Q3 2020 Nextier Oilfield Solutions Inc Earnings Call
Good morning, and welcome to the next tier oil field solutions third quarter Twentytwenty Conference call.
As a reminder, today's call is being recorded.
At this time all participants are in the Sun only about.
Brief question and answer session will follow the formal presentation for.
For opening remarks, and instructions or like to try to cover to cover Mcdonnell Chief administrative officer General Counsel for Nextera. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to the next tier oil build solutions earnings conference call to discuss our third quarter 2020 results.
With me today are Robert Drummond, President and Chief Executive Officer, and kidney tissue Chief Financial Officer, but.
Before we get started I would like to direct your attention to the forward looking statements disclaimer contained in the news release that 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 companys expectations outlook or predictions for the 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, which 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 and Exchange Commission filings.
Additionally, our comments today also include non-GAAP financial measures I.
Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our earnings release for the third quarter of 2020.
And with respect to 2019 related non-GAAP financial measures in our earnings release for the fourth quarter of 2019, each of which are posted on our website with that I will turn the call over to Robert Drummond, President and Chief Executive Officer of next year.
Thank you Kevin and thank everyone for joining us on this call. This morning.
Next year, it's cheap another quarter of delivering on our commitments. Despite the continued challenging market backdrop.
I'm proud of our team as we continue to execute on our strategy of maximizing next year's value proposition for now and the future.
I'll start with a few highlights from the quarter.
Activity steadily trended upwards in Q3, and the momentum is now carrying over into Q4.
We entered the third quarter at a relatively low base of activity after reaching cyclical lows late in Q2.
Well activity levels improved we continued to navigate a path towards sustainable pricing and improved calendar utilization.
Despite these challenging market headwinds come.
Combined with a relatively strong April including Q2 results.
We delivered adjusted EBITDA Decrementals of 30% ahead of our outlook of up to 25%.
We continued to structurally drive out cost, which have favorably impacted and will continue to impact our result.
Third quarter, adjusted EPS DNA of $20 million, Mark the 36% sequential decrease I.
Nearly 60% reduction versus the first quarter.
We fully integrated our digital platform across the value chain, which enables the success of our strategic plan to grow our business.
Generate new revenue.
And drive improved returns for next year.
We averaged 11 fully utilized and 13 deployed fleet, maintaining our U.S. market share within the 8% to 12%.
As of today.
We have successfully redeployed seven fleet since the end of June and with minimal startup cost evidencing the strength of our readiness and customer relationships.
And while nearly doubling our deployed fleet count we are delivering operational efficiencies and safety performance on par or better than where we left off before the downturn.
As we navigate the remainder of 2020.
And again looking ahead to next year.
I'd like to highlight several key points in observations.
Burst.
Global economies began getting back to work following the COVID-19 economic shut down.
Late second quarter was the trough for next year and we believe the worst is now behind us.
Activity has begun to improve and at the same time, there's been a significant increase in U.S. diesel powered frac fleet retirements, reducing future availability of supply.
As service providers continue to rationalize their assets, we anticipate a more balanced playing field as the market continues to rebound.
Second.
Despite market challenges and a fiercely competitive market now.
Next year successfully gained share by providing our customers a superior integrated service offering.
This digitally enabled integrated offering enables wellsite integration of the services involved in and around the Frac well site location and.
And its being utilized by our customers to reduce their overall cost as well as reduce the carbon footprint at the well site.
These new digital tools, and our large completion services footprint or the foundation for our strategic efforts to increase our work scope.
Thanks to these new tools.
Our logistic services are growing faster than our pure frac services and improving the overall value proposition for customers.
Next.
Our four to five financial position ensures next years here for the long haul and allows us to invest in technology and innovation.
And finally after having weathered what is likely the worst of this unprecedented storm driven by the COVID-19 pandemic.
We've positioned the company to win the eventual recovery and provide leading returns for our investors and customers.
We recently reached a milestone with the one year anniversary of kids merger with CJ to for next year.
We have achieved.
And in most instances outperformed all the milestones and rationale for the deal.
We completed a very efficient integration process, while maintaining focus on delivering for customers, ensuring continued safety and service quality.
We exceeded our targeted synergies.
Given these results more than six months ahead of schedule.
We quickly divested of our non core business with the sale of our well support services business at a very operated to mystic time in the first quarter further bolstering our fortified balance sheet position.
And we advanced investment in and deployment of innovation, including the rollout of next club on all deployed fleet in the second quarter.
The real win for next year, it's been our people.
We have the most outstanding employees in the industry, including our best in class management team and.
And I appreciate their loyalty and passion to always challenge the status quo, while striving to reach the next tier.
With that as an overview.
Let's discuss what we're seeing in the market today.
The dramatic pace and magnitude of this year's downturn.
Combined with recent industry attrition.
That's played an important role in beginning to sort out the frac supply demand imbalance.
We believe the total U.S. horsepower has been reduced by over 30% and its today approaching 13 million horsepower.
At the same time well.
Well completion activity levels are improving resulting in a better utilization right across the industry.
The magnitude and cadence of recent activity growth. However is uncertain and dependent on a range of factors influenced largely by the COVID-19 pandemic.
And associated oil demand.
The bifurcation.
Amongst well completion players is more evident than ever includes.
Including a horse power base that is becoming even more stratified by efficiency and sustainability.
We estimate that 70% of today's horsepower base is 100% diesel powered.
