Q1 2021 Nextier Oilfield Solutions Inc Earnings Call
Good morning, and welcome to the next year oilfield solutions first quarter 2021 conference call.
As a reminder, today's call is being recorded.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
For opening remarks, and introductions I'd like to turn the conference call over to Kevin Mcdonald, Chief administrative officer, and General Counsel for next year.
Sir please.
Please go ahead.
Thank you operator, good morning, everyone and welcome to the next tier of oilfield solutions earnings conference call to discuss our first quarter 'twenty 'twenty. One results with me today are Robert Drummond, President and Chief Executive Officer, and kidney tissue Chief Financial Officer before we.
We get started I would like the 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 includes statements that speak to the company's expectations outlook or predictions of 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 in or implied by the statements. We undertake no obligation to revise or update publicly any forward looking statements, except as may be required under applicable securities laws.
We refer you the next year's disclosures regarding risk factors and forward looking statements Center of 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 additional details and a reconciliation to the most directly comparable GAAP financial measure are included in our earnings release for the first quarter of 2021 and with respect of 2019 related non-GAAP financial.
Measures in our earnings release for the first quarter of 2020, each of which are posted in our website with that I will turn the call over to Robert Drummond, Chief Executive Officer of next year.
Thank you, Kevin and thanks, everyone for joining us this morning.
We continue to make good progress with our strategic initiatives around converting our completion fleet to natural gas power in an effort to meet the growing demand in this important part of the market.
Our first quarter ended on a strong note exiting March with our best monthly performance since April of 2020 after recovering from the unexpected and extremely abnormal winter conditions in February and transitioning to new customer activity early in the quarter.
We were pleased to onboard five new customers early in the quarter and enjoyed steadily efficiency improvement as we exited March.
The ongoing results will continue to improve with the additional deployment of newly converted gas powered equipment throughout the rest of 2021.
Our decision last year to increase the pace of conversions from diesel engines to lower carbon footprint natural gas powered tier four pumps is beginning to serve us well as we exit Q1 and <unk>.
As we expected demand continues to grow as we progress towards half two of 2021.
In addition, some of our historical customers are beginning to return to work as we roll further into 2021 and the COVID-19 recovery.
The value proposition of our integrated completion solution is well understood by these customers and is meeting ever increasing interest from new customers as we demonstrate the advantages, including improved efficiency of aligned objectives and incentives around fracking.
Last mile logistics.
Wireline pump down perforating.
And the up and coming deployment of power solutions, our natural gas fueling solutions.
Our new customers of favorably evaluating the cost effectiveness of this more efficient integrated completion, offering and the resulting optimization of well site staffing.
I am very pleased with the momentum of this enhanced and differentiated offering which we expect to be reflected in our results during the back half of Q2 and throughout the rest of the year.
Despite this whipsaw the activity profile caused by the extended freeze in Q1, which shut down the majority of our Frac and wireline Permian Basin centric operations for 10 days I.
I was very proud of the way our next tier team rebounded in March with our best monthly performance since April of 2020.
The ongoing deployment of new E. S. G probe and ESG platinum dual fuel integrated fleets are getting off to a great start with high efficiency and steady improvement in the amount of diesel fuel being displaced with cleaner natural gas.
That was also particularly proud of our cementing business performance through the extended freeze in the Permian where operations managed to continue without interruption.
The momentum of the recovery on our cementing and coiled tubing business has been very positive and is expected to continue.
Overall, our extensive footprint in the Permian Basin is a core next here strength and the initial focal point of our new power solutions business.
This business is on scheduled to become commercial in Q3, which will integrate C and D and field gas with our Frac fleet to make it even easier for our customers to address to transition to natural gas power and a more cost effective lower carbon footprint.
There is no wonder that market demand for this technology is growing especially as diesel prices continue to increase.
We are encouraged by our customers' plans as well as a backdrop of improving commodity prices, we anticipate increased activity in the coming quarters and are managing increased customer interest in our core strategic initiatives that emphasized two key priorities provide.
Providing integrated service solutions through well site scope expansion.
And responsible low cost low carbon completion operations.
These solutions and investments are focused on differentiating our completion services and the part of the market where customers are focused on total cost of operations in maximizing their returns.
We plan to generate meaningful returns as the cycle continues to evolve.
And I will now provide an update on how we are executing on our core strategies.
First on well site service expansion and integration.
Next year's integrated solutions platforms means that our customers benefit from one safety system.
One quality management system, one risk management system, and one cohesive of land team that is focused on efficiency.
The outcome of this which reflects the value proposition of our integrated offering of simple.
Our approach leads to fewer and better align suppliers and personnel on each job and improved financial and well site performance for next year on our customers.
As noted we significantly grew our logistics business in the first quarter and into the second.
Although the nature of the business carries lower margins than our core completion services. It is accretive to both EBITDA and cash flow and importantly, with the capacity gain in our latest merger carries a very low capital cost to deliver.
We continue to demonstrate our ability to land commodities at a lower cost while still generating returns enabled by our AI driven control tower inside the next hub.
