Q2 2020 Nextier Oilfield Solutions Inc Earnings Call
Good morning, and welcome to the next tier oil field solutions second quarter 2020 conference call.
As a reminder, today's call is being recorded.
At this time, all participants are in listen only mode.
Question and answer session will follow the formal presentation.
For opening remarks, an introduction I.
I would like to turn the call over to Kevin Mcdonald Chief administrative.
Administrative officer in General Counsel for next year. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to the next year oil field solutions, earning conference call to discuss our second quarter 2020 results.
With me today, or Robert Drummond, President and Chief Executive Officer.
And kidney tissue Chief financial Officer.
Before we get started I would like to direct your attention to the forward looking statements disclaimer contained in the news release, the we issued yesterday afternoon.
Which is currently posted in the Investor Relations section of the company's website.
Our call. This morning include statements that speak to the company's expectations outlook or predictions of future, which are considered forward looking statements.
These forward looking statements are subject to risks and uncertainties many of which are beyond the company's control that could cause our actual results to differ materially from those expressed or implied by these statements.
We undertake no obligation to revise or update publicly any forward looking statements for any reason.
We refer you to next year's disclosures regarding risk factors and forward looking statements in our annual report on form 10-K subsequently filed quarterly reports on form 10-Q, and other Securities Exchange Commission filings.
Additionally, our comments today also include non-GAAP financial measures.
Additional details in a reconciliation to the most directly comparable GAAP financial measures are included in our press release that is posted on our website.
With that I will turn the call over to Robert Drummond, Chief Executive Officer of next year.
Thank you, Kevin and thanks, everyone for joining the call. This morning.
I would like to start the call, but taking it back to our foundation.
We acted last year to address the need for consolidation in our industry, when we announced a merger of equals establishing next year.
Leader and U.S. well completion services.
Next tier has clearly demonstrated its ability to complete and integrate transformational transactions and I'm extremely proud that all aspects of the transaction strategic rationale have been realized.
We exceeded our targeted synergies and completed the very efficient integration process.
We achieved these results more than six months ahead of schedule with our run rate synergies being fully realized in April.
The integration and the enhancement of our ERP system was successfully completed during the second quarter as well.
We significantly improved our financial position and balance sheet and further improved upon this strength with the divestiture of our will support services business in March in a transaction that accelerated approximately five years of free cash flow onto our balance sheet, while simplifying our operations.
Yes.
Our ability to respond to completion opportunities all over the U.S. and even in Saudi is evident in our safety performance.
It was quality and ultimately our market share.
Lastly, integrating to equal size companies provided a platform to foster best practices assets and the people from both companies.
Our operating capabilities are now stronger than ever and we remain intensely committed to delivering long term stakeholder value for shareholders.
Customers and employees.
As I'll get into more in a moment, we pivoted late in the first quarter and throughout the second quarter on restructuring the organization to be even more lean and nimble well also preserving the balance sheet.
This is the most challenging all feel services market environment that I've experienced in my long career.
Against this backdrop, we remain committed to preserving our balance sheet, while positioning ourselves to harvest strategic opportunities for medium and long term value creation as the market rebounds.
And some.
We're extremely focused on responsibly managing our business through these unprecedented market headwinds and we will never lose sight of our objective to continue building the company for the long haul.
So turning our discussion back to the second quarter results.
During the quarter.
We extended our track record of meeting customer commitments, despite a very tough environment.
Activity declined in line with our expectations as E. M. P. Operator shut in production and temporarily halted a significant majority of their drilling and completion activity in response to the cobot 19 economic shutdowns.
And would that in mine I'd like to share several highlights from the quarter.
We achieved U.S. market share at the upper end of our forecasted range, which we believe placed us with the second most hydraulic fracturing fleets working in the U.S.
Our speed to assess and respond to the activity declines are evident in our reduced cost structure and continued mismanagement and service quality.
The resulting strong adjusted EBITDA decremental performance was meaningfully ahead of our outlook.
We accelerated synergy capture and exceeded our full integration synergy run rate commitment in early April.
We acted quickly and decisively to significantly reduce our cost structure in both operations and support including a 35% sequential decrease in adjusted as DNA.
And remain on pace to achieve further reductions by year end.
We successfully deployed a second completion fleet in Saudi under our collaboration with Nesser as we continue to grow through this differentiated international outlet.
We continue to move forward with our innovation program, including the deployment of next hub.
Providing 24, seven remote monitoring and management capabilities across all of our deployed U.S. fleet and further enhancing the value added by our digital initiatives.
We achieved an incident Fremont in June with no recordable incidences.
This is an incredible achievement in any environment, but I am, particularly proud of our team for not losing focus in a time with crisis.
We increased our cash position by $23 million, driven by working capital release, and the liquidation of excess assets not satisfying our long term return criteria.
We fully repaid our $175 million of revolver borrowings exiting the quarter with $337 million in cash and a net debt position of zero.
Finally.
We read the market correct.
Took response of actions early and executed our plan effectively.
We did not recycle the organization to best suit the trough of market activity. Instead, we've been very thoughtful around managing the company in a way that ensures we remain good stewards of our resources.
While positioning ourselves to be ready owned a man to drive our business board as the market rebounds.
Well I'm very proud of how our team has performed and delivered.
And so many of our former colleagues and everyone across the industry impacted by this market downturn has not been easy.
We unfortunately had to reduce a significant portion of our operations in response to where we sell the market headed.
I'm, especially proud of how our teams stayed focused as activity wound down delivering some of our best safety and operational performance, while continuing to uphold our commitments to our customers.
