I don't have that in front of me. If you have another question we can probably get it in the next 25 seconds..

All right. Sure..

I give it to you off-line it's your choice..

Well, just curious I joined late Brandon so while you are you looking did you give all-in CapEx guidance for 2Q or for the second half growth plus maintenance all-in or range?.

So we did have --I'm going to call it an incremental $1.5 million in Q2 that we had not previously approved and planned so I'm a little gun shy because that CapEx is associated with new contracts and new rig deployments.

So it's very opportunistic.So on a go-forward basis what we do have approved is an -- not an incremental sorry, absolutely not incremental a residual $1 million for our processing services segment and that is essentially yet outside of approximately $1 million worth of maintenance CapEx per quarter.So approved CapEx looks like $3 million point forward through to the end of 2019.

The only caveat is that we continue to have a lot of success I would say on the contracted 24-hour and high margin 12- daylight-hour rig side and those incremental contracted rigs may come with small growth CapEx high stakes and less than $1 million per quarter..

Okay.

And that residual $1 million you would expect to incur all of that in 3Q?.

Yes. Yes..

Okay..

25. Yes, Sorry, Tom..

Did you find it?.

Yes. Hang on just one second..

Sure..

Tom, it looks like it does a even 25-75 split for rig revenue on completion versus production for the quarter..

Terrific. Thanks for taking my questions, guys..

Thanks..

Thank you..

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

I just want to thank everyone for their participation and continued support. We had a nice queue of people in the call today so the interest was quite high and hopefully we delivered the information you wanted to hear. So thank you to all of you and thank you to the outstanding Ranger employees and we look forward to talking to you next quarter.

Thank you, operator..

Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect. And enjoy the rest of your day..