Q3 2020 US Well Services Inc Earnings Call

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Greetings and welcome to the U.S. well services third quarter 2020, <unk> earnings Conference call. At this time all participants are in a listen only mode. A brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad as your line.

This conference is being recorded it is now my pleasure to introduce your host Mr., Josh Shapiro, Vice President Finance and Investor Relations. Thank you Sir you may begin.

Thank you operator, good morning, everyone. We appreciate you joining us for the U.S. Wall Services Conference call Webcast review third quarter 2020 results joining us on the call. This afternoon are Joe oversaw our Chief Executive Officer, Kyle O'neill, Chief Financial Officer. Following their prepared remarks called the open for queuing day yesterday evening to you as well.

I'll services released its third quarter 2020 earnings the earnings release can be found on the company's website at www Dot U.S. well services Dotcom company also intends to file its third quarter 2020 form 10-Q with the FCC. This afternoon. Please note that the information reported on this call speaks only as of today November six.

2020, and therefore time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management. During this conference call may contain forward looking statements within the meaning of the United States Federal Securities laws. These forward looking statements reflect the current views of U.S.

While services management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those expressed in the statements made by management.

The listener is encouraged to review today's earnings release, and the company's filings with the FCC to understand those risks uncertainties and contingencies also.

Also during today's call, we will reference certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release, and now I would like to turn the call over to U.S., while service CEO Mr. Joel Broussard.

Thanks, Josh and good morning, Joe.

During the third quarter of 2020 concerns about covert lighting pandemic began to subside.

An increasing global economic activity helped to stabilize commodity prices.

Even today, even though hydraulic fracturing activity has picked up the market remains oversupplied and faces significant pressure on service pricing.

These persistent market headwinds have caused a number of our competitors to file for bankruptcy and its let others to marriage businesses with the goal of increasing scale and service offering offering.

Yes, well services strategy has remained consistent through the market turmoil and our results in the third quarter further validates our approach to operating in such a cyclical and industry.

Carl will give you more detail on our financial performance this quarter, but I like to highlight a few of the key data points.

We averaged five active frac fleets.

First is 4.3 fleets in the second quarter.

And on a fully utilized basis, our average fleet count was 4.2 versus 3.4 fleets last quarter.

On an annualized basis, we generated approximately 42 million of revenue and 7.5 million of adjusted EBITDA <unk> per fully utilized fleet.

Unlike many of our competitors were able to generate positive adjusted EBITDA through this downtime as a result of our reduced operating costs and the higher utilization of electrically.

At U.S., well services, we believe that being a great Frac company takes more than just high quality service and the feel it requires an ability to anticipate our customers greatest needs and find innovative solutions for them.

On this front our focus has never wavered.

We deployed the industry's first of all electric Frac fleet in 2014, and again developing our data analytics platform or shortly thereafter.

And helping our customers reduce capital costs enhance completion efficiency and harness big data to improve decision, making you as well as services has established itself as a critical partner that is uniquely positioned to help them address the challenges they face in todays market.

Increasingly our customers are experiencing.

Housing pressure to improve their return on capital, while also making significant reductions says environment environmental impact of their operations.

In order to satisfy these objectives S&P companies.

For our leaning heavily on their vendors to deliver high quality service at low cost with a smaller greenhouse gas emissions footprint.

U.S. well services offers a full set of solutions to help our customers meet their goes.

Our clean fleet TEGNA do deliver substantial fuel cost savings some of our customers have reported savings, but as much as 250000 per well.

Resulting meaning meaningful improvements to returns.

In addition to Catholic cost reductions, we help reduce our customers' completion costs by continuously improving our operating efficiency.

U.S., well services equipment, and personnel or costly capturing data and sending it to the cloud where our systems and team of data scientists and engineers generate analysis and insights.

We can then use these insights to monitor equipment health.

Plant preventive maintenance procedures and build Irish machine learning capabilities.

All of these things result in greater uptime, and lower costs for our customers.

Electric fracturing technology like our claim fleet is currently the most effective commercially available solution for lowering greenhouse gas emissions.

In recent months many industry participants have comment it on a mission to performance of different frac equipment.

We also performed a detailed study on the matter.

Like our peers, we actually run both diesel and electric Frac fleets, which allows us to take real measurement and get result.