I'm thankful for all of our employees, who continued to make so many sacrifices.
While navigating a challenging environment at work and at home.
Our focus remains on taking all appropriate actions and precautions to help protect the health.
And well being of our employees.
Partners, and the communities and which we operate.
Turning to how we saw activity in the second quarter play out.
The dual demand and supply shop.
That emerged in March.
Had immediate negative impacts on commodity prices and market sentiment.
Which translated into significant reductions in completion activity.
April activity remained relatively resilient and we averaged 17 fully utilized deployed hydraulic fracturing fleets.
Versus the first quarter average of 27 fleet.
As producers worked through their immediate plans and programs many hit pause right.
Resulting in a precipitous decline in drilling and completion activity, we estimate the market dropped it 50 or less fully utilized completion crews in late May early June.
In response.
We were quick to first execute on our defensive measures.
Our actions protected our liquidity position and adopted a cost structure that helped us navigate these unprecedented activity declines while at the same time preserving the ability to fund the working capital necessary to drive when the market rebounds.
Our decisive actions centered around four key focus areas.
Customer alignment.
Balance sheet optimization.
Strategic staffing.
And managing the warm stacking and preservation of our assets.
We have now position next tier to differentiate our service quality value proposition and overall financial position and the current environment and more importantly into the future recovery.
Benefiting our customers employees and shareholders.
The early benefits of these actions are evidenced in our financials and well managed decrementals.
Financial strength and sustainability remain critical factors and customer decisions when choosing service providers to partner with.
Making nonresponsive actions essential to our success in navigating current headwinds.
And best positioning us to win during the recovery.
All these actions demonstrate our commitment to managing what we can control.
Nevertheless, our results are very much impacted by government shutdowns across the global economy, and the overall macro economic impact on oil and gas supply and demand.
So turning now to what we see going on today.
There's no doubt that conditions.
I've shown signs of improvement.
Albeit on a much smaller base.
Just in production is being brought back online while producers contemplate drilling and completion plans for the second half of the year and beyond.
Commodity prices have improved but they remain below threshold levels necessary for driving significant rig activity growth.
Against this backdrop.
Net pricing remains highly competitive.
As excess capacity continues to pursue limited new opportunities.
Based on these market influences and the associated pricing environment, we're intentionally balancing two critical factors first.
Our commitment to servicing customers, a second our foundational commitment of maintaining balance sheet stability needed to ensure long term success.
Current U.S. land market conditions are not sustainable long term, meaning activity in price improvements will be needed to meet future industry service requirement.
Well, we have visibility on activity in the third quarter.
The fourth quarter remains extremely uncertain as a market grapples with the ongoing impact the virus related disruption older men uncertainty budget exhaustion dynamics geopolitical pressures and other seasonal factors.
Regardless of the exact timing of a more fulsome recovery in activity. We believe several factors will be critical and optimizing our ability to capitalize on a rebound.
We consider the following key elements of our overall rebound readiness strategy.
First people.
The next to your integration process gave us access to a great pool of talent.
We have an extraordinary team in place today.
We have taken many steps to best position ourselves to expand our operational capabilities when the market.
Begins to pick up again.
Second.
Lasting power.
He protective measures to preserve our balance sheet helps us maintain financial flexibility to both play defense and offense.
We have seen on increased emphasis by producers and assessing balance sheet strength for completion companies.
This customer focus is very refreshing given our differentiated capital position.
And it reflects their priority on identifying the best long term partner for supporting their completion programs.
Third.
Asset preservation.
Well, we've only seen a slight recovery in activity thus far.
The customer conversation that shifted to assessing market readiness as they acquire when and how quickly we could get back to work.
Well this is not yet translated to new activity on a large scale. It does reflect an improvement in overall conditions.
In the midst of these market challenges and based on our assessment that a meaningful activity recovery several quarters into the future.
We implemented an asset readiness plan centralizes predicts that sustains readiness for our broad asset base.
This investment ensures that next year has a strong base a market ready equipment that can be deployed quickly and had a minimal cost wants conditions improve.
And fourth.
Innovation.
We continue to believe that innovation would rather next leg of safety.
Efficiency and sustainability.
Our fully deployed integrated digital program is already bearing fruit.
We will continue to use these capabilities to drive change from the well site to the board room.
We continue to evolve our innovation platform and we believe it will continue to serve us as a key differentiator.
With that in mine I'd like to take a moment to expand on some of the investments, we're making with our innovation initiatives.
In response to the downturn, we narrowed our innovation and technology investments to focus on projects with near term returns.
During the second quarter, we successfully completed deployment of next hub.
All operating U.S. fleet.
Next hub is our remote digitally enabled operation support function, which includes 24 seven engineering.
Equipment health monitoring an intervention as well as logistics and dispatching.
All centralized in one cost effective environment working in unison to continuously and consistently support operational efficiency and performance.
That's better leveraging our field engineering support.
This newly digital enabled platform is driving the next phase or continuous improvement in operating efficiency.
An example of this is our real time equivalent health monitoring, which predicts and prevents early major component failures and optimize is maintenance capex and opex cost.
I cannot say enough about the positive impact. The next up is having on our service efficiency and I expect this operational evolution to create even more next to your differentiation as we deploy more fleet.
Another example of our ongoing differentiation is the continued impact of our dual fuel frac fleets to dramatically reduce greenhouse gas emissions and fuel cost.
Through the consumption of natural gas as the primary fuel source.
