DistributionNOW (DNOW) Q1 2016 Earnings Call

posted in: Earnings Call, Notes | 0

DistributionNOW (DNOW) CEO Robert Workman said oil storage capacity is nearly tapped out

“The first quarter of 2016 proved to be as challenging as the many preceding quarters with the U.S. and Canada rig count dropping 23% sequentially and 57% versus the year ago period. While production in the U.S. peaked several months ago, oil storage is proving quite stubborn and is rivaling levels from over 80 years ago. Until production declines translate into meaningful oil inventory storage reductions in the U.S., I believe we will continue to operate in a challenging upstream environment.”

Couldn’t imagine the industry operating under more distressed circumstances

“Without question, today’s operating environment is the most challenging any of our teams have experienced. Even though some of our largest revenue streams are being negatively impacted like never before, in part due to wells being drilled but not completed whereby tank batteries or hook ups are not being constructed.”

Have cut 30% of their workforce since the beginning of the energy downturn

“Total head count was reduced by approximately 425 during the first quarter of 2016, 65 of whom were from companies we’ve acquired since becoming a standalone public company. Excluding acquisitions, by the end of Q1, 2016 we’ve reduced head count by about 1,650 or approximately 30% of the workforce since the late 2014 peak”

Steel, which is used in many of their products, has been rising of late

“We’ve seen an uptick in steel prices that started in February and has continued through April, driven by a rise in iron ore, scrap and the Chinese steel market. Iron ore has risen back to the levels last seen in mid-2015 and scrap has almost doubled in price since early March. This has caused a spike in the hot-rolled coil price, supported by the favorable preliminary determination of a dumping suit filed in the USA for hot-rolled coil.”

Offshore drilling contractors continue to idle rigs

“On earrings calls in the last few weeks, several offshore drilling contractors have announced more scrapping and stacking of rigs, which will in turn add more surplus inventory to the market to be redeployed and cannibalized across their operating fleets. While all of these actions further challenge our operating environment, they also set the stage for higher demand for our products and services when the market corrects. When customers increase activity, the amount of product they’ll need to restock operator warehouses and rigs and the pipe, valves and fittings required to complete wells will benefit DNOW exceptionally well since we will be at the front edge of the recovery just as we were in the decline.”

DistributionNOW (DNOW) CEO Robert Workman thinks the best use of their cash is acquisitions as opposed to share buybacks or retiring debt

“We continue to see the best use of our cash and line of credit to be investing in high-value-add acquisitions that expand the products, services and geographies that allow DNOW to differentiate ourselves in our market.  We do have other deals in the pipeline that we’re reviewing but we’re continuing to watch the market and be fiscally conservative.”

DistributionNOW (DNOW) Chief Accounting Officer David Cherechinsky said their customers are distressed

“What we’re seeing is our customers being more stressed financially, as you would expect. And customers are demanding longer terms and some simply can’t pay their bills, so we’re seeing an uptick in that expense. Again, as the market bottoms and that we see some recovery, hopefully that will abate but that would be sequential increase.”

DistributionNOW (DNOW) CEO Robert Workman thinks oil producers will start adding back rigs when oil gets to the $50-$65 range

“I read all of our customers’ reports and they tell us all the same thing publicly, but I haven’t seen anyone say they’re going to pick up rigs at less than $50. And some are saying, they won’t pick up rigs until we get to $65. So in the $50 to $65 range if it’s sustainable, I think you’re going to see people start adding back rigs.”