Q2 2020 Select Energy Services Inc Earnings Call
Greetings and welcome to the select energy second quarter earnings Conference call.
This time all participants are in listen only mode. A brief question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone keypad as a reminder, this conference call is being recorded.
It is now my pleasure to introduce your host Mr., Chris George. Thank you you may begin.
Thank you operator, and good morning, everyone.
I appreciate you joining us for the select energy Services' conference call and webcast to review, our financial and operating results for the second quarter 2020.
With me today are Hollywood, Donnie, our President and Chief Executive Officer, Nics, Weichai, Senior Vice President and Chief Financial Officer.
Before I turn the call or bribe a few housekeeping items to cover a replay of today's call will be available by webcast and accessible from our website at select energy services Dot com.
There will also be a recorded telephonic replay available until August 19th.
2020.
Access information for this replay was included in yesterday's earnings release.
Please note that the information reported on this call speaks only as of today August 2020, and therefore time sensitive information may no longer be accurate as at the time of the replay listening or transcript reading.
In addition, the comments made by management. During this conference call may contain forward looking statement.
The meaning of the United States Federal Securities laws.
These forward looking statements reflect the current views of flex management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those expressed in the statements made by management.
Well listener is encouraged to read our annual report on form 10-K for the year ended December 31st 2019, or subsequent quarterly reports on form 10-Q, and our current reports on form 8-K to understand those risks uncertainties and contingencies.
Also please refer to our second quarter earnings announcement released yesterday reconciliations of non-GAAP financial measures and now I would like to turn the call over to our President and CEO Hollywood Donny.
Thanks, Chris.
Good morning, everyone. Thanks for joining us today.
The second quarter 2020, with one of the most challenging period, we've ever been through as a company and as an industry. Although our industry is used to the cycle.
A few months have presented their own unique challenges.
First and foremost as an essential service, we've been focused on keeping our people say well continuing to support our customers critical operation.
I'd like thank our employees for their continued dedication and incredible hard work over the last few months and our thoughts are with all of those affected directly or indirectly by cobot 19.
Well, our second quarter financial results clearly challenge. We did have continued success in our cash generation efforts and our cost management strategy is certainly delivering results.
In a moment nipple review the quarter's financial result in more detail, but first I'd like to touch on a few macro point provide you with an update on the specific actions we've taken to meet the challenges of today's market and then review our positioning looking forward.
Although crude prices sensory covered off the trough level seen in April and May impact on our second quarter results with significant.
Gas basins held up better than oil basin, but there was really nowhere to hide during the second quarter.
We experienced activity reductions across the board over the course of the second quarter, what total U.S. rig count down, 55% horizontal completions declining more than 60%.
The number of active Frac fleet declining approximately 70%.
It's always challenging to manage costs downward as fast as activity can drop, particularly when the pace of the decline as a steep as it was and the second quarter.
That said the speed at immediate impact of our cost management decision can clearly be seen in our second quarter results and we anticipate thing further benefits from that in the back half of the here.
The core of our strategy continues to center on providing premier solutions to our customers protecting our strong balance sheet liquidity.
An emerging on the other side of this downturn in a position to capitalize on a significant opportunities we expect will be available.
Doing so his required very difficult far reaching decisions to rightsize the business for the activity environment, we find ourselves and today.
We began to aggressively manage cost downward in mid March and this continued throughout the second quarter.
To that point I'd like to follow up on some of the key cost management initiatives from our first quarter call an update you on our latest actions and target.
First we achieved our previously targeted S. DNA savings ahead of schedule and have increased our target now expecting our third quarter 2020 annualized run rate to be down 40% to 45% relative to our 2019 fourth quarter run rate and down approximately 50% relative to our 2019.
Total S. DNA.
Well, particularly challenging our employee headcount has been reduced by approximately 60% relative to the peak in the first quarter.
We've implemented furlough programs and reduced based pay but at least 10% nearly across the board.