Which sit at the higher end of the emission spectrum given its inability to utilize natural gas is a power source and thus is subject to a lower price point.
While we continue to be a major player and decide the frac market.
We preferentially focus our capital allocation on the upper 30% comprised of natural gas powered and other more sustainable solutions that attract higher pricing and returns.
We've been investing in and growing our natural gas power capability for years and today next year is proud to have the largest natural gas power fleet deployed in the U.S. market in.
In addition.
We plan to allocate all future growth capital to equipment with enhanced returns and lower emissions.
While this bifurcation becomes more apparent we continue to harvest the investments made in our traditional base of diesel powered horsepower, while growing the portion with natural gas powered capability via the conversion of existing equipment.
We are taking prudent and proactive actions that allow us to utilize our assets and capital and the most responsible way, while maintaining flexibility and upside to meet our customers demand and the future.
To accomplish this.
We will reduce our marketed hydraulic fracturing fleet by an additional approximate 400000 horsepower.
And we will utilize the major components overtime to bolster our maintenance inventory.
Once consumed we will cut up the frames and permanently removed them from the marketed base of equipment.
This path forward allows us to partially fund our carbon reduction initiatives by reallocating capital from maintenance Capex.
The stratified top of the Frac market, which offers better pricing fundamentals and a lower emission profile.
We expect that with these efforts, we will be able to further reduce our estimated annual frac maintenance capex band perfectly.
$3.5 million to $3 million.
Combined with the fleet retirements announced.
At the closure of our merger between CNG and key.
We have we'll have removed nearly 650000 tier two diesel powered horse power from the market since the merger one year ago.
We continue to play out.
Our part and aligning frac supply with demand and applaud our industry colleagues, who have taken similar recent measures.
Turning now to our market position, our current base of deployed and working equipment demonstrates for key characteristics.
One of the largest bases of horsepower in the U.S. today.
Number one in wireline pump down plug and perf.
The largest natural gas power fleet in the market today.
And a diversified footprint across all major U.S. spacing with meaningful exposure to both oil and natural gas production.
We are pleased to report that the strong momentum gained in Q3 is carrying over into the fourth quarter.
Today, we have a total of 15 fully utilized fleets in the market.
13 in the U.S.
And two in the Middle East operating in partnership with Messer.
This increase in our position demonstrate the strong customer relationships, we have and the superior service offerings that we are offering.
A critical component of our strategy during the latest market cycle is our ability to probably respond to market growth opportunities, which we refer to as our market readiness strategy.
Our strategy has been very effective had been nearly doubled our active fleet in the last 100 days.
The foundation is built on three key factors or our equipment.
People and balance sheet.
First equipment.
We've been investing approximately $1 million per month to ensure idle assets from all product lines are well maintained and ready to work.
Our digital capabilities enable us greater visibility on the location and status of our equipment and allow us to preserve and protect our assets most effectively.
Actually as we have redeployed equipment in response to increased customer activity across all of our product lines the amount of maintenance capital and Opex allocated to fleet deployment has been minimal.
Evidencing that we have been proactive as we planned and maintaining our asset base during the depth of the market downturn.
In fact, we successfully deployed seven fleet since the end of June with minimal additional startup costs and which are all included in our adjusted EBITDA result.
Second people.
I am pleased to share that we no longer have any employees own furlough.
We were successful in bringing back the people placed on furlough and many that have been released at the start of the downturn.
I am incredibly proud of our team for remaining laser focused on delivering solid operational performance.
In this competitive environment. It remains absolutely critical hit the ground running.
And next to hub has empowered our people to relaunch our fleet with higher caliber execution immediately upon reactivation.
Third balance sheet.
With all that we've done we still have ample liquidity to take advantage of opportunities that the market gradually recovers.
Excluding the third quarter with total liquidity of $371 million.
Our fortified balance sheet allows us to invest in the ongoing integrity and readiness of our equipment well allocating capital to strategic investments that drive enhanced returns and lower emissions.
With our readiness strategy already delivering result, I would like to turn now to our long term strategic direction that will support next year's ability to generate leading through cycle returns.
Despite macro volatility in the near term, we never lose focus on the long term goal of maintaining our position as a differentiated leader in U.S. land completions.
Our strategic focus is centered around expanding the work scope at the well site.
While lowering our carbon footprint.
This strategic focus areas are enabled by our fully deployed digital platform and digital operating model, which is now deeply ingrained in how we do business and how we continue to evolve the way we will do business in the future.
Next year is committed to a sustainable energy future in which oil and gas continues to play a critical role.
We firmly believe in the economic sustainability send ability benefits of natural gas powered technologies.
However, without reliable gas supply.
The benefits and value of dual fuel or other lower emission technologies are not fully realized.
Our customers frequently share how they have been seeking integrated solutions that align the incentives of operators and service providers.
Haven't heard the voice of our customers.
We are excited to announce that in 2021, we are launching next tier power solutions.
Our natural gas treatment and delivery business that will power, our fleet with field gas or CNG.
Through next year power solutions, we will provide guess sourcing.
Impression transport decompression treatment diesel and related services to become a fully integrated well completions provider.
We are proud to have the largest natural gas powered fleet deployed in the U.S. today.
Our investments in clean natural gas powered equipment are paying off and our tiered service offering for displacing diesel with natural gas is being met with strong demand as customers can select the package most suitable for achieving their specific objectives.
