Q4 2020 US Well Services Inc Earnings Call

Greetings and welcome to the U S well services full year and fourth quarter 2020 earnings Conference call.

At this time all participants are in a listen only mode here.

A brief question and answer session will follow the formal presentation.

If anyone should require operator sits and during the conference. Please press star zero on your telephone keypad.

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Josh Shapiro, Vice President Finance and Investor Relations. Thank you Sir you may begin.

Thank you operator, and good morning, everyone. We appreciate you joining us for the U S. Well services conference call and webcast to review the full year and fourth quarter 2020 results joining us on the call. This morning are Joel Broussard, Chief Executive Officer, and Kyle O'neill Chief Financial Officer. Following their prepared remarks, the call will be opened for Q&A.

Yesterday evening U S. Well services released its full year and fourth quarter of 2020 earnings.

The earnings release can be found on the company's website at Www Dot U S. Wealth services Dotcom company also intends to file its form 10-K with the SEC. This afternoon.

Please note that the information reported on this call speaks only as of today March 11, 2021, 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. Well services management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those expressed and the statements made by management, but well.

Or is encouraged to review today's earnings release, and the company's filings with the SEC and understand those risks uncertainties and contingencies and 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 now I would like to turn the call over to <unk>.

U S well services CEO, Mr. Joel Broussard.

Yeah.

Thanks, Josh and good morning, everyone.

Last year and early March we reported on 2019 earnings just as concerns about the spread of COVID-19, we're beginning to surface and the United States.

We pointed out then that we did not know what impact it would have on our business and that we were monitoring the situation and actively.

Because of this uncertainty the us well services team prepared for the worst case scenario and began to implement our strategic plan.

Knowing that the spread of the coronavirus could be devastating to our industry, we aggressively eliminated and fixed cost.

Reduce our variable cost structure and approach to our lenders as well.

Total debt enabled us to eliminate principal and interest payments on our term loan and preserving liquidity to weather the storm.

These actions combined with proactive communication and planning with our customers allowed us well services to remain strong throughout the worst of the pandemic.

I cannot thank my team enough for their hard work dedication and sacrifice throughout the year.

With their commitment and support US well services was able to generate positive adjusted EBITDA, each card and 2020 and emerge well positioned to capitalize on the ongoing market recovery.

Carl will go into detail on the company's financial performance for 2020, but I would like to mention a few highlights.

We generated 244 million of revenue for the year and 31 million of adjusted EBITDA.

During 2020, we recorded $12 million of noncash charges to reflect doubtful collections of accounts receivable and she literally.

These charges, we generated 43 million of adjusted EBITDA, which represents an 18% adjusted EBITDA and margin and $8 million of adjusted EBITDA per fully utilized fleet.

After the sharp slowdown and early Q2 U S Ws and steadily ramped back up through the year.

Exiting the fourth quarter with 5.3 fully utilized fleet.

For the year, we averaged 5.4 fully utilized fleets.

The manpower thirds has continued to strengthen and Q1 2021 and US well services currently has 10 active fleet.

And clothing, all four of our next generation electric fleets.

The market remains oversupplied with horsepower, but the situation is changing rapidly and.

As commodity prices and improve activity has picked up significantly and attrition of conventional horsepower and the U S. Fracturing fleet has accelerated.

It is our view that the Frac services pricing well begin to rise from current levels to more sustainable price levels over the next several months and supply demand balance improves.

I believe that the future for U S well services bright and that today, we are positioned better than any company in our industry and just see it and this market.

Now more than average oil and gas industry faces scrutiny from institutional and retail investors federal and state and local government and regulatory bodies.

So the question of whether we are doing enough to protect the environment E&P customers can no longer focus only improving efficiency and reducing cost and they also need to improve the emissions performance and reduce their greenhouse gas footprint and audit to attract capital.

Since we deployed our first clean fleet in 2014 U S well services preach the benefit of the patent electric fracturing technology.

Eliminating the use of diesel fuel and significantly reduces cost for our customers and really semi truck traffic on community roads.

Using on natural gas turbine generators to power practice and equipment all of us industry, leading greenhouse gas emissions performance.

Our internal data from both diesel and electric fleets.

And the maintenance costs on electric fleet is substantially cheaper and electric fleets reduce noise traffic and other potential safety hazards that make our work safer for those on the well site and then the surrounding communities.

Not surprisingly for the last several years most of our competitors focus their efforts and resources on discounting the benefits of this technology instead of developing their own next generation hydraulic fracturing solutions.

Some competitors along with a chorus of sell side research analysts have claimed that electric fleets are too expensive that the reported benefits are not entirely true and that this technology is inferior to dual fuel fracturing fleets.

We've studied these claims closely and they are not true.