We continue to see long term value in natural gas powered equipment as a path for lowering overall cost animations, and we will continue to assess additional investments in expanding capacity in this area.
So in summary, we're not waiting around for a global market recovery.
Nor are we spending too much time forecasting commodity prices.
It's a tough market.
Well, we remain a company that can compete in any environment built on a proven base of people equipment and customers and further enable but digital capabilities that lower operating cost improve efficiencies.
Global oil demand will recover and we are preparing for an ultimate activity rebound.
Achieving the right balance of these actions are setting the stage for a future performance.
Further.
Our strong balance sheet provides us a differentiated position to when the time is right invest further in next generation fracking techniques and equipment.
We like our position.
Before I turn the call over to Kinney I wanted to share an update regarding next year's leadership team.
Kenny has been off to a great start since assuming the CFO role at the end of last year.
And over the last several quarters has further establishing himself as an essential leadership partner and a member of our executive team.
In recognition of his efforts and contributions I'm proud to report they can't he has been promoted from senior Vice President to Executive Vice President.
He will continue to lead next year's finance and I T efforts.
Please join me and congratulating Kenny and wishing him continued success.
With that I'll now turn the call over to Kenny.
Thanks, Robert total second quarter revenue totaled $196 million compared to $628 million in the first quarter.
Sequential decrease was primarily driven by sharp activity declines and the divestiture or well support services business and late Q1.
Total second quarter, adjusted EBITDA was $2 million compared to $72 million in the first quarter.
Despite the dramatic pace the magnitude of revenue decline, our quick and significant cost reduction actions resulted in adjusted EBITDA Decrementals of approximately 16% ahead of our forecasts of 25% or better.
And our completion services segment second quarter revenue totaled $179 million compared to $513 million in the first quarter.
Completion service segment, adjusted gross profit totaled $32 million compared to $98 million in the first quarter.
During the second quarter, we deployed an average of 13 completions fleets.
And when factoring in activity gaps we operated the equivalent of 11 fully utilize fleets.
As Robert noted activity remained resilient to started the quarter, what 17 average fully utilized frac fleets in the month of April.
Tivity fell dramatically beginning in May and we estimate a market trough was a treated and achieved in late may early June before recovering somewhat and to the end of June where we exited with eight fully utilized frac fleets.
On a fully utilize basis annualized adjusted gross profit per fleet, which includes frac and bottled wireline.
Total $11.4 million compared to $13.4 million per fleet in the first quarter, which continues to position next year as a leader and relative peer performance.
And our well construction a intervention services segment.
Revenue totaled $17 million compared to $57 million in the first quarter.
Adjusted gross profit totaled $1 million compared to $9 million in the first quarter.
In the quarter, we reduced our footprint of our submitting and cool product lines significantly.
Focused on regions that support constructive near and long term levels of activity.
Adjusted EBITDA for the second quarter, and close management adjustments of approximately $33 million.
Consisting primarily of $19 million, a market driven severance and restructuring costs.
$5 million, a noncash stock compensation expense.
$14 million, a merger and integration costs, partially offset by gains of $5 million.
Which includes an accounting gain associated with a make whole provisions on the basic notes proceed as part of the wall support services divestiture completed in March.
Oh, the $33 million a management adjustments during the second quarter approximately $8 million were noncash.
Second quarter, selling general and administrative expense totaled $38 million compared to $57 million in the first quarter.
Excluding management adjustments adjusted <unk> expense totaled $31 million.
Parents, adjusted SGN, a $48 million in the first quarter.
Prior to the merger between keen and Sanjay.
We operated a combined annualized adjusted EPS DNA of approximately $250 million.
As part of our integration process, we identified a significant base of synergies.
We accelerated and completed the capture these synergies of the start of the downturn and quickly pivoted the business transformation.
With these efforts, we achieve second quarter run rate adjusted EPS DNA of approximately a $124 million less than half prior to the merger.
We continue to become more efficient and our support structure and back office processes and continue to target run rate adjusted EPS DNA of approximately $80 million, reflecting a significant improvement in our cost structure, while retaining muscle and growth capacity.
We will continue to keep asking expenditures and our support structure Lane, which will support long term enhance financial performance as market conditions improve.
Turning to the balance sheet, we exited the corp. second quarter with $337 million of cash compared to $314 million a cash at the end of the first quarter, excluding our ABL borrowings.
Total debt at the end of the second quarter was $337 million.
That does discounts and deferred to finance costs, and excluding finance lease obligations compared to $512 million in the first quarter.
As Robert mentioned earlier, we fully repaid the $175 million that we had previously drawn on our ABL facility and the defensive move during the first quarter.
We have confidence in our balance sheet and its last in power.
Not data they ended the second quarter was approximately zero, resulting in a leverage ratio of zero on a trailing pro forma 12 month basis.
We exited the second quarter, what total available liquidity of approximately $430 million comprise of cash of $337 million and availability of approximately $93 million on our asset base credit facility.
Cash flow from operations was $62 million during the second quarter or cash flow use and investing activities totaled $36 million driven by maintenance Capex and select investments in technology.
This resulted in free cash flow of $26 million during the second quarter.
Excluding $13 million, a merger and integration cash costs and $15 million on market related severance restructuring cash costs adjusted free cash flow totaled $53 million and the second quarter.
Turning to our outlook.
As noted earlier, we averaged 11 fully utilize hydraulic fracturing fleets and the second quarter.
It is comprised of a strong April and significantly weaker may and June.
We are entering the third quarter offer this lower base and expect to steadily increase activity as we progress throughout the third quarter, allowing us to maintain our historical market share average in the range of 8% to 12%.