We've always said that our strong and flexible balance sheet position next year to play offense and defense.
With this in mind and due to strong demand for carbon a decent tiered offerings. We are investing in additional tier four dual fuel capabilities via converting equipment currently in our fleet.
With the expectation of delivering beginning in the current quarter.
We plan to maintain our leadership position as a provider of natural gas power technologies, enabling next year to be a market responsible partner.
[noise] executing our strategy of investing to expand our natural gas power capabilities, which will enable maximize gas substitution rates and carbon reduction benefits for next year and our customers.
Our mission is to make it easier for customers to reduce their carbon footprint, while maintaining a leading officials he is safety profile.
We are focused on developing solutions that are scalable overtime into a range of rapidly evolving next generation equipment and solutions.
We are in discussions with customers about our capabilities and plan and look forward to announcing updates in the coming months.
In addition to our carbon reduction initiatives, our digital infrastructure enables the expansion of the work scope of our operations in multiple ways.
With our evolving set of digital tools advanced AI, driven logistics capabilities combined with the scale impact personnel, we have a unique opportunity to deliver value on both sides of the equation, which did not exist previously.
First our work scope expansion strategy enables next here to deliver the lowest landed cost of commodities like.
Like profit in view.
Second it aligns incentives between operator and service provider in a way that leads to greater efficiency and overall savings.
We're extremely focused on carrying out our strategic plan.
We've invested in and built out infrastructure over the past two years, and we plan to harvest that value now.
We believe that an integrated completion well side is better for next year and our customers and we have the capability to drive value lower the overall cost per well, while reducing emissions.
With that I'll now turn things over to Kenny.
Thank you Robert total third quarter revenue totaled $164 million compared to $196 million in the second quarter.
The sequential decrease was primarily driven by reduced calorie utilization and lower pricing in our completions and well construction and intervention services segments.
Finally, offset by efficiency gains.
As noted earlier when next year is up about site, we're operating at a very high level of operational performance.
Total third quarter, adjusted EBITDA was a loss of $2 million.
Fair to $2 million positive adjusted EBITDA in the second quarter.
Despite significantly lower revenue and navigating through what we believe was the market trough, we remain focused on controlling what we could control.
We maintain our relentless focus on continuing to reduce costs at the well site and at the corporate level, which resulted in decrementals of approximately 13% ahead of our outlook of 25% or lower.
And our completion services segment third quarter revenue totaled $154 million compared to $179 million in the second quarter.
Completion service segment, adjusted gross profit totaled $15 million compared to $32 million in the second quarter.
During the third quarter, we deployed an average of 13 completions fleets.
And when factoring out activity gaps we operated the equivalent of 11 fully utilized fleets.
As Robert noted, we exited the second quarter with eight fully utilized completions fleets.
As market conditions started to improve we successfully redeployed one or two fleets each month throughout the third quarter resulted in a 13 fully utilized and 14 deployed fleets when exiting September.
On a fully utilized basis annualized adjusted gross profit per fleet.
Which includes fracking bottled water long totaled $6 million compared to $11 million per fleet in the second quarter.
As we were significantly impacted by utilization inefficiencies, resulting from calendar white space in the quarter.
We are already seeing utilization improvements across the fleet and we believe that the worst for U.S. land activity is now behind us.
And our well construction and intervention services segment revenue totaled $10 million compared to $17 million in the second quarter.
Adjusted gross loss totaled $1 million compared to $1 million of adjusted gross profit in the second quarter.
As discussed last quarter, we significantly reduce the footprint of our cementing and coal tubing service lines during the second quarter and then it's a third quarter.
We remain focused on regions that will support both near term and long term levels of activity and we have positioned ourselves for strong operational and financial performance as market conditions improve.
Adjusted EBITDA for the third quarter includes management adjustments of approximately $20 million consisting primarily of.
$7 million of merger and integration costs, mainly from the implementation of our next to your ERP platform and associated legacy software right, though.
$5 million, a noncash stock compensation expense.
$4 million for an accounting loss associated with the make whole provision on the basic notes received as part of the wall support services divestiture in March.
$3 million of inventory impairment and $1 million or market, driven severance and restructuring costs.
Of the $20 million, a management adjustments during the third quarter, approximately $12 million or non cash.
Looking ahead, we do not anticipate material future merger and integration or restructuring expenses for the first for the fourth quarter and going forward.
Third quarter, selling general and administrative expense totaled $26 million compared to $38 million in the second quarter.
Excluding management adjustments adjusted SGN expense totaled $20 million.
<unk> adjusted she and I have $31 million in the second quarter.
Last quarter, I announced we successfully accelerated and completed the capture of our merger synergies reads.
We reduced our annualized question a cost by more than half of the consolidation consolidated SGN a at the time of the merger.
I'm happy to share that through our business transformation results and continued efforts to improve efficiencies. We are further reduced our S unit costs in the third quarter.
Achieving this lower S. You in a run rate positions us extremely well as the market continues to improve.
We are committed to maintaining a lean support structure.
And with the recent deployment of our ERP system or support capabilities will be more robust than ever. These.
These factors combined with our smarter and more efficient way of working and Powerbar digital platform will help to drive long term financial performance and results.
Turning to the balance sheet.
We exited the third quarter were $305 million of cash compared to $337 million of cash at the end of the second quarter.
Total debt at the other third quarter was $336 million net of debt discount and deferred finance costs and excluding finance lease obligations.