We found that our electric frac fleets reduce C O two equivalent emissions by more than 40%.

Compared to tier.

For diesel fleets.

We also ran simulations using OEM specifications and found that a tier four dual fuel fleet generates over 10% more C O two equivalent emissions than our electric fleets.

Even if it is assumed to be operating near its peak diesel substitution rate throughout the entire duty cycle.

I'm proud of what our team has accomplished through this challenging time and I industry and I remain incredibly excited about our future use.

The U.S. lessors as technology the team the passion to succeed in any market and to deliver value for our shareholders.

I will now turn the call over to Kyle to discuss our financial results.

Thanks, Joel and good morning, everyone.

Revenue increased 11% sequentially to $44 million driven by higher active fleet count.

Service equipment revenue increased 13% in the second quarter, and consumable sales, including seen chemicals and trucking decreased 36%.

Cost of sales increased 7% to $31 million, resulting a grille gross profit margin, increasing 29% versus 27% in Q2.

You can improvements were driven primarily by the reduction in field level overhead and repair and maintenance costs.

Recently, we performed a detailed analysis of our fully loaded maintenance costs, which include both the repair and maintenance expenses as well as a maintenance capital expenditures for all of our fleets.

Over the last 12 months, we found that our maintenance costs well watch it fleets is approximately 35% lower than our conventional diesel equipment.

This translates into approximately $46 million in annualized savings per fleet versus a diesel fleet.

This is incredibly important and often overlooked by month by market observers.

Did we only consider revenue generating potential of electrically as an advantage over conventional equipment.

Moving on its DNA totaling $6.1 million for the third quarter were $5 million after excluding stock based compensation. This.

This compares to 4.1 million in the second quarter of 2020 incur.

The increase in ESS you name it was largely driven by an increase in professional fees.

You as well as reported adjusted EBITDA of $7.9 million for the third quarter of 2020 down 7% sequentially from 8.5 million.

Adjusted EBITDA per fully utilized fleet was approximately seven and a half million dollars for the third quarter as compared to $10 million in the second quarter.

Adjusted EBITDA margins were 18% for the third quarter down slightly from 21%.

The second quarter.

Capital expenditures for the quarter totaled $3.8 million.

As of September 30, the company had $11.8 million of total liquidity.

Well, we believe our cost cutting initiatives undertaken since the onset of COVID-19 have been highly successful teams continuing to evaluate ways to reduce costs and enhance our ability to generate returns in the current market environment.

With that I'll turn the call back over to John for some closing remarks.

Thanks, Kyle I.

I just want to thank the U.S. well services team for their continued hard work in such a difficult market I'm always impressed by my team's work ethic and dedication to executing on behalf of our customers' operator, you can now open the call up skewing it.

Thank you we will be now conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad a confirmation from indicate your line is in the question queue. You May press star accused to move your questions on the queue for participants using speaker equipment. It may be necessary for you to pick up your handset before passing.

To start keep my moment, while we poll for questions.

My first question comes from the line of Macpherson Mcmillan you May proceed with your question.

Thanks, Good morning, everyone I.

Wanted to just bounce off of you the.

Pretty consistent.

Consistent consensus of the other completion services companies this quarter, which has been doing.

And outlook for continued positive momentum in total frac activity through the peak this quarter notwithstanding.

Some holiday vulnerability later in the quarter and then.

Generally you know an expectation that barring a pretty significant relapse with commodity prices that next year would average higher activity than than where we are even in Q4. As some have said you know a range of 150 to 165 fleets, maybe next year, who knows but I wanted to get your perspective on that and.

Also how you see your ability to to redeploy fleets in either hold your current activity levels or continue to grow it.

Based on the opportunity bucket in front of you today.

Yes, and thank you and good morning.

We're seeing a little pick up in a bid activity. A couple award. So we think an activity is going to increase in the fourth quarter and going into the first quarter of next year.

[noise], you've been Joel you've you've been a efficient and very disciplined on costs and your superior EBITDA per fleet.

That you're posting today strikes me is also probably supported by long term contracts on your fleets.

And do you see that as something that you will be able to.

[noise] maintain a in the re contracting.

Phase over the next couple of quarters do you see that as a point of continued differentiation or vulnerability as any contracts expire just what are the puts and takes around that.