Additionally, the efficiency of our AI driven logistics operation supports our focus on responsible operations by the.
Reducing day saw consumption and the number of vehicles on the road.
We are building on this capability, even as the market struggles to address the scarcity of truck drivers of available to support our sector.
We have successfully added capacity to address this dynamic.
And we are expanding capacity to support our customers with the reliable last mile logistics.
Our logistics platform enables lower proppant costs.
Lower last mile cost.
Lower emissions and the opportunity for drivers to make more money.
Yeah.
Well site integration strategy is also a key enabler to achieve an exceptional safety performance and in fact, our wireline business was proud to receive the 2020 Gold Star Safety Award from the a S. C. The association of energy service companies.
Recognizing our team for his commitment to ensuring leading safety results in the field.
Safety is always a primary focus for next year and reflects our license to operate for our customers.
In addition to this exceptional safety performance integrated Frac and wireline remains of critical component of our strategy as.
As we consistently realize 25 per cent or more improvement in frac efficiencies when integrated as of completions fleet.
With the safety and operational performance, we are making gains in the number of integrated completion fleets, we have in the marketplace and see further expansion into the future.
The emergence in Q3 of our power solutions business, providing comprehensive fueling options for natural gas powered fleet further enhances our unique integrated value proposition.
The second we continued to drive forward on our low cost of low carbon strategy.
We would point to several key achievements on this front.
We continue to deploy tier four dual fuel equipment into the market.
We see continued demand for lower emissions Frac technology and as planned we were allocating strategic capital to dual fuel conversions for delivery throughout 2021.
And I want to emphasize the disinvestment converts existing diesel powered pumps to natural gas as the primary fuel source and does not add additional horsepower to the market.
The demand is largely driven by the savings on fueling operations with clean burning natural gas displacing diesel.
And this value proposition is further enhanced as the cost of diesel continues to rise.
Second we continue to evolve our workflows around this new equipment to maximize diesel substitution by utilizing our next hubs digital capabilities and proprietary M. D. T branded frac controls for turning the pump system to operate in the most efficient manner.
We've done on the market with the tiered offering focused on natural gas substitution capabilities, which we've named ESG pro and ESG platinum.
Providing our customers price point options for reducing their well site carbon footprint.
Third.
Our power solutions business is on track to deliver compressed natural gas in early Q3, we're deploying the <unk> equipment and processes that improve upon the safety and reliability of existing solutions and includes new proprietary technology that provides the safest and easiest way for customers to use their own field gas.
Power solutions will help drive and enable greater natural gas substitution power of Frac fleet.
Optionality on field or C N G gas fueling and optimize emissions reductions and reporting.
These benefits combined with fewer and fully integrated well site personnel enabled us to closely align with our customers' objectives.
And finally, we successfully tested the Adobe ideal E Frac system with a key customer and are currently performing additional field test utilizing multiple power sources.
We are field testing alternative of electric power solutions to the first generation electric solution of the large single power source turbines currently being used in the market.
One of these alternatives that we are currently field testing is a 100% natural gas power generator that we believe is more reliable modular more capital efficient and we believe has a lower emissions profile.
We continue to lead the way and successfully piloting these next generation technologies and reducing the technical risks associated with the potential transition to alternative power sources for fracturing.
We look forward to providing further updates on our next gen strategy in the near term.
With that on.
Ill now turn the call over to Kenny.
Thanks Robert.
The first quarter revenue totaled $228 million compared to $215 million in the fourth quarter.
This marks a sequential increase of 6% as new fleet deployments on growth on our integrated logistics business as well as on our WCS business was largely offset by the impacts of severe winter weather in February.
Total first quarter, adjusted EBITDA was $1 million compared to $8 million on the fourth quarter.
Mainly driven by the inclement weather event across our southern region as well as some choppiness in the schedule as we transition to several new customers in the quarter.
The impact of the storm was more than double our preliminary estimate with over two thirds of our operations offline during the 10 day period.
The storm impacted the heart of our operations across our southern region, which includes the Permian the.
Eagle Ford and the Haynesville.
On the activity decline, resulting from the storm was further compounded by the additional cost associated with the head count on equipment, we had in the system from ramping up our operations in response to greater demand building through Q1 and into Q2.
We estimate that the total storm impact on adjusted EBITDA was approximately $10 million.
In our completion services segment first quarter revenue totaled 200 of $9 million compared to $200 million in the fourth quarter.
The completion service segment, adjusted gross profit totaled $15 million compared to $24 million in the fourth quarter.
During the first quarter, we deployed an average of 18 completions fleets and when factoring in activity gaps we operated the equivalent of 15 fully utilized fleets.
On a fully utilized basis annualized adjusted gross profit per fleet, which includes frac and bundled wireline totaled $4 million compared to 6 million per fleet in the fourth quarter were slightly higher utilization was more than offset by the severe winter weather impact.
In our well construction and intervention services segment revenue totaled $19 million up approximately 27% compared to $15 million in the fourth quarter.