Compared to $337 million in the second quarter.
Net debt and then in the third quarter was approximately $31 million, resulting in a leverage ratio of 0.2 times on a trailing pro forma 12 month basis.
We exited the third quarter.
The total available liquidity of approximately $371 million comprised of cash of $305 million and availability of approximately $66 million under our asset based credit facility.
Cash flow used in operations was $28 million July 3rd quarter or cash flow used in investing activities totaled $3 million driven by maintenance Capex and the finalization of our next to your ERP deployment.
This resulted in a free cash flow use of $31 million in the third quarter.
Excluding $7 million and merger and integration costs costs and $1 million in market related severance and restructuring cash costs.
Adjusted free cash flow use totaled $23 million in the third quarter.
As Robert mentioned, we are increasing our investment in tier four dual fuel capabilities.
That will be partially delivered in the fourth quarter of this year.
Factoring in these strategic investments, we are slightly revising our 2020 capex outlook from a range of $100 million to $120 million to a new range of $120 million to $130 million.
We are proud to have a flexible balance sheet positions us to make these select investments combine.
Combined with ongoing cost control measures and digital investments.
Directly contributing cash savings across our business.
Turning to our outlook.
That's the trough experience in late Q2 every month has been better than them up before and we expect this pattern to continue through November.
Visibility remains low in December.
And at this point, we do anticipate a slowdown in activity due to normal seasonal factors.
Based on our current visibility and assuming no improvement in pricing, we forecast sequential fourth quarter revenue growth of between 10, and 15% with a path to positive adjusted EBITDA for the quarter.
This is including an early assessment of the summer and continued efforts to optimize calendar utilization.
Visibility into Q1 also shows continued increase in revenue and overall activity for next year were similar to the third quarter and now into the fourth quarter. We expect to continue to steadily increase our working asset base.
Since the beginning of the year hundreds of millions of dollars of costs have been taken out of our system.
That said, we did not cut to the trough nor did we size next year to operate at current deployed fleet counts.
We adjusted our operations to where we saw the market headed while maintaining ample muscle to ensure we are positioned to participate in and lead the market recovery and that's exactly where we are today.
We're entering the fourth quarter with nearly double the base of deployed fleets. We had operating roughly 100 days ago, we're not letting this robust pace of redeployment and take our eye off the ball as we remain intensely focused on operational excellence and safety performance.
Even with the recent improvement and deployments and then outsize reduction our marketed fleet just 40% of our total fleet is in operation today.
Additionally, Keller inefficiencies remain in place impacting our ability to operate at the most profitable levels.
What this means is that we have tremendous operational leverage embedded in our organization.
Right supply remains in excess of demand, but dynamics continue to improve.
As activity continues to ramp additional horsepower will have to be stopped and deployed in the market a more constructive pricing.
At the same time, there's some permanent activity is expected to result in greater scarcity of clean natural gas powered equipment.
While we maintain and are growing our market, leading position and are deploying more fleets to the upper tier portion of the market.
With that I'll hand, it back to Robert for closing comments.
Thanks Kenny.
2020 has been a challenging year for every economy company and community around the world.
Despite the unprecedented impacts of the ongoing pandemic next tier continues to deliver on this commitment.
We remain on pace to grow our cash balance year over year, while generating close to quarterly breakeven EBITDA, even during the very worst of the market conditions.
Even before considering our new low cost next hub enabled operating structure. Our company generated significant earnings pro forma 2019, adjusted EBITDA was approximately $450 million for the combined keen and Sanjay on 30 to fully utilize fleets.
With the more than $125 million, a fully realize cost synergies, resulting from our merger and accounting for the sale of our non core businesses. This implies total earnings power in excess of $500 million of adjusted EBITDA per year.
We have retained this level of earnings capabilities, even after post merger permanent Frac fleet retirement, reflecting attractive valuation versus peers and upside potential.
Before we open up the line for Q and a.
I'd like to leave everyone with a few concluding comments.
I will maintain equipment world class team and fortified balance sheet or positioning next tier to emerge from the downturn in a leadership position.
Our readiness strategy combined with our investments in our strategic initiatives means that we can best respond to the demand day, while sitting up to outperform in the future.
We will continue to advance on our digital journey, which is enabling better performance lower operating cost work scope expansion and a lower carbon footprint at the well site.
We are further streamlining our resources through additional horsepower retirements, how about allowing us to partially fund our carbon reduction initiatives by reallocating capital from maintenance Capex into next gen equipment with better pricing fundamentals and a lower emission profile.
We are building on our platform as the largest operator of natural gas powered equipment conversions and are committed to making the carbon footprint reduction transition easier for our customers.
And so.
Through maintaining a sharp focus on executing our strategy, we are well positioned to deliver value to our stockholders through a fortified investment platform.
With that operator, we'd now like to open up the lines for Q Tonight. Thank you yes.
Thank you we will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
Asian Speakerphone, please pick up your keys or pick up your handset before pressing <unk>.
Sure John Your question. Please press Star then two just.
This time, well pause momentarily to assemble the roster.
And the first question comes from Sean Meakim with JP Morgan.
Thanks, Hey, good morning.
Hi, good morning.
So starting on the fourth quarter.
You know given the guidance is pretty straight forward and consistent with what we heard from your peers in terms of activity.
I like you maybe dive a little more into your margin guidance is pretty open ended.
So could you maybe just talk about the range of outcomes in terms of incrementals or gross profit per fleet.