We remain the only company that operates both conventional diesel and all electric Frac fleets with which provides us the insights I can competition does not have here on the fat.

The fuel cost savings and rail I place can reduce fuel costs by as much as 1.5 million per month, and we do not rely on us overly optimistic diesel substitution assumptions to arrive at these numbers well.

And its field gas or seen G burned and October bonds, it costs less than diesel.

No technology comes close to reducing emissions to the degree that our clean fleet does.

Last year, we hired a third party to take real emissions readings on a tier two diesel a tier four diesel and a clean fleet operating in Texas.

And we published results and a white paper titled clearing the air that is available on our website. The test showed that the C. O two equivalent emissions from the clean fleet were 42% less and emissions from a tier four fleet and 48% less and the emissions from the chair.

And two fleet.

If you factor in gas that no longer and needs to be flared.

Oh, two equivalent emissions are reduced by 60%.

Claim fleet also reduces smog related emissions by 76% and 94% versus tier four and tier two diesel fleets respectively.

We have seen presentation that suggests the emissions performance of a tier four dual fuel fleet is superior to electric fleet high.

Highlighting the emissions rate of a single and dual fuel pump compared to a turbine generator at low load.

This statistic is irrelevant and the only metric that matters is totally emissions from the job and on this metric the turbine generator often superior result every time.

Electric place did not cost more than conventional fleets when you consider the cost of ownership.

Our claim fleets us long lived components like electric motors, rather than failure problem mechanical components used in a conventional fleet.

We have and we have analyzed our own maintenance cost both the expense and required capital expenses for electric fleets versus diesel fleets, we see a consistent 35% cost advantage for electric fleet.

This cost savings matters, we may spend more on the electric fleet upfront, but we spend less every year and are able to operate the fleet long after the diesel fleet requires replacement.

Finally, I think the market and can learn a lot based on the behavior of our customers and competitors.

Our customers continued to sign and extend contracts for electric fleets are competitors continue to announce plans to introduce day, one unproven electric fracturing solutions U.

U S well services.

Is uniquely poised to lead the industry as we enter a new era, and which cost efficiency and environmental stewardship matter equally.

We're excited about the prospects for our business and are confident that we can continue to deliver results for our customers and shareholders.

With that I would turn the call over to Carl.

Thanks, Joel I'll start off by reviewing the fourth quarter of 2020 before adding some color on our full year results.

We generated $48 million of revenue and the fourth quarter up 9% from $44 million and the third quarter. The increase in revenue was driven primarily by a higher number of active fleets working.

Well revenues were up on higher activity levels services and equipment pricing on a per hour basis was down approximately 10% as we deployed new fleets and market rates cause Joel Joel mentioned earlier, we're beginning to see the market tightened or confident that pricing will improve heading into the second half of the year.

Our cost of sales for the quarter was $42 million up from $31 million and the third quarter. This increase and cost is largely attributable to labor and repair costs incurred as we prepared fleets to return to service and the new year.

On a per hour basis, labor and repair expense increased 5% and 16% quarter over quarter respectively.

SG&A and the fourth quarter was $13 million, excluding a $3 million and noncash charge for doubtful accounts and a $4 7 million dollar charge for stock based compensation SG&A was $5 6 million compared to $5 million and the third quarter.

And the increasing cash SG&A was primarily related to professional fees.

Adjusted EBITDA for the fourth quarter was $1 $8 million, excluding the noncash charge for doubtful accounts adjusted EBITDA was $44 8 million or $3 6 million per fully utilized fleet on an annualized basis. This.

This compares to $8 billion of adjusted EBITDA, and the third quarter were $7 $7 million per fully utilized fleet.

On an annualized basis.

On an accrual basis do us well service to spend approximately $4 1 million on maintenance capital expenditures during the quarter.

Looking at our balance sheet, you us well services ended the year with $14 million and liquidity, consisting of $5 3 million and cash and $8 7 million and availability under our ABL.

During the fourth quarter, we closed on a $25 million credit facility guaranteed by the United States Department of Agriculture under the cares Act.

At year and approximately $22 million was drawn on this facility with proceeds used to fund working capital and other financial obligations.

This facility is a 10 year loan with a fixed five seven and 5% interest rate.

The first three years are interest only with straight line amortization over the remaining seven years.

Earlier, Joel touched on some of the key highlights for 2020, but I'd like to add some additional detail.

Revenue for 2020 was $244 million.

Flex a decrease of approximately 53% relative to 2019 levels, primarily resulting from the COVID-19 pandemic related crude oil demand destruction.

Over the course of the year U S well services made significant improvements to the company's cost structure.

Cost of sales for 2020 was $188 million or $29 million per average active fleet.

As comparison and 2019, our cost of sales was $384 million or <unk> $39 $39 million per average active fleet and say 25 per cent reduction on a per fleet basis.

