Marcel Kessler - President and CEO Jon Faber - CFO

Jon Morrison - CIBC World Markets Jeff Fetterly - Peters & Co. Mike Mazar - BMO Capital Markets

Thank you. Good morning and welcome to Pason’s second quarter 2016 conference call.

With me here in Calgary is Jon Faber, our Chief Financial Officer. I’ll start with a high level overview of second quarter performance and a brief outlook.

Jon Faber will then dive into details of our financial and operational performance. And we will then be happy to take any questions.

As you are all aware, the environment for oil field services worldwide remained extremely challenging during the second quarter. US drilling activity as measured in industry days, dropped 55% from the previous year period and 24% from the first quarter.

These are the lowest US drilling activity levels since reliable tracking has started. Canadian drilling activity experienced a 53% year-over-year reduction and was at the low - and was the weakest in 30 years.

The majority of international markets, with the exceptions of the Middle East and Argentina, were similarly affected. Pason’s second quarter results directly reflect these declines in drilling activity.

Revenue for the quarter was $27.2 million, a 53% decline from the previous year. Adjusted EBITDA was a negative $1.5 million and the company incurred a loss for the quarter of $11.3 million or $0.13 per share.

Significant previously implemented cost reductions and lower depreciation expenses partially offset this drop in revenue. North American EDR market share was down from the previous year, primarily driven by changes in the mix of active customers and regions.

Revenue per EDR day in the US and Canada was essentially unchanged year-over-year with pricing concessions being offset by higher adoption of certain products. Our cash position stood at $162 million at the end of the period.

There is no debt on our balance sheet and we are maintaining our quarterly dividend at $0.17 per share. And briefly turning to our outlook, it is likely that the second quarter was the low point for North American drilling activity both seasonally and cyclically.

However, oil prices continue to be very volatile and the outlook remains highly uncertain. We don’t expect significant increases in operator capital spending plans for the rest of the year.

We also don’t expect any improvements in pricing for some time. In the US, any activity uplift is likely to happen earliest in the Permian region.

For the remainder of 2016, we aim to strike the optimal balance between cost control and investments in future growth. Our objective continues to be to generate positive free cash flow, excluding restructuring costs, before the dividend for this year, while holding on to our position as the service provider of choice for key operator and drilling contractor customers.

We are continuing to invest in future growth, including investing in new product development, service capabilities, infrastructure and systems, and in our international footprint. We plan to continue allocating resources for R&D and IT and we intend to spend up to $25 million in capital expenditures in 2016.

We believe that Pason continues to be very well positioned to maximize returns and the industry’s eventual upturn. I’m now turning the call over to Jon Faber for a more detailed look at the financials.

Thank you, Marcel. Consolidated second quarter revenue of $27.2 million was down 53% year-over-year from $57.4 million in the second quarter of 2015 and down 41% sequentially from the first quarter of 2016.

Significant declines in drilling activity in each of our major operating regions was the primary driver of the revenue decrease. EBITDA for the second quarter was negative $2.2 million, down $9.7 million from positive EBITDA of $7.5 million in the second quarter of 2015 and down $1.9 million sequentially from first quarter 2016 EBITDA of negative $353,000.

Adjusted EBITDA of negative $1.5 million for the quarter was down $11.4 million from positive adjusted EBITDA of $9.9 million in the second quarter of 2015 and down $10.2 million sequentially from positive $8.8 million in the first quarter of the year. Depreciation and amortization expense in the second quarter of $13.6 million compared to $20.6 million in the second quarter of 2015 and $16.4 million in the first quarter of 2016.

The company recorded a net loss of $11.3 million for the second quarter of 2016. On a per share basis, the net loss equates to $0.13 per share compared to a net loss of $0.11 per share in the second quarter of 2015 and a net loss of $0.13 per share in the first quarter of 2016.

Stock-based compensation expense was $2.2 million in the second quarter, compared to $5.6 million in the prior year period and $962,000 in the first quarter of 2016. For the first six months of 2016, consolidated revenue totaled $73 million, a 53% year-over-year reduction from $156.8 million in the first half of 2015.

Significant reductions in drilling activity in each of our major operating regions was the primary driver of the revenue declines in the first half of the year. EBITDA for the first half of the year was negative $2.6 million and was down $54.2 million from positive EBITDA of $51.6 million in the prior year period.

Adjusted EBITDA of $7.3 million for the six month period was down $44.3 million from $51.6 million in 2015. Depreciation and amortization expense for the six month period of $29.9 million was down 29% from $42.3 million in the first half of 2015, largely due to reduced carrying values of rental assets as a result of impairment charges taken in the fourth quarter of 2014 and the third quarter of 2015.