With further reductions beyond that for executive management, and our board of directors.
We have terminated dozens of leases for facilities and housing units as we consolidate our operation we've renegotiated payment terms across a number of our lease jarden facilities, and we simplified our operational structure.
We've negotiated discounts and adjusted pricing terms with a number of our vendors to help manage through this challenging time.
Finally, with normal course asset sales outpacing capex, we effectively reduced our net capex to zero during the second quarter and we're confident we'll come back well under our net capex target of 20 million for the here.
Well revenue declined 67% during the quarter generally in line with activity level, we were able to hold decremental margins to approximately 21% at both the gross margin and adjusted EBITDA margin level significantly outperforming our historical decremental target.
Which reinforces the variable nature of our cost structure and the team's execution to get costs out quickly.
A significant amount of political and economic uncertainty remain underpinned by the effects of cobot night team, but we're cautiously optimistic that activity levels bottomed late during the second quarter.
We've seen modest Frac crew additions in recent weeks as well as customers reevaluating their shut in production and we're getting more visibility into workflows for the coming month.
That said potential Q4 seasonality and the ongoing uncertainty regarding the cobot 19 pandemic will likely result in a slow and steady long term recovery, it's more muted in the near term rather than a D V shaped recovery.
If we look forward I think it's important to do you consider what will be different about the recovery in this cycle for select.
A handful of areas in particular stand out.
Capital availability, the competitive landscape asset availability structural changes to our business and our healthy balance sheet.
When you combine the challenging broader economic conditions with the general recent track record of oil and gas industry return, we anticipate that both debt and equity capital availability, whether through private or public markets will be more limited for our industry going forward as compared to the last downturn.
This will require the industry to solve many of its own challenges out of free cash flow, resulting from increased efficiency consolidation and improve capital discipline.
We believe we'll see the shell upstream landscape continues to consolidate into fewer larger well capitalized and more disciplined organization with many smaller players being consolidated or exiting the market.
Be surviving operators will be keenly focused on driving towards a more efficient and sustainable shale development model.
Oh, it's not lead this will impact our own competitive landscape has a detriment of narrower more commoditized service providers.
Comparative landscape has been changing for a while now and even prior to the current downturn. We've had many competitors struggling to keep up with the operational efficiencies the scale and the technical expertise that's necessary to excel in this environment.
I'd like to not only the financial mean, but the people experience and expertise to continue to extend the gap between ourselves and our competition in the quarters ahead.
We remain very focused on continuing to advance our strategies around data technology and water lifecycle sustainability that we believe are particularly important to these key customers.
The water solutions space is unique when compared to many other oh, if that subsectors, partly driven by the consolidation effort. We undertook back in 2017, what the rock water merger. Unlike other sectors. There very few large players we compete with and even fewer with the balance sheet and capital availability that will be necessary to support.
The major operators and the recovery ahead.
Well our equipment. It's under utilized today are space was not overbuilt during the last summer and the same manner as many other oh that's subsectors.
This positions us very well continue to capture and grow our market share across the service line and generate returns on the capital we've deployed.
In addition to the cost reduction efforts I outlined earlier, we've taken the opportunity to rethink how we're organized and how we execute our operation.
Based on that review in addition to reducing meaningful variable costs, we've implemented a number of structural changes to our organization.
We streamlined our operation significantly reducing the number of operating yard and simplified our reporting structure.
Additionally, we removed layers across the various business lines with a particular focus on further integrating our water and chemicals operation to provide more comprehensive solutions to our customers.
As the water sourcing supply chain continues to become more complex and the opportunities for produced water reuse continue to grow the interplay of the relationship between water quality and the chemistry behind the Frac fluid system continues to garner increased focus from our customers, particularly the larger operators with clear yes, the ambition.
So these efforts have taken a bit of a pause during the current market downturn, but we believe these trends will continue in the recovery.