The factors that will drive that range from the low end to the high end.
Yes, so Sean looking I'd say first of all that well.
We knew early on kind of that Q3 was going to be to bottom for US you know would soon as cobot here, we started adapting to that and we kinda knew we were going to go EBITDA negative in the worst part of Q3 and that we were establishing ourselves to to work our way out you know with solid increase.
Metals as we read redeployed fleets.
And we've been managing our cash and to address that potential pro.
Prolonged suppressed activity levels as necessary, but we're also in a.
Positioning ourselves as the economy recovers.
Can you want to give a little more detail on Q4.
So look as we mentioned, Sean we see a path to positive adjusted EBITDA.
Visibility on this summer is still very limited, it's not good enough to really call a range of outcomes yet on the Incrementals well look what I will say is September margins were better than than our Q3 margins October and November.
As adjusted EBITDA positive.
Based on the activity that we have today. So you know you can expect some incremental at the at the GP level for sure.
And I would say the profitability mess. This three kind of factors that are going on right now you've got obviously you have price.
And you have the GE of geographic mix of our activity, which is pretty volatile.
And then you've got the mix going on between proppant in logistics I called out that our logistics growth is happening at a pace.
Even faster than our Frac fleet Riyadh.
All those are factors in and and the future profitability.
Understood I appreciate that feedback.
I think that naturally brings us to a second.
No more about DNA and free cash flow in Fourq. So you noted threeq. It was the last quarter of major charges associated with the CJ merger ERP conversion lots of cost coming out mix of cash and non cash. So as you look forward can you give us a sense of where you see DNA exiting the year will be already below.
The $80 million annualized target ex adjustments and just ER I've.
Given the uncertainty I know EBITDA is gonna be part of that the moving pieces, but how you see moving pieces for free cash flow in the fourth quarter.
Sure. Thanks, Sean So look I'll start with SGN, a we've got a lot of work around the US unit cost of the year I mentioned that in my prepared remarks.
Especially in the last quarter on non labor costs, we expect Q4 to be very similar to SJ levels in Q3.
On the cash flow look at the beginning of the year, we were just stepping into the downturn driven by COVID-19.
At that stage, we committed to ending 2020 with a higher cash balance of where we started the number was $255 million.
Today, we have line of sight to deliver meaningfully above that target of 255.
In Q4 in terms of the elements of the of the cash flow.
We will be funding some working capital our revenue growth.
But that will be partially offset by some collections that moved into Q4 from Q3.
No not we'll just be financing debt service.
Maintenance Capex and then we called out the additional tier four dual fuel deliveries. So we're really seeing Q4 expectation of cash used to be slightly lower than Q3.
Got it understood I appreciate the feedback gentlemen, thank you.
Thanks Joel.
Thank you and the next question comes Chase Mulvehill with Bank of America.
Hey, good morning, everyone I'm.
Hey, good morning, guys aren't yet.
Well I guess I kind of want to talk about activity in the fourth quarter and I think you said that you exited at 13 fully utilized fleet you said its 15 today.
And so kind of overall for the fourth quarter. What do you think that your average for fully utilize fleets and then if we think about first half activity. You said. It continues to calm you think it continues to climb versus kind of activity levels today or kind of whatever that averages for the fourth quarter.
So chase I'll start by just saying that you know ever since the bottom we've been steadily leaking upward and as far as activity and fleet deployment go.
One key thing that we had to deal with was that.
Our three biggest customers laid down seven fleet during the worst part of that so we've had to we've introduced new dedicated customers to our mix and I'm very proud that that is a that gives us a bigger foundation to build upon is that as activity recovers.
But we still don't have excellent visibility in December I mean, when we see October is solid and we know that November is going to continue as we said in our script.
It will be a bit above October when we get to December we could have a lot of white space. It takes total utilized fleets a bit lower we just can't really call. It yet, but then as you go into Q1, we do have line of sight to new customer startups, particularly you know around our dual fuel offering.
Can you give a little more color on before.
Yeah look I mean, as Robert said, you know, we we exited September.
September as you mentioned chase, we've been building and adding customers.
December based on our client mix it will be down versus November it's too early to call yet, but we do see additional fleets versus our base today in Q1 as we enter Q1, we think Q1 will restart a bit quicker than it did last year and then hopefully steadily increasing from there.
Okay, a quick follow up on that I mean, do you think that your frac revenues.
Well keep up with the pace of your increasing fully utilize fleets or is there some mix and pricing anything like that that might be weighing on the revenue side.
There's going to be a significant amount of mix changing going on but I mean, we do see keeping up keeping pace.
Going forward.
Right.
And quickly here on fleet mix.
Obviously, you're doing some investing to to high grade your fleet or could you talk about where kind of tier four dual fuel horsepower total horsepower is for you today.
And then kind of where you see that going over the next one to two years.
So chase we've tried to call out in our comp.
Comments about the stratification is occurring in a market where about 70% of it is.
Pure diesel Barney the other 30% is dual fuel.
They were purposely not being too clear about how much capacity, we have and dual fuel for competitive reasons, but we are focusing in that upper 30% because the demand there is significant.
And we we or growing our capabilities as we speak and we'll probably have deployed.
Deployed as much as we'll deploy as we get into the middle of Q1, and we created a pricing arrangement that is based upon diesel conversion we have.
A.
Pro and a platinum package this linked to the amount of diesel displacement.