The company recorded a net loss of $22.2 million for the first half of 2016 or $0.26 per share compared to net income of $4.8 million or $0.06 per share in the first half of 2015. I’ll begin a review of the segmented results with our US business unit.

The US business unit posted second quarter revenue of $16.4 million, a 57% reduction from $38.5 million in the second quarter of 2015. Sequentially, revenue was $7.2 million lower than the first quarter of 2016.

The revenue decline was driven by a 55% year-over-year decrease in industry activity and slightly larger US, slightly lower US market share resulting from changes in the mix of active customers and basins. Operating income of $179,000 was down $10.7 million from operating income of $10.8 million in the second quarter of 2015 and decreased $1.4 million sequentially from $1.6 million in the first quarter of 2016.

Year-to-date, US revenue of $40 million is down $56 million from $96 million in 2015. Operating income for the first half of the year of $1.8 million was $31.8 million lower than operating income of $33.6 million in 2015.

Canadian business unit revenue of $5 million in the second quarter compared to $9.2 million in the same period of 2015, as industry activity was 53% lower year-over-year. Sequentially, Canadian revenue decreased 68% from $15.8 million in the first quarter.

An operating loss of $5.3 million was a $2.2 million improvement from an operating loss of $7.5 million in the second quarter of 2015 and down sequentially $8.2 million from operating income of $2.9 million in the first quarter of 2016. The Canadian business unit posted a $2.4 million operating loss in the first half of 2016, on revenue of $20.8 million.

This compares to a $2.7 million operating income and $38.6 million of revenue in the first half of 2015. Our third segment is the international business unit.

In the second quarter, our international business unit posted revenue of $5.8 million, a 41% year-over-year decline from $9.7 million in the same quarter of 2015. Sequentially, revenue declined 9% from $6.4 million in Q1, 2016.

The majority of our international markets with the exception of the Middle East and Argentina have seen similarly challenging operating environments as those experienced in North America. The significant year-over-year decline was also impacted by a significant devaluation of the Argentinian peso in the fourth quarter of 2015.

An operating loss of $190,000 in the second quarter was a $326,000 improvement from an operating loss of $516,000 in the second quarter of 2015. For the six months ended June 30, revenue for the international business unit totaled $12.1 million, down 45% from $22.2 million in the first half of 2015.

The six month comparison is similarly impacted by the devaluation of the Argentinian peso in the fourth quarter of 2015. An operating loss of $1.4 million in the six month period compared to operating income of $957,000 in the first half of 2015.

Finally, I will briefly review capital expenditures and the balance sheet. Capital expenditures in the first half of 2016 tootled $11.5 million, including $4.9 million in the second quarter.

This represents a 51% decrease year-over-year for the second quarter and a 66% decrease for the six-month period. We expect to spend up to $25 million on capital expenditures including capitalist R&D and IT investments in 2016.

At June 30, we had positive working capital of $198 million. Our cash balance at June 30 stood at $162 million, down from $176 million at March 31.

There is no debt on the balance sheet and we are maintaining a quarterly dividend at $0.17 per share. At this point, we'll be happy to take any questions.

It is fair to assume that customers aren't asking for further reductions at this point and you believe that stability and pricing probably holds from here in next few quarters?

I don't think that's quite the situation Jon, we do see continued strong pricing pressure with customer asking for significant reductions. They ask it and some price concessions both in the US and Canada, I don't think we can go into the detail but the stability in revenue per EDR day is essentially the result of the price concessions being offset by higher adoption of certain products.

But the pricing pressure has not eased especially in Canada.

Were you surprised to see the ancillary uptick in more products considering that you saw some customers shedding products call it six or nine months ago?

Well, I would say positively surprised, I think there are some newer products which do have significant value for customers and we see the uptick there. So, [indiscernible] and some other ancillary products.

So we were obviously very hopeful that there would be some positive momentum there but it’s a positive result.

Are you seeing any change in your market largest customers’ behavior and they are starting to come to line and not get pricing discounts or ultimately it is still a very competitive market out there?

I think it is still very, very price competitive, we have not really seen that easing in any way.

On the communication side, can you speak about the industry demand trends that you're seeing from your customers and has there been any shift in the amount of communication demand that they have relative to the positive trend that you saw over the last call it two years?

I think clearly with the cost crunch, the reduction of bandwidth was one of the first easy steps for the customers to reduce the spend, so we have certainly seen much of that the reduction in bandwidth consumption during 2015, I don't think we have seen much more of that in 2016.

Can you give any idea, you talked about in the quarter your success in Saudi and the Middle East, can you give any sense of what your market share is in those markets at this stage?