Well I I see it as the.

The.

It's operating cost of electric fleets are are a lot lower than diesel fleet and.

Our make up right now is a lot more you know 75% election versus diesel.

Not that's on a long term contracts, but we.

We will be working with the same people working for this year and next year without electrically.

Understood I'll pass it over thanks, guys.

And our next question comes from the line of Stephen Gengaro with Stifel. You May proceed with your question.

Hi, Thanks, good morning, gentlemen.

[laughter] things just following up on on the prior question. When you look at the drop in EBITDA for fleet sequentially. It seems like it mirror the b.

The drop in revenue per fleet in the quarter, which I think was down about 10% can you just talk to that and like works what drove that drop in revenue per fleet is it pricing utilization.

And how should we think about that going forward it.

It was more pivotal to a light a little bit a little white space for a couple of weeks or three weeks on a.

That that caused that.

[noise] and Ari or is your expectation.

Like if you were to think about kind of Oh.

A range of outcomes for EBITDA for fleet in the fourth quarter and going forward is is that range of three to four Q reasonable or or or should we be thinking it could be a little lower in the near term.

Oh, we think is reasonable you know would concentrate on making money and.

We're not really concerned about how many active fleets, we have working we want them all to be profitable and positive cash flow.

Okay, and then just one follow up I think I think Colm mentioned to the.

Difference in maintenance Capex you saw.

Oh, a four to 6 million difference between any fleet in a conventional fleet.

I I may be wrong, but I had in my model that maintenance Capex was like seven and a half or conventional fleet.

And three and a half front easily but the numbers you gave seem to.

Seem to be so.

Ingesting, there's a much wider gap so how do you know capex.

Capex for <unk> for both types of ways.

Like towels.

Take that but I think thats, a combination of maintenance expenses and capex.

Yeah, that's that's right Joel we've you Stephen if you recall, we changed our accounting policy on fluid ends in Q1 of this year. So we now spends fluid ends and I think what we were looking at was total maintenance cost right. So we want to look at us from capturing what flows through our you know the people on the expense side for.

Repair and maintenance, which now includes a fluid ends and the maintenance Capex line. So it's both of those categories, which is why the bid so it's not all maintenance capex.

Okay. Thank you and then just just as a quick follow up to.

Do the fluid ends last longer on the fleets.

No Uh huh.

It really takes off it was on the <unk>.

But we don't have all the changes we don't have you know some of their kids and et cetera, <unk> engine rebuild.

Transmissions and to me, that's where the cost savings are God. Thank you for clarifying appreciate it. Thank.

Thank you.

Our next question comes from the line of Daniel Burke with Johnson Rice and company. You May proceed with your question.

Yeah. Good morning, guys, let's see first appreciate the the detail in the presentation. This morning, that's appreciated up the question in terms of Ah you know the customer interest and E.S.G. and of course cost savings increasing is that sufficient to stimulate any interest in the in the legacy electric fleet.

Good morning, Bill Yeah, Yeah, Yeah, Yeah. So I don't know I mean, sorry, good morning, yes.

We are bidding stuff Uninflated Laura.

Lower rates and lower pressures.

We're currently bidding now.

Okay, I've, yet so I get that I guess the answer to your question would be yes. It is.

Okay. That's helpful. Appreciate that.

And also noise also noise.

Okay. That's helpful. And then maybe maybe the only other one I wanted to ask you all about I assume that's the six fleet referred to in a in the fourth quarter would be a redeployment of the the fourth a new Gen electric I assume that's the case and can you talk about the visibility on that fleet into next year.

Yeah.

Yes that fleet as a.

It's actually working today.

They went back to work.

And as you know.

It'll be working through that the first half of the year for sure got.

Got it so like I said on a contract basis.

Okay, and just to be clear then so as of today, you've got you've got six six deployed fleets.

That's correct okay.

Okay, Great Alright, Joel Carla I appreciate the chance to check in thank you guys.

Oh, Thank you I think you hit it thanks Dan.

Thank you for joining US today. This concludes today's question and answer session Mr. Gilbert side I'll turn it back over to you for closing remarks.

Thank you for joining us.

Today have a nice weekend. Thank every time.

This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation have a great rest of your weekend.

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