We were able to make similar reductions of the company's overhead SG&A, excluding noncash charges for doubtful accounts and stock based compensation was $23 5 million compared to $26 $2 million from 2019.

Full year 2020 capital expenditures were $37 million of which 23 million was related to maintenance capital expenditures. The remaining $14 million was for growth cap capital expenditures related to the delivery of our Newbuild electric fleet in Q1 of 2020.

And with that I'll turn the call back over to Joel for his closing remarks.

Thanks, Kyle you us well services is in an enviable position our intellectual property.

Property experienced operating next generation electric fleets and proven track record on <unk>.

Levering adults and on behalf of our customers has this company well suited to be a market leader going forward.

The electric fracturing is the future of our industry and we continue to enjoy a first mover advantage and I'd like to once again, thank the entire U S. Ws team for a job well done in 'twenty, and 'twenty and well now turn the call over to the operator for Q&A.

Thank you we will now be conducting a question and answer session.

And he would like to ask a question. Please press star one on your telephone keypad.

Confirmation tone will indicate your line is and the question queue. You May Press Star two if you would like to remove your question from the queue.

So participants using speaker equipment, it may be necessary to pick up your handset before pressing us darkies one moment, please while we poll for questions.

Thank you. Our first question comes from the line of Stephen Chin Garwood Stifel. Please proceed with your question.

Thanks, Good morning, gentlemen.

Good morning.

Alright, two things.

Two things. Please the first if you could well.

And if you could talk a little bit about this so your your sort of adjusted profitability per fleet.

I think it ran probably about five and a half million of EBITDA of annualized EBITDA per fleet when you adjust for the startup costs in the quarter.

Given the higher activity levels that you are predicting and the first quarter and I know theres some <unk>.

Pricing headwinds that are continuing.

How should we just think about the sort of the direction and and magnitude of change we could see there over the next couple of quarters.

Yeah.

Guy you want to take that one.

Sure.

But.

The increased activity is obviously going to.

Help spread out some of our fixed costs and overhead oh, well anytime we ramp up and.

Nearly double our active fleet count you've got a lot of one.

And one time cost to where all those fleets out so that debt expenditures those expenses have been spent and I think that are you know <unk>.

Absent.

Any type of.

Further downturn.

Be able to have those fleets are fully utilized and that will help us increase.

Increased profitability.

Yes, we've seen an uptick in activity and and greater fleet utilization and.

And generally has a lag and pricing improvement usually follows us increase in utilization.

Although we expect the pricing environment to improve predicating. The exact time timing is difficult right. So.

Everybody knows you never went from five and a half active fleets at 10 and this quarter. So we.

We feel that our pricing will continue to improve and some of these one time costs that Carl had mentioned and I'll go away.

And just to follow up on it if you if you don't see pricing based on the contracts and the overhead absorption.

Can that number get close to double digits without pricing or do you need pricing to get.

To double digits.

On a on a per fleet basis, like well need only pricing improvement to get to into the double digits per fleet on an annualized basis.

Okay. Thank you and then the second question was just around some of the comments that you guys made us.

And on electric fleets and the cost of ownership of the clean fleet versus the upfront cost.

And what I was curious about was.

The the pricing dynamic that you use.

You've seen and you expect to see force.

For the clean fleets versus.

The traditional fleets, especially in light of them and the cost savings you have on the diesel front, but when and how.

How do you think that starts to accrue to your benefit versus the E&ps well.

Well, we feel it's a crew and a benefit now even with the if.

If we take part of that they are.

The fuel savings, let's say half of it we're still way ahead of the diesel fleet on a per fleet EBITDA basis.

Well when we previously started this food when the market was real hot and pricing was up and all our peers will actually making EBITDA and putting fleets out for positive cash flow, which most of them arent doing now we would give all of the cost savings of fuel to the client, but we at low prices the way they are.

We can still give us.

50% or more of cost savings and fuels.

The client and still and that makes those fleets are way more profitable for us.

Okay.

Is it is it fair to say there and that the conventional fleets are operating.

So a little bit of the headwind to EBITDA per fleet going forward as sort of a mix hurt you a little bit because it sounds like youre getting better prices for the clean fleets.

Exactly yeah.

That's exactly right.

Great. Thank you for the color gentlemen.

Okay. Thank you.

Our next question comes from the line of Ian Macpherson with Simmons. Please proceed with your question.

Hey, good morning team, Joe I wanted to circle back to a comment and the release regarding.

On some commercial opportunities that exist for expanding your clean fleet.

This year so.

To me was.

Noteworthy.

Obviously, you don't have tremendous balance sheet flexibility to do any fleet expansion on a you know.

And on any form of speculative basis, clearly, so I presume youre contemplating sponsored.