A comprehensive nature of our existing customer relationships service capabilities and technical expertise across both water and chemical allow us to more effectively grow our business further disparate differentiate our market leading position and advance our strategy to be the full solutions provider.
Finally, our balance sheet affords us a significant amount of flexibility to pursue new solutions for our customers, while maintaining a focused on free cash flow generation.
Our intention is to maintain a business model that allows us to limit our maintenance capital to one third or less of EBIT talk to the cycles.
We've seen the benefits of this recently as we've shown a significant amount of flexibility to control our capital spending during the downturn without detrimentally impacting our capabilities our ability to support our customers in a future recovery.
Well continue to pursue opportunities to grow organically and we will evaluate investments in technology and accretive acquisitions that support our long term strategy.
That said will be disciplined in our approach to growth and acquisition just as we've been in the past.
We recognize we still have tough days ahead of us, but we also know that the future will belong to those companies her the most efficient the best capitalized and active fastest to transform their businesses to match the market.
With that I'll hand, it over to Nick to walk through our second quarter financial performance in more detail.
Thank you Holly and good morning, everyone well the second quarter was certainly difficult from an industry activity perspective, we effectively matched our best free cash flow quarter ever as a public company exited the quarter with unprecedented balance sheet strength.
$56 million, a free cash flow generated during the second quarter demonstrates the resilience of our business model and our disciplined capital structure as well as our nimble and resolute approach to cost rationalization.
Roughly 80% decline and completions activity from peak levels earlier. This year makes for an extremely difficult hill to climb in terms of taking cost out quickly enough to keep pace with declines in activity and what was effectively a free falling market.
We eliminated significant cost for both the field and back office and after adjusting for non recurring expenses, we achieved our S. DNA targets production a quarter early with more savings to call.
That's all we mentioned our ability to hold decrementals to near 20% levels in the face of revenue declines we've never before seen as a company represents a significant achievement.
While these cost savings measures were unable to prevent adjusted EBITDA from going negative during the second quarter given the speed of the revenue declines. We've seen continued improvements in July with modest revenue growth adjusted EBITDA projections approaching breakeven.
I feel optimistic that we're positioned to return to adjusted EBITDA levels, a breakeven or better a third quarter supported by moderate revenue improvements, but I'd caution that forecasting certainly remains a difficult proposition in this environment.
Our $97 million of year to date free cash flow has further bolstered our already pristine balance sheet and provides us with increasing optionality in a distress landscape.
We now have over 166 million of cash on hand as of the ended the quarter with zero debt at a fully undrawn revolver, providing for overall liquidity of 262 million.
With the downturn with swiftly cut back to effectively zero net capex for the quarter, which benefited our cash flows in tandem with significant collections from our accounts receivable balances.
Turning to our results in more detail slick generated total revenue of $92 million in the second quarter declining due to the industry downturn from 278 million in the first quarter, though this rapid downward trend showed signs of having dropped quite yet.
Gross margins before depreciation and amortization fell precipitously to 1.9% during the second quarter due to the magnitude of the revenue declines insufficient utilization to cover certain fixed costs and the nonrecurring impact of severance and yard closure costs among others.
That's it for these nonrecurring costs consolidated gross margin before DNA would increase by more than 400 basis points to 6.1% during the second quarter.
Adjusted EBITDA, which decreased from $24 million in the first quarter two negative 8.3 million in the second quarter was impacted by these gross margin declines as well as an additional bad debt accrual of a little over 2 million.
Total adjustments this quarter of 18 million, most notably for asset impairments severance and non cash losses on asset sales.
With a net loss for the second quarter, a $53 million.
As a net loss of 291 million in the first quarter, which was greatly impacted by 276 million goodwill impairment.
The water services segments revenues decreased 63% sequentially $56 million in the second quarter from 150 million in the first.
With the exception of our study are produced water hauling business our service lines generally declined in line with completions activity.