Adjusted gross profit totaled $2 million compared to $1 million in the fourth quarter.
The improvement in results in both of our cement and coil tubing business lines as a result of market share growth on focused basins as well as returning customer activity.
Adjusted EBITDA for the first quarter excludes management adjustments of approximately $4 million.
Which are primarily noncash related.
Net non cash adjustments of approximately $5 million are primarily comprised of market driven facility closure and severance costs stock compensation expense.
And the loss on a financial investment.
Partially offset by a reduction in estimated accruals from favorable progress on a pre merger related tax audit.
Approximately $1 million of management adjustments are cash related.
First quarter, selling general and administrative expense totaled $16 million compared to $23 $7 million in the fourth quarter.
Excluding the management adjustments adjusted SG&A expense totaled $21 million effectively flat to prior quarter.
And reflecting the decrease of 56% versus Q1 of 2020.
Turning to the balance sheet, we exited the first quarter with $272 million of cash relatively flat as compared to the prior quarter.
Cash as of the first quarter included the receipt of $34 million associated with the second part of the wall support services sale consideration.
Which was partially offset by our ongoing capital investment and our low cost low carbon strategy.
Total debt at the end of the first quarter was $355 million net of debt discounts and deferred financing costs and excluding the finance lease obligations comps.
Compared to $336 million in the fourth quarter.
Net debt at the end of the first quarter was approximately $63 million.
We exited the first quarter with total available liquidity of approximately $353 million.
Apprised of cash of $272 million.
And availability of approximately $81 million under our asset based credit facility.
Cash flow used in operations was $23 million during the first quarter.
Driven by increased use of working capital mainly due to the revenue ramp in March and timing of collections generating higher receivables.
Excluding the receipt of $34 million associated with the second part of the wall support services sale cash flow used in investing activities totaled $14 million.
Our investment activities are mostly driven by additional investments in our tier four dual fuel carbon reducing technologies maintenance capex and investments in our power solutions business.
Partially offset by proceeds from excess equipment and property sales.
This resulted in free cash flow use of $37 million for the first quarter.
Turning to our outlook as we turn to the second quarter positive factors are at play first the significant onetime impacts associated with the winter storm are behind us on more than two thirds of our operations were offline for nearly 10 days. During February we successfully returned to pre storm levels and late <unk>.
February.
Second our customers were up and running we benefited from continued activity growth in the final weeks of the quarter and now on to the second quarter as customers return to work with robust activity and confidence of commodity pricing continues to show some strength.
And finally, we see improving calendar utilization in Q2.
While calendar gaps remain we have seen improvement in our ability to utilize our asset base more efficiently.
Taken together.
We currently expect to have 20 deployed and 18 fully utilized fleets for the second quarter.
This activity growth combined with the factors just mentioned are expected the drive second quarter sequential revenue growth of at least 25%.
Combined with better fixed cost absorption with the higher number of working fleets and some improved calendar utilization, we expect to deliver second quarter adjusted EBITDA of between 18 and $22 million.
We continue to expect total capital expenditures for the first half of 2021 of approximately $60 million.
Comprised of maintenance capex across our product and service lines, including $3 million per fleet per year for Frac as well as strategic investments in additional dual fuel conversions and the continued deployment of our new power solutions business.
We have not wavered in our long time commitment to asset readiness and expect to continue to invest nearly $1 million per month on our fleet readiness program that continues to drive minimal fleet reactivation cost and confidence on redeployment quality and speed.
Looking ahead, we are encouraged of what we're seeing in the market as we head into the second half of the year, including an improved commodity price environment and further tightening in the market for natural gas powered fleets, which account for a growing percentage of our asset base.
This is exactly what we planned for when we laid out our strategy during the early part of the market response to the impacts from the COVID-19 related shutdown.
Our platform provides significant earnings power, including meaningful embedded earnings growth associated with continued utilization of improvement in.
In addition, we continue to see price and recovery for our services as the potential amplifier to our growth as.
As noted we've seen the opportunity for some net price increases recovering a portion of the pricing conceded that the depths of the downturn, but continue to see further pricing upside potential through the rest of the year and into 2020 to assess.
Especially for the natural gas powered equipment, which comprises the majority of our deployed fleet.
With that I'll hand, it back to Robert for closing comments.
Thanks Kenny.
We have provided routine updates on our strategic initiatives as we've continued to build on new company. Since next year's creation back in Q4 of 2019.
I would now like to provide our investors with three key update.
First we're scheduling a virtual investor event for September the 24th we will provide a deep dive into the company and our technology.
Please look for a save the date invitation soon.
Second.
On April the 26th we published our spring 2021, Investor presentation, which sets out more details on low cost low carbon strategy that provides a compelling valuation on next year's earning potential.
And third we recently published next years 2020, corporate responsibility report, providing a deeper look into the importance of responsible operations as a driver for our low cost low carbon strategy. These reports are available on the Investor Relations page on our website.
In closing I.
I would like to reiterate that we continue to reduce our operating costs.