So, I don't think we have the exact statistics, we expect we have of the order of 10% to 15% of the rigs in Saudi Arabia but that’s an educated guess.

Jon, is the expensed R&D that you guys posted in Q1 and Q2 fairly indicative of what we should expect in the coming 3 to 4 quarters, just given that you continue to plan to invest in the business going forward?

I think if you look at the second quarter that's a better reflection, [indiscernible] we had a further reduction on the staffing side at the end of the first quarter, so the second quarter is a better reflection of certain run rate if you will.

Assuming that we don't see any incremental weakening, especially at trough from a cyclical and seasonal perspective, is it fair to assume that we shouldn't think that any further cost reductions are on the coming the next couple of quarters?

I think you will see some positive run rate effects from previously announced reductions, we will be able to further reduce the cost for satellite bandwidth here at the end of the year but in terms of other operating costs that’s correct we don't plan to make further cuts at this point.

Last one just from me, Marcel, can you talk philosophically how you think about the dividend versus other cash expenditures at this point, you’ve obviously taken fairly aggressive steps to scale your business and not be burning cash flow from operations on the employee side, but I was somewhat surprised that the dividend holds constant and ultimately isn’t adjusted at this stage and is largely been funded of the balance sheet? Can you just give some sense of why it was held versus being cut?

Yes, so you are right, we are funding the dividend almost entirely from the balance sheet at this point. There are really two drivers for that, one is, we know that many of our longstanding institutional and private investors have a strong preference for the maintenance of the dividend, we are having many conversations regarding the dividend with our investors.

So, that is the situation for many of them. Secondly, we feel that the reduction in cash balance that we are seeing this year does not really constrain our strategic freedom in terms of what we think is out there in terms of uses for cash through M&A or organic initiatives, so we don't really feel that, it does not limit our degree to freedom.

So you believe it is fair to assume that M&A and everything else is still on the table and ultimately you have more than enough capital to chase and pursue both of those dual pools I guess?

That's correct, I think M&A is still on the table, I see now the list of potentially interesting targets for us as always been [indiscernible] we can't really buy market share in our core so most acquisitions of any size would be some level of step out, obviously many of those step outs are a lot less attractive today, they are a lot more questionable at least than they would have been a couple of years ago. Some of the things that are very interesting today still are just extraordinarily expensive if you talk more about the pure software and technology side, so relatively less affordable than it would have been a couple of years ago.

But it’s still on the table there is a few interesting things out there but we don't believe that again the reduction in the cash balance [indiscernible] actually limits anything we think we can considerably do here over the next year or two.

On the purchasing side, I know Marcel you talked about some sensitivity around it but, can you give us a little bit more perspective color of some of the discounts or incentives that you’re providing and how that ties into the adoption element?

I don't think we want to provide a lot more detail around that given how extremely price competitive this space has become at least for some of our products. I don't want to say a lot more, we have spoken in the past about having given in aggregate for both Canada and the US about 10% price concessions across the board, across all products.

I think that still holds on average across the board but there would be differences between various product categories. And I don't think it would be appropriate for me for competitive reasons to go into more detail than that.

Is there a specific product or specific region where you’re seeing the greatest or disproportionate pricing pressure for competitiveness?

I don’t want to go into that Jeff, I'm sorry.

To follow-up on John's question around the dividends, given that you're comfortable funding it from the balance sheet for now, how long are you comfortable continuing to use the balance sheet to sustain the current dividend?

I would say we are comfortable using exclusively the balance sheet until the end of this year. We will revisit that dividend in 2017, I think it’s probably reasonable to expect at least there was no change in activity levels in 2017 there will have to be an adjustment in the dividend level.

And lastly, on cost cutting and I guess the scale of the platform, so, with the reductions you've made in terms of North American rig count or US rig count, what size do you think you’ve scaled the business down to in terms of managing activity and to what level do you think you can handle an increase in rig count without adding incremental cost you’re significantly having to add incremental costs of the business?

Good question Jeff, now I believe fundamentally we have significant capacity to absorb higher activity and higher rig counts. At least 50% if not more can easily be absorbed within the current cost structure both on the field service side, the deskhelp side as well as we see available bandwidth.

Now that being said, it depends significantly where the activity recovery happens, if it is in basins that are currently fairly low staffed, we might have to add back staffs in those regions but based on what we see today, with much of the recovery in the US likely to happen in the Permian or simply in basins that are currently quite back, we believe that we can absorb, easily absorb a significant activity increase in the current cost structure.

Hey guys sorry, my question was [indiscernible] in terms of how you can scale the cost, I just didn’t know how to cancel the question.