The following discussion of our financial condition, results of operations,
liquidity, and capital resources should be read in conjunction with the
unaudited condensed consolidated financial statements and notes thereto included
in this report as well as our Annual Report on Form 10-K for the year ended
December 31, 2019. Our second quarter represents the three month period ended
June 30 and our first half represents the six month period ended June 30. Unless
otherwise noted, all currency amounts are stated in U.S. dollars. The reference
to a "Note" herein refers to the accompanying Notes to Unaudited Condensed
Consolidated Financial Statements contained in Item 1 "Financial Statements."
Overview
We are a geographically diversified supplier providing products, as well as
rentals and services. We operate our business through two reportable segments:
Fluids Systems, which primarily serves the oil and natural gas exploration and
production ("E&P") industry, and Mats and Integrated Services, which serves a
variety of industries, including E&P, electrical transmission & distribution,
pipeline, renewable energy, petrochemical, and construction industries.
Our operating results, particularly for the Fluids Systems segment, depend on
oil and natural gas drilling activity levels in the markets we serve and the
nature of the drilling operations (including the depth and whether the wells are
drilled vertically or horizontally), which governs the revenue potential of each
well. Drilling activity levels, in turn, depend on a variety of factors,
including oil and natural gas commodity pricing, inventory levels, product
demand, and regulatory restrictions. Oil and natural gas prices and activity are
cyclical and volatile, and this market volatility has a significant impact on
our operating results.
While our revenue potential is driven by a number of factors including those
described above, rig count data remains the most widely accepted indicator of
drilling activity. Average North American rig count data for the second quarter
and first half of 2020 as compared to the same periods of 2019 is as follows:
                                          Second Quarter                           2020 vs 2019
                                        2020            2019        Count            %
         U.S. Rig Count                     392          989        (597)              (60) %
         Canada Rig Count                    25           82         (57)              (70) %
         North America Rig Count            417        1,071        (654)              (61) %

                                            First Half                             2020 vs 2019
                                        2020            2019        Count            %
         U.S. Rig Count                     588        1,016        (428)              (42) %
         Canada Rig Count                   110          132         (22)              (17) %
         North America Rig Count            698        1,148        (450)              (39) %

_______________________________________________________

Source: Baker Hughes Company During 2019, U.S. rig counts steadily declined, exiting the year at 805 active rigs, a 26% decline from the end of 2018. During March 2020, oil prices collapsed due to geopolitical events along with the worldwide effects of the COVID-19 pandemic. As a result, average U.S. rig counts in the second quarter of 2020 declined 50% from the first quarter of 2020 average level. The pace of decline in the U.S. land market rig count has decreased in recent weeks, with the U.S. active rig count at 251 as of July 31, 2020. The Canada active rig count reflects both the current weakness in oil prices as well as normal seasonality for this market, with the highest rig count levels generally observed in the first quarter of each year, prior to Spring break-up. We anticipate that market activity may begin to improve from current levels through the remainder of 2020, although the ongoing impacts of the COVID-19 pandemic and an uncertain economic environment that will likely persist through the remainder of 2020 make the timing and pace of recovery difficult to predict. Outside of North America, drilling activity is generally more stable as drilling activity in many countries is based on longer-term economic projections and multi-year drilling programs, which tends to reduce the impact of short-term changes in commodity prices on overall drilling activity. However, operations in several countries in the EMEA region experienced activity disruptions and project delays beginning in March 2020 which continued throughout the second quarter of 2020, driven by government-imposed restrictions on movements of personnel, quarantines of staffing, and logistical limitations as a result of the COVID-19 pandemic. We currently expect these disruptions and project delays will continue to impact international activity levels into the fourth quarter of 2020 before beginning to gradually recover late in 2020 and into early 2021, although the