Our increasing digital capabilities and are beginning the process of recovering pricing conceded during the worst part of the COVID-19 driven activity downturn.
Pricing, particularly in the natural gas powered portion of the market. We will continue to leak upwards as agreements are reset and supply and demand continues to tighten.
We expect our lower operating cost and enhanced integrated completion platform will deliver very healthy profit fall through as price recovers and our margins continue improving over the next two years the.
Despite the weather related challenges that we experienced in Q1, we continued to see the activity ramp we anticipated in the Q2.
And our Q2 EBITDA exit annual run rate above $80 million is in line with our expectations at this early stage of the market recovery.
In addition.
We see Q3 EBITDA run rate improving considerably off of this established Q2 base.
Based on current visibility, we believe that we will achieve at least $80 million of EBITDA in 2021, and exited the year with double digit EBITDA margins.
This reiterate our previous comments debt 2021 is going to be a transition year for U S. Oilfield services and we believe that we are very well positioned and we will have strong momentum as we move into next year.
With that wed now like to open the lines for Q&A.
Operator.
Okay.
Ladies and gentlemen at this time well begin the question and answer session.
I ask a question you May press Star and then one using of Touchtone telephone.
The draw your question you May press Star two.
If you are using a speaker phone we do ask you. Please pick up the handset before pressing the numbers to ensure the best sound quality.
Once again that is star and then one particularly on the question queue.
And our first question today comes from Chase Mulvehill from Bank of America. Please go ahead with your question.
Hey, good morning, everybody.
Good morning, James first.
Good morning, Robert that's the first thing I wanted to talk about was just kind of come back to the pricing conversation you say youre seeing net pricing and we've heard that from some of your competitors as well.
Maybe if you could just take a moment and talk to you know how much pricing actually fail.
During the downturn, how much you've been able to get back.
And then.
The net pricing increases you're seeing just the kind of tier four DGB fleets or are you are you able the kind of push pricing on some of the conventional fleets too.
Thanks for the question, Jason you know much of the current as you point out pricing was set during the worst part of the COVID-19 shutdowns in.
We have been in with our customers for the long haul from the beginning and we believe in long term partnerships.
I would say in general current bids that we're making in the market today are higher than they were.
During the COVID-19 period of the worst part of the COVID-19 period.
The agreements that we said along the way.
They they have reopened and we work with our customers along the way to recoup.
Inflationary changes and.
Do the most part of that negotiation during the reopener.
You asked how much it dropped I would say it it dropped a lot during.
During the worst part of of the middle of last year.
And we've only began the recuperates very small amount.
And that's growing we think give us the ability to change more because there's two there's two or three factors first on supply and demand side I mean, the steadily converging.
Because one demand is increasing.
And so as Frac intensity.
And it's consuming equipment of fast pace.
That's the thing and.
Been very extremely minimal capex investment in Guinea kind of growth to the market.
And I think that debt those factors.
In the in addition to the fact that we are dealing with now more and more of bifurcated market bifurcated around fuel source.
Natural gas powered fleets that are representing somewhere in the neighborhood of.
The 20 to 25, 23% of the total deployed fleet.
Because the market in general is growing net percentage is shrinking.
And it's relatively sold out there.
That dynamic for pricing improvement in that arena is much better.
In the conventional portion of the market.
I'd say that the dynamics there impacted a lot by small independents that are yet to be sold out with the conventional equipment and that part of the market as.
Is much slower to move so far.
But the bottom line is on.
Our customers went through the process.
You know two two.
The heal their balance sheet in 2021, and when we say 2021 of the trends transitional year sort of as kind of what we're saying they're in the process of allowing our balance sheet. The heel and we expect as we roll into 2022, that's when we'll see most of our opportunities to to make of price move and that's given.
That in conjunction with the fact that we know what customers. We got come in fact of our traditional customer base.
Give us confidence to be us.
As forthcoming on our guide as we did.
Hope on us okay.
Absolutely absolutely I appreciate the color.
If we could talk a little bit about some of your frac.
I don't know how much.
Some of the truck operations Youre doing today, it's obviously, a small part of the market you need four plus wells per pad to really kind of take advantage of salary frac and so I don't know if you could maybe just take a minute to talk about some of the trends that youre seeing out there with some of your frac and the ability for next year to be able to handle all the on the logistics side.
And help your customers advanced kind of the sudden reflect the penetration.
Well look I'm glad you asked that question because some of Frac is becoming more and more important part of our customers' forward thinking.
We've been involved with it pretty dramatically from the beginning.
And in some basins is becoming a bigger and bigger piece of <unk> pieces of our work while in some basins, it's yet to be of factor really.
So I would say in the beginning it was.
Typically lower rates and trading pressures per well and with that.
Our ability to have less wear and tear on on equipment was good it was.
Our process debt.
It was interesting and more and more attractive to the customer because of delivering more footage per frac on the on a routine basis.
But the lately.