The segment generated gross profit before depreciation and amortization of 1.8 million in the second quarter compared to 20 million in the first reflecting a decline in segment gross margin from 14% to 3.2% or a 20% decremental margin.
Absent the effect of severance yard closure costs and other nonrecurring costs margins would have been 6.9%.
We believe this adjusted margin can be achieved in the third quarter, even on flat or modestly lower revenue as the upward completion activity trajectory. We currently forecast is unlikely to be a mirror image of the downward slope of Q2.
Water infrastructure segment saw revenues declined from $58 million in the first quarter to 15 million in the second.
Gross profit before DNA decrease from $10 million to 1.4 million quarter on quarter and gross margin before DNA decrease from 17% during the first quarter to 9.3% in second quarter, representing a 20% decremental margin.
The segment was not as impacted by special items like severance or yard closures. So adjusted for the point $2 million of charges incurred gross margins would have held in double digits at 10.6% during the quarter.
More impactful, where the large reductions in pipeline volumes during the quarter, especially for our high margin Bakken pipelines, which drove a big hit to revenue and especially margins.
Going volumes are unlikely to return to first quarter levels in the near term, we're seeing a modest recovery and purchases in the Bakken and our northern Delaware pipeline volumes should see an incremental increases well third quarter.
These developments should drive sequential revenue growth and a return to double digit margins in Q3.
As a quick reminder, on the accounting treatment for the northern Delaware pipeline, we reconcile cash payments annually for the anchor tenant early in the following year or the terms of both of the take or pay contracts. We recognized only the revenue for actual barrels sold in the applicable period.
Well chemicals segment dropped from 71 million of revenue in the first quarter $21 million in the second.
Gross margin before DNA decline from 16% to negative 6.8%, let's say gross loss before DNA of 1.4 million as compared to a gross profit of one of 11 million in the first quarter, representing a 25% decremental margin.
The segment was challenged by pricing declines for finished products relative to higher cost raw materials inventory purchase early in the year.
Additionally, severance inventory reserve adjustments and costs related to yard closures and early rental equipment returns, most notably relating to the idling of our Tyler manufacturing facility attracted approximately 1.6 million from gross profit for nearly 800 basis points.
Adjusted for these items gross margins would have remained positive at approximately 1%.
We expect modestly higher revenue and mid to high single digit margins for the segment for the third quarter.
Decisive actions, we took to reduce SGN a yielded a 7.6 million dollar reduction for the quarter or 30% to 17.7 million from 25.3 million in the first quarter.
[noise] considering the reductions made during the quarter and our June run rate. We expect these savings to continue to accumulate in the third quarter, resulting in SDMA reductions of 40% to 45% relative to Q4 2019 through an expense of approximately $13.5 million to $15 million for the third quarter.
Below the line, we've heard a slight tax benefit during the second quarter, while depreciation and amortization declined slightly to $26 million.
We expect to see DNA continued decline modestly in the coming quarters, given the capex reductions made.
We continue to have zero banks set and enjoy a net cash position of $166 million as of June thirtyth.
While we certainly won't repeat the 97 million dollar free cash flow year to date and the second half of the year.
At this time, we do anticipate a modest positive free cash flow number over the balance of the year.
Finally during the second quarter, we bought back 1.14 million shares for approximately $3.8 million at an average price of $3.36 per share.
In the near term, we will likely reduce share repurchases for the second half of the year as we further assess brought our capital allocation opportunities on the market.
Our 10 consecutive quarters of positive free cash flow has eliminated our past that funded new investments and left us with significant optionality in the form of dry powder at a time of severe market dislocation.
As we evaluate our options we will continue to execute on our core priorities driving free cash flow and preserving a strong balance sheet, while keeping our goal of shareholder value creation central of everything we do.
That I'll turn it over to the operator, well take your questions before Holly wraps up with some concluding remarks operator.
Thank you we will now be conducting a question and answer session. If you'd like to ask your question. Please press star one on your telephone keypad.
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One moment, please probably polling for questions.