And you create debt via deployment of tier two or tier four.
Dual fuel equipment associated with some of the other technologies like hibernate and others that they that help you manage your diesel consumption down.
And our customers are we meeting a lot of interest in this and this offering because it gives them.
Then the opportunity to move in the direction they want to move and with this power solutions model that we talked about we were deploying this is making it easier for them to do that so is leveraging.
No our investment in dual fuel to deploy it quicker.
Our objective is to stay a little bit ahead of the demand, but that's kind of the story overall without being too competitively a revealing.
Bernie makes sense appreciate the color where you go.
Thanks Jay.
Thank you and the next question comes from Taliaferro Stevens.
Good morning, and thanks for taking my question.
Hi, Good morning, Tom went on.
Robert I wanted to talk about the announcement on your power solutions business. How long has this idea been in the pipeline for you guys from a competitive standpoint.
What's the value you think you can bring to a customer where they can come to a single source for the service package and now some of the fuel consumed in the delivery of that service and can you give us anything in terms of revenue opportunity unit economics, how quickly you can scale it more on the financial impacts side.
Thank you.
I really appreciate his questions I'm excited about this because we have been thinking about it for a number of quarters and we've been building up the expertise in the company through do hiring the talent to help us build it out we thought about doing it inorganically, but decided that doing it fit for purpose.
For fueling our own needs was a much better way to do it for us and our customers.
An objective really is to build the capabilities to fuel our own demand and when you think about the economics around that you know a hard running diesel fleet a barn in excess of $12 million a year in diesel so converting that stream to natural gas or CNG is an.
Opportunity to not only reduce emissions, but to take advantage of the few arbitrage between natural gas and diesel which as oil price goes back up in diesel price goes back up that's only go make those economics even better.
But the key thing is no our customers want to use feel gas and many of them are building their networks to be able to do that supported the service offering of power solutions is going to be able to help them make that connection and make that happen most cost effectively.
And when you think about the fact that we as a Frac company integrated Frac company with a large number of personnel on location. It gives us the ability to think about integrating around staffing as well so that the ability to do it for a better X.
Nomics then currently being done in piecemeal arrangement is built around that bigger footprint and when we talk about.
The evolution has occurred or within that within our logistics capabilities around I mean this is a real this is a real game changing situation, where we can do things much more effectively and cost effectively than we have in the past.
So in the gas delivering process, there's a lot of logistics built into that so those were there's weren't we have advantages of putting it together that way and the customers can see that clearly and we're in early days of that and we will we expect may take a little while bill is that we expect to be bringing us into them.
Market in Q3 of 2021, and we may even accelerate debt for a couple of cases earlier than that as we get into the opportunities and 2021. So this is a big deal for US we think it's obviously, enabling our already strong dual fuel fleet and.
It stand alone has a solid economics.
All very helpful context, Robert Thank you.
And as a follow up I wanted to pivot to the theme of consolidation, which is one where kane has been active oh really throughout its history.
As you look forward and as as we see a lot of the customer base consolidating.
Does it change at all the the rationale from your standpoint, Robert I mean post the cion JV transaction.
You had a scale that it felt like it was sufficient to service the market in North America.
That you didn't need a whole lot more <unk>.
Any change in the thinking there as the operator landscape has changed and if maybe if not for US for next year just for your competitor base. How do you see this unfolding on the service company side.
You know I think many of us in the service company side Kinda anticipated MP consolidations going beyond the horizon I think coal would obviously probably move that up you can see it everywhere.
As far as far as our interest in M&A you know, we we feel like we did it at a good time for US you know got solid balance sheet now got some technology things that are really enable us to strategically differentiate ourselves.
And we don't want to Uh huh.
Seem like we don't have a lot of interest.
Because we are open minded and I think that we've established that we're very good at integrating and I think we can do that very very handily.
And I think that the integration needs to occur in Oh with best base, just as much as it does in the E M P space.
But when we look at it we want it to be kind of in tune with our strategic drivers that we put a lot of effort into establishing.
So hope you take all that is to say is that.
Based on our history in our new ERP system, we can do it but.
But it's going to need to be something that makes a lot of good sense for our shareholders and I think it in general is good for our fast when it happens in us I.
You know I salute to people, who make it happen recently.
And getting some of that done so it's kinda open ended but we do have an open mind.
Thank you, Sir I'll turn it back.
Thank you.
Thank you and the next question comes from Chris Hoy with Wells Fargo.
Thanks, Good morning.
Hey, Chris.
I'm curious if you could give us a little color on Capex and 2021, I think you said about 3 million maintenance Capex per fleet, but how much should we budget for things like yes Junior technology investments like no cure for dual fuel the other business lines and next year power solutions.
Yeah, Let me, let me kind of walk out the 2021, Capex and obviously, it's a bit early.
But what I would say as you know we made a lot of progress in reducing our maintenance capex per fleet for Frac. This year with our next up we have been able to get that down to about three and a half million dollars per fleet.
We believe that this is a sustainable level of capital to allocate to to to conventional equipment.
We've talked about our fleet rationalization, so we'll be bringing that down to $3 million per fleet.
Not Frac service lines will be in the range of $8 million to $10 million, depending on depending on the activity.
Well look for the strategic Capex, it's probably still too early to comment.
We will be funding some tier four early in the queue and we will be funding our power initiative.
But you know until 2021 unfolds more and we're not we're not ready to talk about that low spending just yet.