The intensity of some of Frac is increasing and it's consuming more and more horsepower. Obviously, we're adapting our pricing models and renovation process to that but the point that we want to make there is that when people say, how many fleets operating in the market without clarity around.
How do you count Asama Frac fleet.
Becomes less and less clear.
And I would say is that this is one of the factors that we think is consuming a lot of the supply in the market.
Where are some of freight fleet.
Got accounted at what 1.25 to perhaps even up to two fleet.
And inside that arena of execution matters dramatically and they do have the list transition time, but you've got to wireline operations embedded in it is good for us in the hope of benefit of our model around integration is amplified when you have that kind of intense operation going on.
So my prediction is that you're going to see this.
This continues to increase I think a little bit and.
The coupon out its the only applicable of certain pad configurations typically.
Ads that are designed to accommodate it and that process I think some of our customers are working towards.
We embrace it we're good at it I think we were on the early stages of it incorporates a pretty good bit of our work today and it is intense work and we tend to excel in the debt kind of arena.
Good question.
Alright, awesome I'll turn it back over thanks, Robert for Eagle.
Okay.
And our next question comes from Chris of away from Wells Fargo. Please go with your question.
Thanks, Good morning, I thought I'd, maybe ask about your tiered offering for kind of ESG type suites.
I'm curious what kind of appetite youre seeing from customers is there a lot of difference between.
Appetite for ESG probe versus the.
ESG platinum.
Uh huh.
How is it evolving in terms of what people want and how much they care about higher natural gas sorry of diesel displacement versus lower.
Chris Good question look it's evolving.
I think there are a number of factors involved there obviously the benefits of burning gas the arbitrage between diesel and natural gas prices as the driver.
But it's also around our customers, reducing their carbon footprint and there's a lot of information in the market today about claims about what is the best of emission profile of equipment.
And I think the entire sector is on the learning curve, a little bit and we got a strong opinion. We spent a lot of time studying that and I've noticed that our customers are getting more and more educated the more and more smart about the process.
So I would just say is that we have a good mix between ESG CRO and ESG platinum.
The key thing to think about though is the.
There is.
On a premium associated with both of those packages over what you would pay of customer would pay for diesel conventional fleet.
So that's the reason we had multiple <unk>.
Entry points for our customers, how we blend the equipment and how we run it to deliver different levels of diesel displacement, so that they could enter where they wanted to.
But I think I would predict that over time as the market becomes more material on that understanding the cost benefits of carbon footprint reduction that will see more and more of a migration toward platinum.
And the requirement for tier four dual fuel equipment being one of the best and most cost effective answers. So that's the way I would describe that dynamic in and.
We're very encouraged about where its going on you're going to see us continue to deploy.
Dual fuel fleets throughout 2021, and we got.
We've been calling out the investment, we're making and we've been fortunate enough to be able to offset a lot of that investment with the sale of our well servicing business that we completed right at the beginning of COVID-19.
Okay. Thank you congrats on.
Sure and maybe for the <unk>.
One just about growth in the active fleets curious if you can describe how much growth you expect from here, obviously throughput is going to be going up strong revenue growth in the second quarter, just more work per fleet, but what about suite additions as you go through the back half of the year and maybe some commentary around which basins do you expect to grow the most.
Yeah. So you know it is basin question somewhat too.
But I won't reiterate we see 'twenty one on bolt on kind of like we expected and it's going to be a transition year.
What we said in our prepared remarks was that we've been fortunate to onboard new customers the.
During the beginning of this year.
Net.
In many ways, replacing some of the traditional customers who ramp down activity aggressively in 2020.
But all along the planning of stage recovery. During 2021. So when you asked that question from our perspective, we got visibility on continued additions in the Q2 in the Q3.
And it'll be on it.
On the neighborhood of a couple per quarter kind of thing, but mostly with our new.
The tier four DSG platinum type.
Offerings and that's the reason, we're getting so strong for Q2 and Q3 going forward.
At the same time the dynamics around the market in general has continued to improve in our sales and marketing.
The efforts of our continuously improving as we've added new talent into that arena. So we can get our message out to the entire customer base.
But.
That's what we see 2021 and for US that evolution is we've turned that it gives us the ability to turn cash flow positive in the 2022 and ultimately as we get fully deployed with our ESG strategy and power solutions and everything that we've got going to be a leader in free cash flow generation when we.
You get into 2023.
Okay and is most of that growth can be in the Permian.
So back of your points of good question you asked me about the basins.
Yes, a dramatic amount of it is on.
Our footprint in and the and the Appalachian basins.
He has been a core of our company for a long time is of crowded space more so even than the Permian I think the supply and demand and we're working through that we've seen some competitors pulled out of the region.
And we have a long history with the goods a lot of good customers out there in the <unk>.
Terminal about what gas price outlook isn't opinions vary a little bit, but I think we're very proud of debt position, we have there but in the visible term.
Most of that.
Growth is in Texas put it that way.
Got it thank you.
Our next question comes from Ian Macpherson from Simmons. Please go ahead with your question.
Thanks, Good morning, Robert when you talk about your.