Fleet expansion can you elaborate on those possibilities and and maybe any magnitude and timing of those.

We started and the next 19, a private 120 days well have three trials with three different clients with our.

Original.

A version of our fleet and we built in 2014 and all three of those clients are saying that they want to go electric and actually and the first client wants to keep it if it goes well, which it will go well.

However, we're making those decisions now and when it comes to US on building them I would like we have.

Although exhilarate equipment to deploy to more electric fleets, we just need to build on.

And some pumps, which we could do through vendor financing and slash <unk>.

Equity so we think debt.

By the end of the year with demand, we see and we can potentially add two more electric fleets out.

Okay, and so really you are speaking to your advantage as an experienced operator this equipment as well as less and a full 100% of capital requirement in order to build out a couple of a couple more fleets because you have some of that capital and house presently.

Exactly correct.

Okay.

I've got some more model stuff I'll follow up with you later, Kyle on that but thanks for the thoughts.

Thanks, Dan.

Yeah.

Our next question comes from the line of Daniel Burke with Johnson Rice. Please proceed with your question.

Hey, good morning.

Good morning, Daniel on and let's.

Let's see.

What's left Joe you guys have produced some pretty good efficiencies out there and the field, which what's your outlook for efficiencies this year across the fleet, both the electrics and and the diesels.

You know we.

On on efficiency wise.

We're really happy with most of our fleets.

Especially the electrical ones.

You know the diesel ones that are coming out well.

We're seeing slight improvement, but our efficiencies that are top of the top of our peer group and on on hours pumped per month.

And we're excited about it now on the electric side, there's some opportunities to where we deploy fleets without any generators and actually.

Frac off the grid, which we.

Well.

Well IP.

It's pretty robust when it comes to that.

And a lot of people have built out theres some clients E&P clients that have built out substations and have contracted power from the electrical companies.

That or not.

Using what they said they would use and are fixed and that gets charged penalties for using it. So we feel this will be advantage to us also.

Okay. That's that's that's an interesting element of the of the build out on the electric side for you guys as well and then.

Alright, Okay. So were in March you're you got 10 fleets deployed I assume I'm. The trials that would involve the first generation electric would be additive to the 10 I think you've still got a couple of fleets on the diesel side left and inventory do you have visibility towards any further reactivation and into Q2.

I do not.

You are right. The first question, you're right it'll be and.

Additive to the 10 fleets.

However, I do not foresee us putting any more diesel fleets out there and we currently have out now.

Okay and less pricing.

And potentially price it went up to double.

Okay, and and does that speak to the reactivation costs associated with what remains.

Yes.

Okay, and then maybe just one last one well and.

Sorry, Daniel it, especially speaks to the pricing on diesel.

Yeah, Okay, that's fair.

The driving factor of course, if the pricing is substantial enough to where we can justify the reactive cost I would do it but I.

Today's.

Diesel prices are not even close to what and activate and others diesel fleet.

Understood and then maybe last one from me maybe for Kyle is any thoughts on our cash flow outlook here for Q1, and if that's hard to speak to you and maybe more simply what working capital trends look like and Q1.

Todd you want to take that one please.

Yes, sure, yes, we and we made made big strides and the and the second half of last year.

Our working capital back in line.

And I think things are normalizing and heading the right direction like Oh.

Thinking about the company kind of and a steady state working capital environment, and you know looking at EBIT and EBITDA less maintenance Capex, we should be and a positive cash flow position.

Understood Okay Joel call I appreciate the time this morning, thanks guys.

Thanks.

Yeah.

Thank you. Our next question is a follow up from Stephen <unk> with Stifel. Please proceed with your question.

Thanks.

Two other quick ones. Please gentlemen, the first.

You might have mentioned this I may have missed it and.

Any thoughts on on 'twenty, 'twenty, one capex outlook and.

You mentioned and the release about it.

Potential opportunities to expand the fleet.

Well, if you looked at something like that well.

And what kind of contract would it require and how would you think about financing it.

Well like I mentioned earlier, it would be through equity and vendor financing.

<unk>.

And that would be.

Would add another.

And 36 or seven pumps.

And I think and to blenders and I've run about right right at $50 million, which would probably be done.

Equity slash vendor financing.

Great and then just maintenance Capex for 2021.

And more than 2020 on a per fleet basis.

It's going to be slightly higher Steven and Thats, just because the proportion of diesel fleets, there's going to be increasing relatively relative to 2020 levels.

So it's going to be slightly higher and it'll be probably more in line with what our 2019 figures looks like.

Okay, great. Thank you.

Thank you.

We have reached the end of the question and answer session. Mr. Broussard I would now like to turn the floor back over to you for closing comments.

Okay.

Thank you for joining us today.

Have a good weekend.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.

Okay.