As Robert noted, we will continue to maintain a certain level of fleet utilization and activity, but not at the expense of our balance sheet.
From a revenue perspective due to strong contributions from April and our second quarter combined with the impacts of an increasingly competitive pricing environment, we expect third quarter revenue decline versus the second quarter.
As noted earlier, we continue to drive down support costs and expect to reduce third quarter SGN day by another 25% as compared to the second quarter.
On this basis, we expect to hold adjusted EBITDA decrementals to less than 25%.
With that I'll hand, it back to Robert for closing comments.
Thanks Kenny.
Before we open the lines for Q and I don't want to leave everyone with a few concluding comments.
We believe that the U.S. Lan oil and gas business is a key component of the global economy and will be an important source of supply for decades into the future as oil and gas inventory settle into the post cobot demand profile.
We created a leading completions platform that while smaller is stronger than ever I wish strategic planning is focused on this and continuing to be a technically innovative U.S. land focused completion company that builds long term customer relationships with like minded partners.
We remain focused on market readiness and continuing to deliver leading service quality and safety performance, while balancing the market backdrop with our ongoing commitment of long term value creation.
Lastly, I want to thank our employees for their continued perseverance and enlist dedication I'm inspired by the way our team continues to lead innovation challenge the status quo and uphold our mission of making next tier a leading completions company.
With that wed now like to open up the last for Q and I.
Operator.
Thank you.
We will now begin the question and answer session to ask a question Press Star then one on your telephone keypad.
<unk> Speakerphone, please pick up your handset before pressing the keys.
If at any time your question, it's been addressed than you would like to withdraw your question.
Please press Star then too.
The interest of time, we ask participants the please limit themselves to one question and one follow up.
My first question today is from Sean Meakim I've J.P. Morgan. Please go ahead.
Thank you Hey, good morning.
Good morning show.
Well, thanks for all the commentary or so you noted there at the end.
We expect revenue down quarter over quarter. It sounds like pricing is a factor there can you just talk about.
And how many fleets you averaged in July.
Expectations for the balance of the quarter, maybe trying to get a sense of the range of outcomes in terms of volumes versus the impact of pricing.
Sure Sean Good question look.
It ended the day the reason that we're guiding a little bit revenue down in Q3 is that pricing is certainly been a factor as we've migrated from you know really ramped up Q1, where we were really clicking.
To a where the markets at today.
But also you know the mix of oil and gas basin. This is evolving as well activity in the oil basins, starting to pick up a little bit more there's a there's more white space, we see in the calendars as operators begin to pick up Ah fleets to maybe attack the Dutch cow or.
Are you know, it's just not as routine as it was you know when we were all home and then 20 and 2019 or maybe in early Q1 of this year.
So.
That's kind of the scenario and trajectory was.
When we were ramping down at the end of Q1 and into Q2, we were coming off of a reset a price it roll down from 2019 in the 2020 and you know we sell the trajectory of Q2, you know April being the highest month and you know everybody can see that June is probably the beginning of June.
It was the low point.
Our Frac fleet count in the U.S., probably got as low as 50.
And then we see that market now beginning to work its way back up as easy as the operators come in now with meaning in most cases renegotiated pricing that occurred in the middle of the bottom of the worst you know downturn in history of U.S. land probably.
So that's the dynamic that that is that it is present.
As for it is guiding you know about how many fleets we got working it you know.
We're going to stick with our guidance that no might have kind of where the rig count.
Freaking out that.
They were going to be in that 8% to 12% market share range.
And.
It doesn't behoove us really too much to talk exactly about where rig count our Frac fleet count is from a competitive perspective, when the market is small as it is right now.
But the thing that we would say is it we are getting the to look at everything and they were being very patient about how we're going to price into that environment. It just doesn't make sense to a price.
Into a cash flow negative environment and environment and you know I would say the spot market in the U.S.
To be said to be that in many cases.
Got it I appreciate that Robert I think that's [laughter]. That's all fair so that leads to the follow up then so thinking about.
That pathway to sustaining positive EBITDA and ultimately positive cash flow.
She's got directionally better activity, but still pretty challenged.
You're working towards that optimize gionee level.
None of the big step change in the third quarter, a back half of the years, primarily maintenance capital in terms of your spend.
Can you talk about your confidence in your ability to sustain not just positive EBITDA positive free cash flow for the back half of the year.
Sure look.
As far as free cash flow you know, we're still on that path of ending this year with more cash than we then we ended last year with.
Confident about that but we knew that the working capital one day almost complete front in this year loaded.
And as far as you know balancing pricing and market share and and margins.
You know, there's a lot of moving parts going on and the market right now and one inside the company.
We've got a huge focus on driving operating cost down and you got to see you know we had been guiding towards the three and a half million dollar minus Capex. For example, we know what kinda we own that track.
This next hub implementation that I referred to is allowing us to catch.
Major equipment component failures before they occur this is happening positive impact on our operating performance.
So it's a move in dynamic that we're continuously rolling into our modeling as we priced into the market. So Oh I would say is it it's probably going to be a period, where you know cash or negative EBITDA is is a real scenario.
But you know we were factoring all of that into.
Our pricing discipline and.
You know, we and versus our cash flow projections, and we're still committed to having more cash not into this year than we had it in the last year and things are playing out pretty much kind of as we had thought they would as we were making these plans back in March.
So it's very dynamic is what I would say you know as far as if we're to upper end or the lower end of that market share God.