                                       16

--------------------------------------------------------------------------------



impact from the duration and magnitude of the ongoing health pandemic and
related government responses are very difficult to predict.
In response to the deteriorating U.S. land oil and natural gas market and
reduced demand for our products and services as a result of the decline in oil
prices and the COVID-19 pandemic, we initiated a number of actions late in the
first quarter of 2020 aimed at conserving cash and protecting our liquidity, and
continued these actions in the second quarter of 2020, including:
•The implementation of cost reduction programs, including workforce reductions,
employee furloughs, the suspension of the Company's matching contributions to
its U.S. defined contribution plan, and temporary salary reductions effective
April 1, 2020 for a significant portion of U.S. employees, including a 15% cut
to the salaries paid to executive officers and the annual cash retainers paid to
all non-employee members of the Board of Directors;
•The initiation of additional actions to further reduce the operational
footprint of the Fluids Systems business in U.S. land, to better align our cost
structure with expected declines in market activity levels; and
•The elimination of all non-critical capital investments.
As part of the cost reduction programs, we have reduced our global employee base
by approximately 550 (25%) in the first half of 2020.
We recognized $13.3 million of charges for inventory write-downs, severance
costs, and facility exit costs in the first half of 2020, with $12.9 million in
the Fluids Systems segment and $0.4 million in the Corporate office. The
$12.9 million of Fluids Systems charges includes $9.0 million for inventory
write-downs, $3.1 million in severance costs, and $0.8 million in facility
closures and related exit costs.
While we have taken certain actions to reduce our workforce and cost structure,
our business contains high levels of fixed costs, including significant facility
and personnel expenses. We continue to evaluate under-performing areas as well
as opportunities to further enable a more efficient and scalable cost structure.
In the absence of a longer-term increase in activity levels, we may incur future
charges related to further cost reduction efforts or potential asset
impairments, which may negatively impact our future results.
Segment Overview
Our Fluids Systems segment, which generated 78% of consolidated revenues for the
first half of 2020, provides customized drilling, completion, and stimulation
fluids solutions to E&P customers primarily in North America and Europe, the
Middle East and Africa ("EMEA"), as well as certain countries in Asia Pacific
and Latin America. International expansion, including the penetration of
international oil companies ("IOCs") and national oil companies ("NOCs"), is a
key element of our Fluids Systems strategy, which has historically helped to
stabilize segment revenues while North American oil and natural gas exploration
activities have fluctuated significantly. Revenues from IOC and NOC customers
represented approximately 44% of Fluids Systems segment revenues for the first
half of 2020 compared to approximately 29% for the first half of 2019.
In addition to our international expansion efforts, we have also expanded our
presence in the deepwater Gulf of Mexico, capitalizing on our capabilities,
infrastructure, and strong market position, as well as through product line
extensions into adjacent product offerings, including completion
fluids. Revenues for drilling and completion fluids from offshore Gulf of Mexico
increased to $30 million for the first half of 2020 compared to $22 million for
the first half of 2019.
In response to the increasing market demand for cleaning products following the
COVID-19 pandemic, we began leveraging our chemical blending capacity and
technical expertise to begin producing a variety of disinfectants and cleaning
products in the second quarter of 2020. While not significant, we began
supplying our first customer order in the second quarter and continue to work
with several other potential customers with plans to ramp up production over the
next several months.
Our Mats and Integrated Services segment, which generated 22% of consolidated
revenues for the first half of 2020, provides composite mat rentals utilized for
temporary worksite access, along with related site construction and services to
customers in various markets including E&P, electrical transmission &
distribution, pipeline, renewable energy, petrochemical, and construction
industries across North America and Europe. We also sell composite mats to
customers around the world.

                                       17

--------------------------------------------------------------------------------

The expansion of our rental and service activities in non-E&P markets remains a strategic priority for us due to the magnitude of this market growth opportunity, as well as the market's relative stability compared to E&P. The Mats and Integrated Services segment rental and service revenues from non-E&P markets was approximately $29 million for the first half of 2020 compared to approximately $33 million for the first half of 2019. Product sales revenues largely reflect sales to utility customers and other non-E&P markets, and typically fluctuate based on the timing of customer orders. Including product sales, total revenues from non-E&P markets represented approximately 64% of total segment revenues for the first half of 2020 compared to approximately 45% of total segment revenues for the first half of 2019. During the first half of 2020, our business was impacted by the COVID-19 pandemic, as customers delayed sales orders and project timing citing COVID-related market uncertainty, permitting delays, and logistical restrictions. As a result, we are reducing our mat production levels for the remainder of 2020 to reduce current inventory levels, which may negatively impact our future results due to the high level of fixed costs in our manufacturing operations. We currently expect that increased activity for both rental projects and product sales remains highly dependent on our customers gaining confidence in the broader economic recovery. While customer quoting activity has improved from the lull seen during the second quarter of 2020, the ongoing impact of these uncertainties, permitting delays, and logistical restrictions are difficult to predict.



                                       18

--------------------------------------------------------------------------------

© Edgar Online, source Glimpses