Turnover of the customer book and picking up five new customers in Q1.
Does that make it easier for next year or two.
Prosecute your efforts in.
Expanding your work scope on the well site.
Selling more integration.
And.
And all of it and I Wonder if you could.
Speak to how also the change in the customer book is influencing the rollover in your pricing if we've basically seen.
All of the effects of repricing your fleet.
The purged through than the average portfolio of pricing should be melting up along with the the spot market from here forward.
Good question.
Look I would say.
Our value proposition is very much driven by the integration aspect you often hear us call out the efficiency.
Delta between our completion crew being frac and wireline together versus operating independently and this is statistically.
Ever since the beginning of Keane and isn't he knows by.
By working together, it's adding 25% on the average or above.
Frac efficiency by working the two together so when you talk about pricing and value proposition to me.
You have to look at it from an integrated perspective to get the full total cost of operation from the operators. So as we bring new customers into our portfolio, they're looking at our historical customer base and the results there to make their decisions about making that move with us and.
And we're trying to drive the company, we realized that the profitability levels are or lack thereof. Currently.
Are unsustainable and that we have to fix it pricing is no question of very important point as we call. It back from the concessions that we made.
During one of the worst downturns ever.
But during that process, we also lowered our cost to operate substantially and the tools for doing that with digital has changed so we're locking in the lower cost we don't have to claw back as much price as we yielded the.
See the same levels of profitability and.
And then when you add on the other profitability levers that we talk about and that is integrating our nextgen gas powered solutions.
Tier four dual fuel or perhaps even a per act when we move further down the road.
With the integration of last mile logistics and are coming fueling power solutions.
This is one we can start to take advantage of scale more.
And then also we put two companies together to be able to address a lot bigger portfolio of opportunities than we have currently if you remember back before COVID-19 struck we were like 31 fleet in growing at that particular time, so as we add fleets back into the mix our scale improves our ability to generate more profitability per.
<unk> will be driven a lot by that as well so.
Okay, I hope that debt address most of the question, yes, absolutely yeah. Thanks, Robert I wanted to ask a quick follow up.
For you or for Kenny.
On cash flow for this year, you said that you are really thinking about free cash flow coming into focus for next year.
Near term it looks like your Capex is going to be heavier in Q2 than it was in Q1, so probably another negative free cash flow quarter.
How should we think about the capex after the.
The special power solutions Capex in the first half.
Any any early read on second half Capex and like.
Like ballpark for free cash flow ranges for the full year.
Ladies and gentlemen, it appears we may be having some technical difficulties. Please remain patient while we try to reconnect the speaker line. Thank you.
[music].
And the Speaker line has been reconnected.
Can you hear me.
Yes.
Sorry about that.
Hey look I was.
Yeah. So look I was just going through the the components of our of our H, one and our full year cash.
Cash flow and like I was saying in H two our investment cadence of will increase somewhat we have our returning customer activity that has high demand on gas powered fleet. So we're going to continue to invest in tier four DGB.
So if you do the math you know in 2021, we will we will have free cash flow use but you know 2021 will be an investment year for us.
No we've been very diligent during the downturn of protecting our cash balance at the end of Q1, we actually have more cash than what we started with.
Pre COVID-19 alright, so we've always said that we're going to use our balance sheet to play offense.
In defense.
And with the increasing demand for natural gas powered equipment, we're gonna be investing that in 2021 as well as our power solutions business, but as Robert mentioned as we go into 2022 price dynamics changed a bit we continue with our leading position on our tier four dual fuel we believe that we can generate meaningful cash flow.
Free cash flow in 2022, and especially in 2023.
Okay got it sort of so the shorthand capex could actually be higher in the second half of the first half, but then as the power solutions us standing.
Standing that up.
Completes then we should look probably more towards maintenance capex levels into 'twenty, two with rising EBITDA.
That's a good way to put it in.
Okay Super.
Thank you.
Thank you.
And our next question comes from Steven from Garo <unk> from Stifel. Please go ahead with your question.
Thanks, Good morning, gentlemen.
Good morning.
Two things from me.
When you think about and I know I'm not asking for guidance for next year or anything, but when you think about the gross profit per fleet numbers.
Getting back into the mid teens 15 $16 million range of what will it take to get there I mean like I'm just trying to get back to I think it was chase's question earlier about about pricing and utilization, but what would be sort of a.
A roadmap to get back to that level of profitability.
Yeah look as we mentioned we have a line of sight on EBITDA margins to progress through the year and exiting by the end of the year at 10%.
On on your specific question. If you look at our gross profit per fleet progression is done it is going to double in Q2 versus Q1, obviously, we had some inclement weather impact in Q1 that we called out, but it's going to double and it'll be higher than it was in Q4 2020.
And then if you look further into Q3, we see that we'll be able to deliver double digit gross profit per fleet.
And from there and beyond that will be double digits. So we're going to keep our SG&A flat.
So any incremental revenue pricing.
The utilization is going to fall through pretty well from an EBITDA standpoint.