I have a lot to do with.
The strategic opportunities that present themselves are and how we price into those if it's just to bring a crew online to go address you know a a short set a does and then go and then it goes back down yeah, that's not something that would be the same as something that was going to be sustained.
So for all the way into next year for example.
Oh I hope that hope that was what's your which is what you're asking.
Yeah that'd be helpful. Thanks, Robert.
Thanks, Phil.
Our next question is from Tommy Mall at Stephens. Please go ahead.
Good morning, and thanks for taking my question.
Hey, Tom important.
Robert I want to talk about your middle East footprint for a second of the two crews over there currently.
First off how is the partnership going and secondly.
What kind of visibility do you have to how active those crews will be for the balance of the year and potentially whether you might add.
More.
Crews during that same timeframe.
Thank you. Thank you that question and and look we're we're honored and lucky to be partnered with a company like Nasser.
This is a company that has got a very good handle on.
I understand the market in Mena.
We where it's kind of the best both world They got their strengths or in our strengths are bringing no efficiencies and expertise into the frac in wireline pumped down arena.
We as as you heard us.
Added to our second crude into the mix.
During the during the last quarter and I would say that the upside of that arrangement is.
Directly linked to nesters business development.
Process and that you know that they're good at that and I think the the customers in the region are very interested in seeing that that grow I would say that during the cold would a period, we've been going through the operating cost Oh are already inflated.
No because of the challenges associated with moving people around.
And that's something we can you know continuously improve on.
And we'll do so but I think it's a team, we're we're getting better and better.
And as far as you know.
Just as best I can say is it in the future growth is directly tied to Nasser.
But I don't anticipate a significant increase from where we are now during this year.
That's helpful. Robert Thank you.
Wanted to shift to a strategic question for you.
Oh, Robert if if you could comment on how you see the.
Competitive dynamic evolving in North America, Frac, specifically, you've you've already started to see some restructuring.
You're likely going to continue to see some under investment.
Some of the players that aren't as well capitalized so in that environment. How do you see the marketplace evolving there's been some talk maybe a bifurcation in terms of horsepower quality or availability.
And then potentially if you see more opportunity for consolidation how that might impact the dynamic.
Yeah I like the question then.
And I would just say that this is that when you go into a period lever going through right. Now. It is one of those that maybe most people's downside scenario. They had been planning in the past this got beyond that.
And then you see the scramble that has a card related to pricing during the you know the trough or the market.
When we when we say that we don't don't believe that the pricing current levels of pricing is sustainable.
That's because we believed that in many cases that that pricing is cash flow negative free cash flow negative, meaning that the gross profit levels that are being generated or not able to pay for the maintenance capex or does the corporate support necessary to you know cost.
Safely administered that fleet activity.
And when that happens you know cash is going to be consumed to maintain the equipment, one way or the other and it's going to drain liquidity.
Or either the equipment deteriorate deteriorates and maybe an operator this challenge for cash has supported by cannibalizing stacked equipment, which is taken.
Passes the off the market.
Or are they having adequate support.
So in leases some sort of catastrophic issue that that accelerates both for the of the above so.
Well, we believe when we said what we wouldn't be patient. We believe that evolution is don't put pressure on that bifurcation, you know as it exists and we'll see maybe some capitulation into market.
Whether or not that drives consolidation or not I think is a is somewhat yet to be determine.
I would say, there's also kind of an evolution going on to movements to using gas is the <unk> natural gas is the power source and you have to have investment capability to be able to do that so.
So if you were going to try to consolidate a market where the conventional assets you got to wonder you know is there a scenario that make sense for everybody.
Yes.
[noise] consolidation around some sort a next generation or.
Of evolution that have helped you address this power conversion from diesel to natural gas then you know maybe there's some opportunity there.
We got to believe that increasing the scope of the activity our scope of the activity at the well side.
Where we can use our footprint.
And in our support structure.
To leverage across a bigger piece of business that we can get more efficient for both us and the operator more cost efficient.
Can you less people differently and so forth. So when we think about you know strategic consolidation on M&A in general that's kinda logic will be will be cells.
All hope that's kind of addressed it but but bottom line as you know for US we believe that being patient now let data market evolve a bit that way and then you know we've got a lot of focused on having our assets ready and then we'll be ready to hit the market when things change a little bit to the upside or more more materially.
Yes, all helpful. Thank you Robert and I'll turn it back.
Thanks, Tom.
Our next question today is from Stephen Gengaro. That's Stifel. Please go ahead.
Oh, Thanks, and good morning, gentlemen.
<unk>.
Just two things if you don't like can you start with.
Your next he mentioned the market you saw a bottom at around 50 fleets in the quarter you have any any color on kind of where you think we are right now.
Steve when you know I wouldn't profess to be an expert, but you know we do spend a lot a time, making sure that we understand competitive landscape.
And when you say, how many fleets are in the market, we always got to be careful to define.
We're asking are we talking about fully utilized at many of US report are just deployed.
And I kind of believed that the market isn't the number is around 85 or so deployed.
Meaning that somewhat less than that fully utilized.
And I'll go inside that I think that that number will cannot continue to the walk up slowly.
Yeah, we're on IRI side of this recovery curve now and more more operators are getting there.
Their plans in place and obviously going to be linked to oil price, but but I would think it would be heading to somewhere.
Around 110, something like that and the neighborhood of that in Q4.
Great. Thank you and then just a you touched a little bit on this earlier, but as we think about longer term and sort of coming out of this downturn into some some level of normalized environment, maybe it's maybe it's a lower environmental as well as many you're thinking but if you thought about I'm using.