Got it thanks, and then just one that's I'm not there. So is there any upside to the number of fleet I think you have to there now in 2001.
So as you know I appreciate you asking that question.
Our partnership with NASA is creating a lot of value in the middle East.
For our customers their operational performance managed continues to get better and better and we've raised the bar a lot.
I think it represents the excellent team work do we got between three parties you know the customer and to service companies, which is makes it a bit unique.
The the the regional opportunities, though they very much dependent dependent on the commercial potential.
For attractive ROI for us.
And you know, we've clearly increased the ROI for fracking dollar spent by the MPS in that region because of the amount of stages being deliberate per foot per fleet.
Yes, there is a great partner and they're very good at you know being able to build new business development in the region. So we maintain some some expectations and hope that there will be opportunities into only 21, but do not have a direct laser view of any on the near term horizon.
Got it. Thank you I'll turn about it make your budget yep.
Thank you.
Thank you and the next question comes from Ian Macpherson with Simmons.
Good morning, Thanks for all but the.
Information already maybe following up on power solutions I'm curious if this is a envision too.
Expand your dual fuel capacity overall, it's it's more design to allow you to customize the substitution rate.
A little more nimbly for your customers that their preference or just to to raise substitution rates overall across your fleet.
Lead by fleet and it maybe you could.
If you could indicate to US where you think substitution rates are on average on your dual fuel fleet today, and where you see them heading in the future with the enabling of of this new business line.
Yeah. Appreciate the question and you know little bit all of the all of the above I would say that our control system that we are using now across our entire fleet.
Dual fuel and otherwise.
Brought a lot of advantages one of them or is in this area. When we do have a dual fuel system being able to tune the engines to maximize the conversion has been a is obviously working and we have a number of data points to prove it out from our customers and some of the suppliers.
So doing that is an advantage also levering our ability to make this process easy for our customers will move our utilization of our dual fuel capacity higher up in that tier that we've been trying to describe so those those are exciting things for us but.
But also I think that the business itself has a lot of opportunity to.
To grow you know.
As we start out we're going to be focusing in on one region of the U.S. and then we will expand that over time.
You asked that you know what are the conversion rates with that with that.
Pro package that we have it's a package that will displace own average at 50%.
In the platinum package will displace diesel at a rate 65%.
And you can do you know with a pure fleet of.
Tier four do you feel you can get it up into the Eightys. So we're tearing it so the operator can choose where he wants to interact and I think that meets the needs.
And the gas supply opportunity to vary across the regions in a way that allows them to have a menu and so far so good people like that and I think it's good for for for all involved hope.
Hope that addressed it.
Yeah, absolutely thanks Robert.
I wanted to also just ask one on the topic of.
Total market attrition.
You said you think the U.S. is at 13 million horsepower today, 70% basically pure diesel.
When you drew the line on your latest 400000 horsepower retirement can you qualify for us what the what the.
Threshold was for.
Your fleet in terms of what what Didnt make the cut and what Didnt make the cut was or was there any defining attribute or was it really just kind of the obvious factors of.
Of age and and state of duty.
So that's a good question you had to kind of have a view of the macro before you make a call like that and you know weve been stating that we don't intend to invest further in the conventional fleets mainly.
Meaning that everything we do in the future will be related to our strategy that we've been outlining.
So that made it.
That was a defining factor and then you look at the projections for 2021 2022.
Our U.S. land projects in this may be smaller and rig count and fleet count activity.
We wanted to be able to deploy.
You know a large number of fleets in after this you know after this rationalization, we're still able to do 37 fleets and if you remember in my prepared remarks, I made some comments around 30, something at least generate 500 million in EBITDA.
So we think in that that bottom part that we're using for maintenance Capex support was not going to be deployed probably within the next year or two.
And based upon that is seen more capital efficient to to harvest that.
[noise] toward.
Yes.
Yeah.
Sure.
Yeah.
Yes.
Good morning.
Right.
That's right.
Okay.
[laughter].
[laughter].
[music].
Yes.
[noise] fleet.
We do believe we're a little bit more visibility on that total number you know has been flashing around a lot over.
Over the last years as all of us have been trying to.
Determined what that number is some other components or tote basically unknown and they were having to be assumptions made and I think there's been more clarity in the last three or four months than we've had before so that's why we.
Kind of been I'm willing to say that we think is somewhere around 13 million in total.
Very helpful. Appreciate it.
Sure.
Thank you and the next question comes to me and Gara with Stifel.
Thanks, Good morning, gentlemen.
Morning.
Two things.
First I think you referenced about 5 million 6 million of annualized EBITDA fleet in the quarter.
And when you talked about sort of the earnings power of the business I think that implies sort of a $15 million to $16 million.
EBITDA per fleet number if my math is right. What do you think the cafes to kept there from a from a activity level perspective.
Patricia <unk>, how do you think that plays out and I know this is up you will probably get trued. It through your question not a six month question Bert, but what do you think you need to get back to those levels of profitability.
Look thanks for the question I'm going to kind of step you through that so you know I think it's too early to call what a mid cycle EBITDA per fleet you know, we'll be obviously it has to be cash flow positive.
And were charting our path to that you know and we're increasing our earnings potential through our strategy, we talked about our increased scope, we've talked about our lower emissions.
Today, we see a path to adjusted EBITDA in Q4, we.
We think our cost structure is largely sorted out.