So look just to kind of reiterate from Robert talked about earlier all of the different levers that we have we're adding utilization.
Which will help with our leverage.
We have our integration around wireline, we have our integration around power solutions and our integrated logistics and then in addition to that we have the large and growing tier four DGB fleet that we believe is going to give us better pricing dynamics as we go through the year on into 'twenty to 'twenty two and beyond.
So look I think all of those things combined you know I'm not ready really ready to commit on timing of that kind of kind of full cycle of mid cycle G.
G P or EBITDA per fleet, but we are seeing improvement based on the factors that I just described and we believe that even more acceleration on the EBITDA EBITDA trajectory as we go in the 2022 and 2023.
Oh, great. Thank you that's very good color.
One other follow up I know you you have this fleet readiness program in place and when I when I think about.
Having 20 fleets the port in the second quarter and looking at kind of your total asset base right now.
What at what level of fleets deployed the you start to see.
Material escalation in activation costs is it 25 is it higher than that I'm, just trying to sort of think about where you'd need to.
Put more capital to work to the reactivate assets.
So we like.
We talk about spin of millions of Mark on.
Keeping that ready.
When you look at the total fleets of we have at our disposal and you take into account the consumption of horsepower around some of that.
We.
We can deploy double digit more fleets.
At the same kind of cost structure that we've been deploying them since the bottom of the downturn.
When you get past say.
30.
Fleet.
Then we may have a little bit more but.
Anything that had substantial cost to re.
To redeploy we've cut up in the <unk>.
We called out 600000 horsepower since the merger.
And we did that we probably would not have done that much. If we didnt think U S land was going to be different going forward than it was in the cash and now we're talking.
Our fleet count as the months go into the mid two hundreds as we get into the.
The next year.
And we think debt.
What we have now we can deploy very cost effectively and that's the reason we believe we got a lot of pent up earning potential.
The net of an excellent well.
Yes, thank you for the color John.
Thank you Sir thank you.
Okay.
And our next question comes from Waqar Sayed from <unk> capital markets. Please go ahead with your question.
Thank you for taking my question. The first of all could you talk maybe talk about your international fleet. How many of currently active what's embedded in your outlook for Q2, and then for the remainder of the year.
Yes. Thank you for asking the nor partnership with NASA has served us well.
It has been a case where bringing R.
Our U S capabilities and efficiencies into the unconventional arena over there where they have significant volume has made a big difference.
We have currently two fleets operating and it's been that way for a number of quarters and as we look into the rest of this year.
We see the potential to begin perhaps to deploy another one around business development opportunities as other REIT. The other countries inside in Mena region.
Look to try to do the same thing, but it's also the the opportunity for us in the short term from material impact.
Has to be the link to places where they have the volume to for us to address on an efficient scale.
E. They've got a lot of the inventory of wells.
And that's of developing.
Arena in the Middle East, but I would say the we're doing opt.
Operationally, we're very happy we're very happy with necessarily the partner.
And business development.
Largely driven by Masters.
The capabilities and I would not really the big partner of anybody else from the comfort that they are very good.
And we get a chance to look at a lot of things that way. So I would just say from the rest of this year, we can't see it flat.
From a financing.
Inc.
Okay, just one kind of broader kind of philosophical type of question is you know.
If you could help us understand how this cycle may be different from the last cycle.
Historically, what has happened in the industry pumping industry is.
That kind of off the bottom as activity picks up as slowly profit margins grow and only when EBITDA margins are in EBITDA gets into the 10 million to $15 million per.
True does the industry start to add capacity the customer base now on list alloys in the on the up cycle start spending up to 120% of the free cash flow.
When I look at this cycle your customer base right now has almost all said that they're going to be at the maintenance capital for some period of time.
But the industry pumping industry it sort of has started to make investments.
Earlier in the profitability curve that even when the margins are still in debt low to mid single digit range.
And so I'm struggling to understand why is this optimism about investing so much into capacity on upgrading while customers are still not paid on it.
The competitive market still a fragmented market.
And.
And Moreover, the.
The fees continue to become more and more efficient. So you are artificially to some extent, adding supply to the market. So help me understand why this kind of industry is starting to invest so much earlier in the cycle.
Look that's a good question.
Answer like this.
I think everybody in our sector of kind of understands that the activity profile in general is range bound a bit more than it was in the past relate.
Related to your maintenance.
Investment portfolio and operators staying closer to their cash flow and investment profile.
The reason, we take the strategy that were taken.
And investing in converting existing horsepower capacity.
Two natural gas power is because we moved from one part of the bifurcated market to another and the upper end of that bifurcated market is essentially sold out.
It is somewhat still pricing lead linked to the total market, but there has not been.
Additional capacity added on a.
The scale of any sort of there's been an eighth later two placed in.
On a.
Fleet or two.
This is my view.
Of of tier four kind of equipment the added by other other competitors in the marketplace, but in general I think are part of the market have been very disciplined about adding additional horsepower while simultaneously consuming more of what we already have two things like some of rack and increased frac intensity. So.