2022, as an example, but just longer term.
Do you think is anything structural but that impacts your ability to get back to the gross profit levels for fleet that we had seen in the past.
[laughter] I define the past, but I would say if you compare it to 2019 that I would say or that is very much very possible to get back to that.
Partially because of the discussion we just had about the evolution of the market.
And you know I would also say very much link obviously to the macro of oil price and you know what does that look like.
But do you can make a case that you know it's going to take you know when you get to the back half of 2022.
Kinda believes when needed by the same kind of well count in the U.S.
That it was taken in Q1 at 2019, and I think that's maybe a new car.
Market size of like 300, or so frac fleets in the U.S. and this is after there's been some you know reductions in total right market.
Are capable of being deployed.
While simultaneously taking in account the fact that.
The things that we're doing utilizing digital program to improve our operating costs. These are sustainable into the future you know in I think that.
For those reasons I, absolutely believe that is true.
Great. Thank you that's helpful color.
Thank you.
Our next question will come from Chase Mulvehill from Bank of America. Please go ahead.
Hey, good morning, everybody.
Hey, good morning.
Robert I guess, a quick kind of clarification, maybe you talk about 8% to 12% market share and I guess, maybe does that include or exclude the to middle East fleets and then on the middle East fleets of you can just kinda quickly comment about the duration of the contracts and maybe try to frame.
You know the PML impact as far as those two cleats are related to.
Hi, Good point good question or they are when we talk in market share God, We're talking U.S. only our U.S. fleet employment versus the U.S. total Frac fleet, whether you're talking deployed or fully utilized.
And as far as duration or the Saudi contract and I'd like to be able to say evergreen I mean, I think Sharif my two.
But as far as on paper it does have a term that.
That though.
We hadn't went public with but multi year.
And kind of right. The first refusal kind of thing for a as they grow. So he is both a chance to look at how things are going.
And to make decisions on though not as we as we expand whether or not we want to do it or not.
But.
That's a.
Yeah, that's desk I think that's yeah Sanchez to to address the other profitability I mean, we've always said, it's accretive to our our U.S. market I mean that was a hurdle to get it or into the international Arena.
And still today that holds rubber mentioned, we did have some additional costs and this code environment, but we're managing through the.
Okay very helpful color.
And then you know if we kind of think about you know your U.S. frac fleets. How many would you consider to kinda beat you know crude are staffed.
And then what we think about a you know bringing cold stacked equipment.
That's not staff, what kind of free cash flow level would you need to actually reactivate kind of more what I'll consider kind of cold stacked fleet.
So you know we.
We spent a lot of time to try to balance our pipeline of opportunity with what.
Warm or hot assets, we haven't definition, a warm mining equipment is ready to go not crude definition a hot band both.
Women's ready to go and the people who are ready.
And try to keep one typically are too.
You know depending on the pipeline of hot equipment ready to go if we needed to be able to do so.
That way our ability to respond to opportunities in one of those that have occurred recently, where we were able to jump out there.
And take advantage of it and we hit the ground running at the same efficiently efficiency levels that are that we had had you know in Q1 customer strain. Please but we like we like that strategy.
But as far as you know what kind of a free cash flow scenario drives.
No hard to a willingness to grow bigger.
I think it's got a lot of components to that.
First can you get can do you have visibility on you know the efficiency and the volume of work and committed is or what space in a schedule and so forth and all of that drives.
Rising.
Is it worth.
Bringing a fleet up if even if it's free cash flow neutral I would argue no unless it has a strategic component and some visibility to free cash flow positive even in this environment.
And that's what we mean less in there will be will be patient so.
That's about it takes probably as much as I could probably psyche Kennedy thing to add on that.
Okay. So look I think you know we've talked about our GP level of.
Cash flow breakeven in the past in this market is very competitive because it's a very small market.
But what I would say as you know we have our own internal hurdles that we that we work through it.
And that pricing levels go below that hurdle, we're going to take a disciplined approach, especially in this environment to Q3 unlikely into Q4.
Okay. If you were to add those hot and warm stack turned up you know cruise together, how many cleats would that add too.
But the chase, we I mean I mentioned it earlier that you know when the market to smaller is is right now if we give guidance like we've had historically.
We got deployed is starting to become a competitive.
The negative so they had we had said anything about it publicly.
So it's understood.
Thank you.
Okay, I'll turn it back over thanks, guys.
Thanks, Jason.
Our next question is for me and Macpherson Simmons. Please go ahead.
Thanks, Good morning, gentlemen, congratulations on the free cash flow in the quarter.
Robert you're talking about the continuing uptake for dual fuel.
Can you speak to what proportion of your fleet there is.
Not only a well on one hand dual fuel ready and on the other here can you speak to usage or natural gas.
As a proportion of you know your total hours on the fleets that are engaged in that mode.
Yeah, I'd first say that.
A fleet that can burn a natural gas right now is got to have an advantage in the market in general.
And have an anticipated that and been participating in that for a while.
We have in the past and are in present kinda continually to invest in growing that capacity among our fleet.
And the best the benefits are obvious.
From the sustainability for the emissions asked but is much lower.
And the conversion from basically guess A's you know both of US a lot of money.
When we went and had the acquisition was Sanjay and brought in the MDT control systems.
Into our to our mix, we've been able to you know control the partake controls <unk> Oh, the engines a bit to maximize.
The amount of conversion from the diesel due to natural gas, we think a little bit better than the market in general is dual fuel systems.
