Q2 2021 Solaris Oilfield Infrastructure Inc Earnings Call
Good day and welcome to the flurry of second quarter 2021earnings conference.
Call all participants will be in a listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then 1 on a touchtone phone to withdraw your question. Please press Star then 2 please note.
This event is being recorded I would now like to turn the conference over to Yvonne Fletcher Senior Vice President of Finance and Investor Relations. Please go ahead.
Morning, and welcome to the Solaris second quarter 2021 earnings Conference call I'm joined today by our chairman and CEO of bills are alert and our president and CFO hire.
Robin on or before.
Before we begin I'd like to remind you of our standard cautionary remarks regarding the forward looking nature of some of the statements we will make today.
Such forward looking statements may include comments regarding future financial results and reflect a number of known and unknown risks.
Please refer to our press release issued yesterday along.
The recent public filings with the Securities and Exchange Commission that outline those risks.
I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance.
The presentation of this additional information should not be considered in isolation.
With the substitute for results prepared in accordance with GAAP.
Reconciliations to comparable GAAP measures are available in our earnings release, which is posted on our website at Solaris oilfield Dot com under the news section on the.
Now I'll turn the call over to our chairman and CEO Bill Lerner.
Thank you Hugo on and thank you everyone for joining us today.
<unk> for the second quarter of 2021 was another strong quarter for Solaris, we generated a 23% sequential increase in revenue to over $35 million adjusted EBITDA increased 6% sequentially to $6.5 million and we paid our 11th consecutive quarterly dividend, we ended the quarter with of $46 million.
And no debt on the balance sheet.
During the second quarter of 2021 oil prices climb from over $60 to over $70 as operators remain disciplined with supply additions and global oil demand continued to improve U S. Natural gas prices also improved from the $2 range for over $4 Historically U S operators.
As have been quick to ramp completions activity in reaction to the similar commodity price increases the cycle. The cycle. However, we are seeing a measure of the industry reaction, which we believe bodes well for sustained recovery in the U S oil and gas market.
During the second quarter of public operators maintain capital and production discipline by holding Frac program is relatively steady.
Private operators and adding significant completions activity in the run up the oil prices in the $60 range have not had a significant activity response to the $70 zone the.
U S horizontal rig count. However is currently up over 30% from the second quarter average, while the completions ramp remained slower.
The initial look at.
Of the year, we believe that operators are allocating an increased portion of remaining 2021 budgets to drilling activity combined with sustained higher commodity prices, which provides incentives for increased U S. Completions activity later in 2021 and through 2022 with Solaris is gearing up for with new and existing.
Customers in technology, which I will give more detail on shortly.
Turning to the Solaris activity our system count has grown more than 25% over the course of 2021 which is closely followed overall industry trends, our Permian exposure drove the stronger start in the first quarter than peers with different based on exposures in our business model was relative.
For the rest of the less impacted by winter storm Erie in February for both of which impacted our relative growth rates in the second quarter.
Looking into the third quarter, we expect relatively flat frac activity for the industry as operators maintained capital discipline and shifting budgets towards drilling activity. However, we expect to see some market share gains that should lead the soliris of system.
Count increasing throughout the third quarter to exit higher than where we are today.
This week, we are finalizing a 3 year agreement with an existing customer who will switch their non solaris provided San storage equipment to Solaris on jobs, where they manage the supply chain decisions, while we do not control of the pace of this activity ramp we expect to end of the third quarter of few systems.
A little higher than where we are today with this customer alone. Additionally, as this customer's activity levels grow we expect to grow with them.
Strategic customer alignments, such as this on example of how we are gaining recognition and trust from new and existing partners now our customers are confident in partnering with us to drive further efficiencies in.
Systems completion operations, we see another Great example of these type of alignment with our customers through the growth in our last mile business, where we help our customers solve supply chain issues by leveraging the continued development of our Solaris lens last mile software. These developments position us even stronger as a dedicated and trusted provider of value.
But what we think will be a strong finish for the year and even stronger next year.
On the topic of the efficiencies last quarter, we spoke about our technology Open house, where we demonstrated our new electric blending technology as part of our full equipment offering during the second quarter. We successfully ran our all new electric blender.
Value on full scale multi well trials. During these initial trials are blender reached up to $8.5 pounds of sand per gallon at 108 barrels per minute, which translates to over 27000 pounds per minute of sand throughput. We achieve these rates over the course of multiple stages and we believe they represent leading edge performance in the industry.
All of this was operating remotely from the safety of the date of van on location for moving 3 of more people from potentially hazardous work areas of 24 hours a day.
We are working on incorporating learnings from our initial trials as well as developing the right commercial model for this new technology. The initial results are driving active dialogue with our customers around potential.
Long term commitments for multiple units as a result, we are building additional units and expect to bring to more of a of lenders into service late in the fourth quarter that we believe will generate compelling incremental returns we have increased confidence that the demand for the newsletter will generate additional pull through revenue opportunities for the full solaris equipment and services offering.
In addition to the momentum we are generating with our electric Blender. We also expect to bring our second generation equipment for filling our sand systems using belly dump trucks to the market in the third quarter. This bolt on addition to our <unk> system is in the final testing stages, and we believe it will extend the benefits of a reliable vertical storage and delivery systems to markets where operators are seeing the.
The advantages of belly dump trucking over pneumatic trucking.
Soliris will continue developing and introducing solutions that automate operations and reduce the resources need for oil and gas development. We believe designing of equipment that is fit for purpose all electric and fully automated for today's high throughput completion design, which in.
In some instance, even push the limits beyond the current.
<unk> all with the goal of helping our customers maximize well site value performance economics and safety.
With that I'll turn it over the call for a more detailed financial review.