The supply and demand is converging I think pretty rapidly.
I think.
You can't look at the market the way, we probably used to as one unit of elliptic monolithic.
The supply base when you have this bifurcation of aspect.
So that's the way, it's a little bit complicated, perhaps but I would just say as debt.
The investment.
From next year is inside that upper part of the market that has a growing demand structure.
Fair enough fair enough.
My hope was that maybe.
In the sale of would wait to upgrade and let the let the customers pay for it rather than proactively doing that and the worry is that it may become the the dual fueled market may become as commoditized as the diesel market was at some point.
Well one thing I would say is that we feel like our balance sheet gives us differentiation on being able to do so and any kind of scale and a competitive advantage being had there and debt.
The company our size I believe has.
As many dual fuel we got as many gas powered fleets deployed as anybody in the market and it's going to take the number of years I think the biopsy get above the scale of the being able to do it so.
Debt.
First taking care of of what we can control I believe.
And both from the attrition standpoint on the conventional side.
And the movement into a different tier.
On the.
Evolutionary shot.
But I understand your point I hope I made some of Dan in that because that's the was not think debt.
It's not one unified moved this on the mood the ability to move price will move price inside the bifurcated market differently.
Thank you Sir thank you very much reliance.
Thank you.
Once again, if you would like to ask a question. Please press star and then one.
And our next question comes from John Daniel from Daniel Energy Partners. Please go ahead with your question.
Hey, guys. Thanks for squeezing me in.
The first one.
Guidance is on the on boarding of the five new clients can you just walk us through maybe what drove their decision is it on the growth the solution with the two.
Tier four engines performance issues of peers, just any color that you can provide would be helpful.
John I think that.
We are competing in the market.
Every day and there's a lot of oftentimes, there's a tender process price is a big factor.
And so is efficiency.
And more importantly, probably how you present yourself in the market.
Rice was is very much linked to what kind of efficiencies you can project into your own models.
Our integrated offering is a factor the percentage of our fleet that are where supply on our own sand and logistics is as high as it's ever been and on the increase.
And I think that's a factor.
Especially during parts of COVID-19, where the.
The infrastructure was challenged and we are differentiated like better positions I think largely driven by our.
Of our abilities inside of next hub to eliminate.
Eliminate the margin give drivers for an example ability to make more money, we're operating with us as opposed to somebody else, where they have the more wait time and less total travel total hauls per day for example.
So it's it's a it's as you would expect.
The whole of the whole shooting match and obviously for us the hold on those customers we have to deliver what we said we were going to do and when.
That's what we think the readiness program also had differentiate our ability to hit the ground running pretty good with our customers not error free.
But much better I think than the average.
Alright fair enough.
I've got a housekeeping question sort of a follow on the chases but with the rise in simultaneous of activity.
If you've got a crew out doing the simultaneous D. Do you count that as one crew or do you count that as two for disclosure purposes.
John It's a good point and where.
We're trying to decide what to do.
Okay. It's been it's been an evolutionary.
<unk> I would just in the beginning I would've said 1.25 was the number of the ought to be historically, we don't count them as well.
And I would say more likely.
Like one of the half.
Kind of on average so I would just say, we all look at debt to determine but certainly I think the accounts like youre not talk about being around 200.
Most of them. This is one.
That's what other okay fair.
Fair enough alright dominant asking the question is.
On this question for Greg because I know you just gave guidance, it's going up and that's that's good the pricing is going up.
But our the volume of inquiries for new work.
As robust as they were two to three months ago can you just characterize the inbound calls from customers for work.
I'd put it this way.
As I reiterated our reiterate a little bit what I always said about our.
Perspective around the customers that we very familiar with we already kind of knew what they were.
Their plans, we're gonna be on when they were gonna be layered into the to the outlet the future deployments of 'twenty one.
But the bid level and we get to look at it I think nearly everything.
And I would say that it's on the slight uptick there steady uptake.
But I would also say as it sometimes debt is the customer fishing I think about what price looks like what's going on in price and haven't yet.
Exactly decided when they might deploy the sleek.
In the.
I think that's a dynamic that's difficult to nail down, but we're excited frankly about the volume of opportunity and obviously, we run of pipeline and we can we try to handicap that in net.
The pipeline is very healthy.
Okay great.
Hey, I appreciate all the time and color you guys gave today.
Hey, Thanks, John Thank you.
Operator, I think that's the last question we can take.
So as you know before we before we close I just wanted to say one thing was that too.
To the analysts I appreciate there's been a lot of blood.
Turnover in and the growth that you guys got a lot of large volume of activity to cover and we appreciate your interest in our company.
And.
I really want to thank all of the next year employees.
Their dedication to our customers and our company and the collect the safety that we demonstrated throughout all of the turmoil that's been happening everything from the Texas free too.
COVID-19 before that so thanks for participating on today's call.
Yes.
Ladies and gentlemen, with that we'll conclude today's conference call. We do thank you for attending.
You may now disconnect your lines.