But I got to say, we haven't for competitive reasons again, we havent just come out and said how many of our fleets or are dual fuel what I would just tell you is that we've been just barely one step ahead of the demand for our fleet, so far and we're trying to stay that way.
Understood.
My other questions have been answered thank you very much.
Thank you for the question.
Our next question today is from Chris Voice with Wells Fargo. Please go ahead.
Thanks, Good morning.
Good morning, Chris.
Okay. So curious.
I know you're trying to be little sensitive on fleet numbers, but is it fair to assume at least that you will be making some reactivations and third quarter.
Yes are we.
Like I was saying in the beginning kinda saw the Q2 fleets going from high to low front to back on the quarter. We see the same thing occurring where our fleet count would trickle up all the way in October.
As well for from a visibility perspective off the bottom. So yes, it's a little bit dynamic in our fleet count can go up and down pretty easily.
And we I can tell you how much time, we spent on this readiness asked but so that when we put these assets in the readiness program they going through a cycle, where these the equipment is check and put on pressure test and continuously you know the mechanics running through it for any kind of thing that might need.
To be fixed so that we got.
The equipment ready to go straight away you can respond quickly. So you know you get what you can see clearly and then you have these opportunities that pop up that you might be able to make an arrangement that makes sense to get cash flow positive work. So.
We're trying to differentiate ourselves there where the customer base. So they can see that we can move quickly and hit the ground run.
And you know <unk>, we're going to continue to do that.
Okay. That's helpful. Thanks, and then on Capex. Your guide for this year I guess it unchanged 100 120, if we think about next year or are there any benefits from Harbin harvesting equipment that remains idle and I think you called out about 3 million expectation maintenance Capex for fleet, but should we think about some kind of technology budget or.
Tier four DDB engine budget on top of those numbers as you you know new technologies are always coming to market should we think about three times number of fleets plus 20 million or how should we think about capex in 2021.
So I think canyon not tag team. This question and I'll, just say is that we really do have a lot of opportunity right now to a invest in things that we believe have a good return profile many of those related to the evolution, though the fleet I know overtime and.
When you were planning to continue to be disciplined.
You know until we get to the point where are our visibility on the futures a little more clear and because we had the balance sheet that we do when we say, we can be defensive or offensive or defensive we kinda I've already shore that up I'm, making sure that we're getting a minus capex is lowest possible stop most of the strategic investments <unk>.
<unk> when the time becomes right and we know that we will have.
The cash flow to support working capital, perhaps in a 20 to 22 ramp up we'll we were going to start to come back and look at the strategic investments that are focused on.
I think largely around gas burning and taking the fleet that exist to another level of efficiency then.
<unk> technological innovations that will require some investment.
That's kind of a lodging can't even once you elaborate on the we're going to where we're going to you know we already sorting at the top end of that print. If you project, our current fleet count and our lower maintenance Capex roughly.
What kind of the top end of that Im sorry, yeah. So on cap. It slipped H ones been was was anticipated those front end loaded you know mainly driven by strategic topic span of then winding down our maintenance spend inline with our activity and H. two on Capex, you know, it's going to come down significantly.
We'll be spending money, primarily on maintenance and right now we see about a 110 to 120 still within our range, but in the 110 to 120 range.
In terms of next year it look we.
I would pull those levers that we talked about and we have been able to achieve maintenance capex for fleet of three and a half million or less 3.5.
You know, we're really encouraged at the impact of our next up specifically our equipment help monitoring program, which is going to help us to keep that that maintenance capex per fleet to a lower level than what we've seen in the past. So that'll that'll that'll continue into 2021, because we'll continue to plug the fleets and as we continue to grow.
Into our equipment health monitoring program and into our next hub.
And regarding the part of the question you asked about would we sacrifice some portion of the fleet for cannibalization I think is what you're saying and I think that that is a card for us to consider what we would do it in a manner that was in a controlled and planned.
And it would ultimately mean taken additional horsepower off the market permanently and using those components to consume and not least trend capital, which is a card in our deck for sure, but it would be in a very controlled manner.
Okay, we need so to wrap it all.
Thanks, good wrap it all together.
Maybe a starting point about three and a half personally and 21 plus technology investment that that obviously is not yet clear, but it's it's likely to occur.
That's a very good assessment.
Got it right. Thanks a lot.
Thank you.
Our next question is from Marc Bianchi of Cowen. Please go ahead.
Thank you.
Wanted to ask about Gionee I think the targets to get to kind of an 80 million dollar <unk> run rate is still out there.
And and the guidance here for for third quarter down, 25%, what what sort of puts you at about 23 million Bucks a in the third quarter. So, suggesting you know some more room to to go to get to that that 80 million run rate should we expect that that run rate by the end of the year and along with that.
Should we see some more adjustments are called out in the in the third and fourth quarter and either related to the generic or other reasons and if you could put put some brackets around that that would be helpful.
Yeah sure. So look we as I mentioned, we've kind of cut our DNA a half our adjusted SGN Hot in half from pre merger levels and you know it to 35% out last quarter, we're going to take another 25, or so I'll ask the next quarter and I wanted to mentioned.
We did finalize our ERP conversion.
We actually closed our books fully in one system in June.
And you know, having one ERP is going to give us additional and I would argue long term improvement in our back office efficiency. So that's what you're going to start to see some results from that marching towards the 80 million as we exit Q4.
In terms of adjustments you know one of the thing is I wanted to mention.