Our first question comes from Kurt Hallead with RBC. Please proceed with your question.
Hey, good morning.
Good morning hurt.
I appreciate the color commentary and the a and B update.
I I think the yes, we're getting a a lot of commentary about a pickup in frac activity going into two <unk> third quarter again, some mixed read as to what that May look like going out into a into the fourth so understanding that nobody really has hit all crystal ball here and you can see things clearly I just want to get your perspective.
On your discussions with various customers and hey, with your ear to the ground on MP side of the business you know what what is your expectation you know poor frac activity. How you think it could maintain momentum going into fourth quarter or do you think that there's still some risk of there may be.
A decline in a in frac activity for seasonal purposes.
That's a great question, Kurt and as you would imagine the answer is you get varies greatly between customers and how they manage their capital program, but but clearly there was a heavy weighting towards a building of ducs in the first half a year. So we do I expect to see the Don.
Dollars first going towards completions and and we've seen that in the Frac crew count as it's been increasing over the course in July.
And you know as we if you think about trajectory, it's absolutely heading into right direction, we would expect it to get to triple digits. The question then to your point becomes.
What happens in Q4, and we had gotten into a pretty good routine of understanding while it wasn't any fun, we knew that Q4 would drop off fairly meaningfully because of the capital exhaustion and seasonality.
Because we're starting from such a a lower base. This year I don't expect the fall off to be as extreme as it has been the last few.
Fourth quarters, but but I think just based on behavior and the holidays and everything else is people reset and recharge for 2021, we will see some decline in the fourth quarter. So we're expecting a fairly steady ramp over the course of the third quarter and then that November.
At December timeframe, where we're certainly going to be prepared for a situation where activity level scale back.
Got it okay. I appreciate that now you're in a very enviable position you know with no debt on the balance sheet and continued positive free cash flow from based on your commentary here for the second half of the year.
Can you just help us a kind of remind us what your priorities might be in terms of you know cash allocation and do you feel like a any external pressures to have to do anything we said it would that spare cash.
Yes, Kurt So as you noted we are in a and B will position here, let's say returns to shareholders or a priority through the cycle, but as I mentioned, probably something that will step back from a little bit on a on a quarterly basis.
Always survey the market so we.
We've talked about we're we're interested we know there's dislocation there there may be some good franchises out there that need new homes or new capital and so we're going to look around for that but we don't feel any outside pressure to Russia, often do anything that wouldn't be in shareholders' interests were going to carefully evaluate everything.
If we see a great opportunity, we're going to look into it further we don't that will.
Wait for a better time and keep looking.
Okay. That's great. That's it for me thank you.
Great. Thanks.
Our next question comes from in macro trends with Simmons and company. Please proceed with your question.
Hi, good morning, Holly and that's.
Good morning handling.
I wanted to make sure I understand where we are in the cost re sizing.
Arc, if you will so.
You are a bit cautious on Q4 seasonality, but just hypothetically.
Fourth quarter revenues on a consolidated basis for pretty flat.
From Q3 in Q4 would you still in that case still expected that of margin improvement because of the digital.
Cost restructuring benefits playing out through a full quarter or do you think that the margins that we took that you've described for Q3 or is it simply a as has your stabilized.
Run rate going forward.
Yeah, there's probably a I'll say a little bit Iran of improvement in there. If if revenue were to remain flat Ian just because to your point, we won't get a full quarters benefit of some of this in and as your business ramps back up similar to the way down you're you're never as efficient and.
So we'll have some fits and starts of how we add resources back people things like that that will probably make the third quarter, a little less than optimal. So if we were into a steady state flat revenue in the fourth quarter. We would expect that you you could find some incremental benefits, but well what I think it.
Obviously quite important is the team was able to manage the business. So carefully and it makes structural changes you know we've been able to take is as we mentioned in the prepared remarks, 20% Decrementals for this business we would expect.