And that 50 fleets today, we're seeing much better GP per fleet and that's translating into a positive adjusted EBITDA.
The frac the path to free cash flow is going to be in 2021, we're going to continue to get productivity on our fixed cost and that's DNA with additional deployments.
We're starting to see better utilization from a calendar perspective, assuming this continues that will be part of that path.
And then we continue to drive down our maintenance Capex for fleet and overall cash cost of doing our business. So you know first we had to see positive adjusted EBITDA and now we're on a path towards positive free cash flow.
Okay. Thank you and then.
Just the second question when you look at the competitive landscape and clearly there's been consolidation on the P. side, a little bit on the Frac side as well you've got companies that are in bankruptcy or have you know week cash positions.
And have you seen any impact yet on.
The bidding process.
Reference for.
You know next year or other more stable providers.
That's showing up at all yet and if not do you expect to.
You know when you go into a turmoil that we went through in Q2 and.
Coming out of now you see a lot of varying behavior among the competitive landscape I would say.
I think that when the outlook for 2021 becomes more clear maybe people be more consistent but I think.
If the 2021 outlook is not.
Not a significant rebound.
The part of the market that is struggling with liquidity, we'll we'll do different things and we've seen some some pricing that is you know no matter what is extremely cash flow negative that we will you know when that bottom tier of the market that we've talked about burn impure data.
Hello.
With the tier two equipment that you know is not sustainable and you know maybe just a playbook to try to prepare for for for for M&A as some sort of I'm not sure but.
It's certainly one that you don't it is not sustainable.
So I think we see we have seen some of that even now.
And going forward I think you know.
I don't know what that's going to look like in 2021, but it's very much linked to the macro view of each each individual company.
Okay, great. Thank you for the color gentlemen.
Thank you.
Thank you and the next question comes from Scott Gruber with Citigroup.
Yes, good morning.
Scott.
Most of my questions have been answered, but just a quick one on the the dual fuel lead.
How much of the economic benefit from diesel displacement or are you capturing versus a customer it sounds like there's a bit of a range. This on your your your your pricing strategy, but ballpark what does that range look like.
You know a mess interesting way to look at it and that was the way it's been looked a little bit in the past, but we're just Atlas you might as I was trying to point out a while ago that different pricing tiers associated with amount of displacement.
When a customer can look at it if a <unk> to see if it makes sense for him commercially or not and we know what we set it up so it doesn't make sense for us.
And as we get power solutions put in place I think a little bit of put together, an overall package versus what they're doing no matter. How they are doing it that's going to demonstrate the value of integration and all the things I explained earlier.
We'll make our or pack, it's better for them and us. So that is that's what it's going to look like and we wouldn't be investing in it otherwise.
Got you that's it for me it sounds like an exciting opportunity. So I appreciate it. Thank you bye bye.
Question.
Thank you we got time for one more relevant over time.
Okay very good and that comes from John Daniel Daniel Energy Partners.
Hey, guys. Thanks, Rob.
Robert.
<unk>.
Or no.
Hi, John.
John We can't hear you.
How about now better.
Better yes. Thank you sorry about that I <unk>. The first question just on gear for dual fuel and how you see that versus you guys also looking at US the turbine solutions are forthcoming.
Yes, a good good question so.
When you when you look at the benefit of next generation equipment the burn now.
Natural gas.
To lower emissions.
The customers out the options of the older generation tier two or tier four as you point out or perhaps migrating towards fully electric.
When you look at electric you guys start thinking about what is the power solution look like as you well know whether that be a turban powered or some other source of power that they can make it make it work that is the chat most challenging part of the capital investment process I mean.
Understanding.
How that would work and how you can get become capital efficient with it.
We're looking at it hard and I expect it will be field testing out.
Our version of that in Q1 of this coming year Okay.
That will give us a chance to offer to our customers who want to go that route.
That that option at the same time, we do believe that.
The complete package assessment that.
Here for dual fuel like.
Our platinum pro a platinum package.
Is the answer that that is best suited for for both for both players. So I'll just say is there more to come on that okay.
So it's safe to say you could you could actually provide though down the road.
Yes, yeah. The other one is when you look at the competitive landscape I know a number of your peers have tier two fleets or tier four without dual fuel given your emphasis on the dual fuel solution and perhaps down the road turbines.
<unk> should we then assume that those companies with call. It the legacy fleets are certainly.
Not M&A candidates for you guys.
You know we get asked that.
A number of times that I won't ask very carefully to say is that we got an open mind, but when we prioritize we would certainly be prioritizing equipment that would fit to our strategy better.
Right now the benefit of.
The pure benefits from a macro consolidation weighed against that was what would have to look at obviously, okay. So we don't want to start running Buddy all from <unk> <unk> from from consideration because we do believe we're we're very good at integrating.
But on the other hand, we also want to look at the the best fit for Us first.
Fair enough, okay, thanks for putting them.
Hey, Thanks, John all the best.
Ladies and gentlemen, we have reached the end of the question answer session I would like to turn the call back to Mr., Robert Drummond for closing comments.
Thank you I'd like to recognize the next tier employees, but because of the magnitude the downturn. Our team has worked extremely hard to navigate all the challenges while delivering the leading safety performance and top service quality that our customers expect.
Every day, our employees collaborate and design solutions to maximize value for our customers investors and the company. It's been my honor to work alongside each of you and I share your commitment to the long term success of next year. Thank you for participating this call today. Thank you.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.