Is on costs related to the merger in our market driven restructuring you know, we see less than about 8 million as we wrap up the year, so work, including both of those programs mainly in Q3, so you're going to start to see some of the management adjustments, both cash and book come down as we wind up those programs.
Thanks can you would you say that that's a that 8 million as a similar number for both the income statement cash flow statement.
This is gonna be it's gonna be eight main cash.
Okay.
Okay, Great and then just at that at that 80 million kind of run rate what would you say that size for in terms of a a fleet count and you know if we get above that fleet count maybe help us think about the sensitivity for for GSK.
Well you know the reason we came up with that target was because women were keen. We ran you know at 27 28 bleeds would that kind of number.
So I mean, I think that we with the next hub in the new ERP in a few days I'd that we can probably give beyond that at the same level support cost.
So a project that in the <unk> expectations are for total market size in our piece of that in 2020 to 2023, you know it's probably a.
Sustainable at least through that kind of period, yeah, I'd just add as I mentioned in my prepared remarks, and we're going to keep that level tight as we grow.
So that'll that'll position us for better Incrementals as the market rebounds.
Yeah.
Thanks for the answers guys.
Hi, good morning.
Again. It is star then one to ask a question on our next question will come from calling our line of Morgan Stanley. Please go ahead.
Yeah. Thanks.
Wanted to ask about capital allocation here.
I don't want to be flip in about the magnitude of decisions that you guys had to make adjustments you've had to make over the past few months here, but as we sit here at you know what looks to be a little bit pass the bottom.
Translational structure.
In line relatively speaking and you have a lot of cash on the balance sheet, what's your thinking around a potential return of capital maybe some buybacks to support the shares given how strong your balance sheet is in your relatively.
Free cash outlook, just wondering if you could discuss the puts and takes on that.
Thanks for the question gone or and of course in our boardroom, we would have a discussion of all the time, but I'll just say for right now there's still significant amount of uncertainty in the market we've been to great extreme.
Strange to.
Position ourselves to give us a lot of flexibility one on the runway no matter kinda like what happens we can be okay with our liquidity and then number two a lot of opportunity, we believe to invest that capital in a manner that when might be better than stock buybacks or dividends. So.
I wouldn't think that you would see much of a us talking about that in the foreseeable short run way I'm, assuming mid mid runway.
And that we got a.
Got it would be we gotta.
Until the uncertainty Arta clarity gets there we need to Uh huh, we need to keep it on balance sheet.
Okay. That's fair I I mean, if if we do get through a market where we're in.
You know slightly better shape from a visibility perspective I mean.
How much cash or what sort of level of net debt do you feels appropriate to run this this business.
Look I mean I'm. If you look at how this is going to play out you know what you always have to keep in mind is that you have to fund the growth cycle you want to participate in that growth cycle. So you have to have a minimum monthly cash to be able to fund working capital and in the meantime be able to invest as Robert mentioned.
And next Gen technologies are in dual fuel gasparini technologies that allow you to compete and compete at the higher tier of the spectrum. So I'm not gonna called out a number well what I would say is up you know you need a substantial amount of cash to cast a rebound.
All right appreciate it.
Thanks, Tom.
Our next question is from John Daniel Daniel Energy Partners. Please go ahead.
Hey, Robert Thanks for putting me and just one question. Good morning, guys get just given your financial strength any thoughts or plans to roll out new pumps technology next year.
So as you guys know several Oems are designed into pumps just curious your thoughts.
So John that's that's a good question obviously.
Next generation Frac is we'd like to call it.
Certainly a on the Horizon question is you know win and we obviously.
Yeah.
Consider I said to be maybe number two sides.
Right company in U.S. land, we expect to participate in that.
And.
We just got to time.
Strategically deploying that when pricing can support the investment with.
What is the best technical solution and you know many of these in our view or not proven yet and being a fast follow or maybe it's the best way. The a you know deployed capital.
Sorry, our logic is been.
Bridge into it with a lot of dual fuel to your you know.
You know diesel engines burning natural gas as you will know.
And how do you avoid strand, how do you minimize stranded capital from the old conventional fleets all that is a bit of timing debt.
And we aren't in the process of investigating at least two options that we believe could make the timeline that you did you project.
In essentially more about.
[noise] optimizing the power solution. It's part of that are that investment and we get that right and you know we got some customers who are who are Ah are talking about the timing and then and we expect to be participating in that.
But obviously this capital discussions we just had that that we got to make sure that we got sustainability and runway to deal with the worst case scenarios first and then second really close second is it didn't without a that evolution.
Okay do you do you get any sense from many of the let's just call them the more.
S.G. sensitive customers that they're going to help underwrite those types of investments since it ultimately benefits them.
Yes, I do I think that around the power solution is there there's a lot of different scenarios that can evolve there and you know some of those make the capital investment much more palatable for service company.
But you know and there's ways to participate in that in many different ways I think in the business model itself will be a bit different I think than what perhaps exists today.
And that will be what probably enables it to take off or whatever speed. It takes off but the bottom line is the bridge with dual fuel is really very good bridge.
We needed to is a sector evolve our ability to burn natural gas because of all the good the financial reasons, but also for the mission reasons and deal fuels, a significant step in Iraq direction.
Borderline right up against as good as anything else in the Nexgen Arena. So it's not a bad spot for US is the industry individually or between service company in the operator.
Got it okay, thanks for putting us.
The best.
Nice job.
Well Allison I think that's the end of the questions Ah we really appreciate.
Everybody participating in the call today and your interest in next year, we hope you'll see you'll stay safe and have great day. Thank you.
Thank you.
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