What I'll call historical and Incrementals and that is because of the permanent elimination of certain costs that a that will certainly benefit the business and provide some tailwinds.
Okay. That's helpful color and so if we got into.
What we saw some recovery trajectory next year.
Just to throw out bogeys 20, or 30% recovery.
Frac crew activity allows for that are the 25, 30% gross margin incrementals that we've talked about historically are those five going forward.
Yeah. The Oh, we have a good operating leverage, especially with our pipelines and our chemicals business. So and Q2, we saw very little activity in them and the pipelines, especially the Bakken.
That's that's changing here in the third quarter and we hope that trajectory continues.
And as far as chemicals.
It's more of a manufacturing business so the.
The ability to fully utilize that manufacturing facility is critical to efficiently absorb the the cost as well so we see about 30 to 35.
Percent Incrementals overall for the business when I kind of blending three segments together and thinking about some of those that low hanging fruit, we have especially in pipelines and when you think about the target gross margins for the individual segments and some of the guidance. We've given in the past what will be critical there is what happens with pricing.
And and then what is the contribution to next point, if our pipelines are contributing more than I think getting back to our historical margins on the infrastructure a segment should should be possible. When we look at services and a water services and when we look at chemicals will have to follow pricing quite.
Closely and one of the <unk> as I mentioned again in my prepared remarks, we haven't seen the same overbuild and our space. So if we get back to a I'll call. It a reasonable activity level on 2021, we think there could be a tightening of you know supply and demand for the services that we offer and see some.
Support for pricing and if that does play out that I think some of the historical margins.
We generated and targeted would would be possible.
Hi, It makes sense. Thanks, Holly Thanks, Nick I'll pass it over sure.
Thank you.
As a reminder, if you'd like to ask a question. Please press star one on your telephone keypad, one moment why we poll for questions.
Our next question comes some Sean Meakim with JP Morgan. Please proceed with your question.
Thank you good morning.
Sean.
I'd love to hear more feedback on your expectations for completions activity in the third quarter versus second quarter, we touched on the bit.
It sounds like you're guiding flat to up trajectory quarter over quarter for water services doesn't seem unreasonable within the band of feedback across other completions companies. This quarter in terms of Frac fleet count. It sounds like July was up modestly off of June, but still down 20% off the to keep average so I guess I've just.
Let me hear more about you know based on your customer discussions confidence in terms of the ramp in August and September being sufficient given the relatively tough comp you have in April.
Yeah that that you just hit on it Sean that the shape and the quarters is show vastly different it's it's actually hard to make any sort of apples to apples comparison, but we're we're not expecting the slope of the I'll say the improvement in Q3 to be as extreme.
As the fall in in Q2, So April was still well above 100, Frac crews and then you saw in May and June you get down to the low Sixtys and maybe the high Sixtys and yes, we have seen an improvement in that in July and then it's going to become you know and maybe more.
The Eightys 90 ish frac crews out here in the very near term and and could see that break the the triple digit Mark but I think it's just we're not gonna have the benefit in Q3 that we had in Q2 of that April month into your point, that's why we would expect water services to be.
Flat to maybe slightly down, but I would note that we expect chemicals to be up and part of that's just because they can be a little bit of a leading indicator. If you. If you think about your largely that's a product business versus a service and so during the downturn our customers will consume their inventory and.
Then as things pick up that need to rebuild a little bit of inventory. So it should be it should improve a little more quickly than the services space and then on the infrastructure side, we had essentially no contribution from the North Dakota, North Dakota, I'm pipeline system, and we are seeing.
Contribution in the third quarter, and then on the New Mexico system, we expect volumes to be flat to up there as well. So I think our infrastructure segment. We would also expect to see some improvement there two three relative to Q2.
Got it yeah. That's helpful clarification, and I wanted to touch on chemicals that more as well so negative gross margins in the quarter you noted some.
Inventory drag higher price inventory, and then of course and pricing concessions and so you expect revenue up.
The question third quarter, if we talk more about what drives the sequential improvement as the production coming back online and that just some restocking and how should we think about.
The implications for gross margin in the third quarter.
Yeah. When you if you think about our chemicals business 10 ish percent or last is production chemicals, so that's not going to drive.
The segment, we are seeing wells coming back online. So we do expect an improvement in our production chemical business in Q3 versus Q2, but it's really not that material. So the majority of the benefit will come from our completions and and a treatment WCS businesses and that's just that's part.
Lately to your point of the restocking of inventory, but it's driven by activity levels.
And when we think about the margins again, a a manufacturing business is going to have more fixed costs. So we would expect our margins to to get back to the mid single digit certainly in chemicals and in Q3 and certainly as we can start to increase our volumes through our plan.
Yes that that'll have a material difference on those margins.
Very good thanks Ali Yep.
Our next question comes from Ryan Thanks, with B. Riley. Please proceed with your question.
Hey, good morning, guys.
Morning.
Can you provide some detail on how for water services temporary transfer pricing progress throughout the quarter end to the early part of Threeq you, thus far and have you seen competitors actually price themselves out of business yet.
It's a it's an interesting question because you really have to I'll say peel back the layers of the again when you think about pricing because as you can imagine of the frac crews that are working today the customers. The operators that are actually supporting that business, it's a pretty wide range.
Size wise and leverage wise and some of your smaller operators are incredibly price sensitive and many of those operators will make a decision based solely on price and frankly, they're working with vendors and suppliers that are smaller organizations that.
Many of which I'd have to assume are reaping the benefits of the payroll protection.
Actually there essentially getting their labor subsidized so there are jobs being bid and executed at I'll say historically low pricing levels, we're not participating a with those customers. It doesn't fit our model for a lot of different reasons. One is is the price.
Obviously, the others just the consistency of the work I'd also add that the credit quality of those customers, we would be particularly concerned about in this particular market.
So I think that the labor subsidy is probably keeping more of the competitive landscape on life support than we would've seen in prior.
Oh cycles, but that will eventually go away and I think that's when you will start to see even though it's on a deferred or lag basis, you'll start to see the the competitors unable to support their businesses when they have to fully price and their labor.
Thanks, I appreciate all that detail I'm sure and and then turning to water infrastructure.
You guys mentioned that the Bakken system will make a bit of a comeback in threeq two but can you provide some additional color and how you view utilization for the northern Delaware through the yes the year.
Thanks for your anchor tenant and otherwise.
Yeah, you know.
We certainly saw a drop in Q2 on that system from the first quarter, but again, we are expecting a slight improvement in Q3, and then Q4 will be again, that's where I wish I had a better crystal ball, but would expect some seasonality there and with regards to the anchor tenant keep my.
And that is a take or pay contract, but the way. It works is that if we don't deliver the volume. This year, we wont be paid this year. It gets trued up in the early part of the following year. So we wouldn't recognize earnings for the benefit of that take or pay so depending.
On that how those volumes move that that'll obviously have implications from a timing perspective on when we're able to recognize those those revenues.
That's helpful. Thanks, I'll turn it back.
Yeah.
MS will dominate there are no further questions at this time I'd like to turn the floor back over to you for closing comments.
Well again, thanks for your time today, we all know that there's a tough market in front of us, but I hope one of the key messages that that you. All took away is that flex quite well position to deal with this recovery as Nick mentioned I think our capital allocation discipline over the last couple of years to eliminate all of our.
Yet to be sitting here in the cycle with cash on our balance sheet creates a lot of options and certainly what we're hopeful for is that when the time is right, we'll be playing offense, while some others are playing defense and we'll stay focused on our core business and making sure that we start to generate our the right sort of cash flow again to just.
Support investment across the space, but again, thanks for your time and have a good week.
Ladies and gentlemen, thank you for your participation. This does conclude todays teleconference. You may disconnect your lines and have a wonderful day.