Thanks, Bill and good morning, everyone to recap some of the numbers during the second quarter, we generated.
The weighted $35 million of revenue and adjusted EBIT EBITDA of about $6.5 million, we averaged 53 fully utilized systems to play of the customers, which represents a modest sequential increase from the first quarter and over 25% higher than average fourth quarter 2020 levels total revenue increased 23% sequentially.
<unk> driven mainly by an increase in last mile services and modest growth in system activity.
Over the course of the quarter, we deployed a total of 87 proppant systems, which worked with varying degrees of utilization of our calculation of 53 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter, which we believe is the best.
<unk> measured for modeling purposes, the gap between our fully utilized and deployed systems was the highest it has ever been insulated history, driven primarily by the white space created by private operators with less consistent completion programs nearly 2 thirds of current U S drilling activity is now private operator, driven.
Which is the highest percentage mix we've seen in recent history.
Operating cash flow for the quarter was approximately $1.3 million. He was impacted by several working capital cash requirements, which I will highlight in more detail.
To ensure trucking availability for higher activity levels in our last mile services, we've been making inc.
Driven decision to pay for these trucking services at an accelerated pace. In addition, we experienced a buildup in accounts receivable that was mainly driven by late collections from a single customer that had merger related transition delays and has now caught up.
These delayed collections in of roughly $3 million impact on our operating cash flow.
On contract for total capital expenditures of approximately $5.1 million or free cash flow was negative $3.8 million.
Absent the customer specific collection delay and adjusting for the accelerated trucking payments in the second quarter free cash flow would have been slightly positive.
Turning to shareholder returns.
I'm trying to a total of approximately $5 million to shareholders in the second quarter in the form of dividends, which is flat with the prior quarter.
Since initiating our dividend in 2018, we have returned approximately $83 million in cash to shareholders in the form of dividends and share repurchases.
We ended the second quarter.
With approximately $46 million in cash from $50 million available under our Undrawn credit facility for a total of $96 million of liquidity.
Turning to our outlook Solaris systems deployed in the second quarter were up slightly from first quarter levels and over 25% higher from fourth quarter 2020.
The levels as we began the year with strong momentum and experienced minimal impact on fully utilized systems from inclement weather in February.
As public operators remain committed to capital discipline, even in the stronger commodity price environment, we anticipate on activity to be flattish in the third quarter sequentially, though exiting the quarter higher than <unk>.
The levels driven by the introduction of our new 3 year customer agreement.
Many of our customers and peers have recently discussed rising cost inflation and in many cases using that as the rationale for realizing higher pricing.
While we are seeing some of the same inflation pressures, we historically have not driven our pricing based.
Second cross and of challenge ourselves internally to find ways to become even more lean and strategic way.
Of instead focus on our pricing strategy on value delivery from our customers every year, our customers received upgrades to our systems and software enhancements that are included in our core offerings. During the 2020 downturn, we strategically and proactively.
<unk> offered temporary discounts and partnership with our customers, we've begun approaching those customers to recapture some of the temporary discounts as our value offering has continued to increase throughout the downturn, while we don't know the ultimate path recent inflationary pressures will take through the rest of the year. They are not the sole impetus for us pushing pricing higher.
On our call it could have an impact on our ability to realize net pricing.
Turning to our expectations for SG&A costs SG&A expenses for the second quarter were approximately $5 million inclusive of noncash stock based compensation for the third quarter of 2021, we expect total SG&A the roughly in line with the second quarter.
Higher levels inclusive of the normal quarterly expensing of noncash stock compensation.
Turning to Capex, our typical annual maintenance and upgrade capex runs between $5 million to $10 million last year, we spent $5 million closer to the low end for maintenance and upgrades due to the uncertainty created by the global pandemic.
Quarter, 1 this year, our maintenance Capex is closer to the higher end.
Our previous expectation was for growth capex to add another $5 million, but given our decision to develop 2 additional blenders and the belly dump solution. In addition to continued automation initiatives, we expect growth capex to range from 5 to 10 million.
For the full year 2021 for a total capex budget of $15 million to $20 million of the remaining spend for 2021, we expect capex for next quarter to be in the $6 million to $7 million range for decreasing slightly in the fourth quarter.
Soliris continues to be a leader in innovation.
And our team continues to be focused on and energized by helping our customers maximize completion efficiencies and optimize well site performance and safety operating discipline and an ongoing economic rebound point to sustained recovery for the U S oil and gas industry, which gives us increased confidence that investing in our new product development.
<unk> and drive incremental returns for our shareholders in the coming years, we remain committed to preserving our conservative balance sheet, our dividend and finding ways to add incremental returns for shareholders, both organically and inorganically with that we'd now be happy to take your questions.
We will now begin the question and answer session.
Ask the question you May Press Star then 1 on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question. That's been addressed and you would like to withdraw your question. Please press Star then 2.
At this time, we will pause momentarily to assemble our roster.
Our first question will come from George O'leary with T. P. H and company. Please go ahead.
Good morning, guys.
George.
I mean, the other successful field trials of the blender the cooler.
Cool event in March to go see the Emperor.
And then since the time that you guys. Thanks for hosting.
We've seen that just curious how of the discussions with customers are going with respect of the Blender and then what's driving the decision to build wondering about a day.
Are they giving you the.
Term button for some form of some sort of contract for you to build on what drives the decision to both of those but those lenders for customers.
Yes, George the trials have gone very well the as built into the operational performance is exceeding expectations. So we're really excited about it our customers are really excited about it. We obviously had 1 working on the field the day and we expect to deliver 2 more by the end of the year on them at this point on all 3 of those are not under contract.
The way, we are approaching it and what we've communicated very specifically with customers is in order to grow beyond that point, we will need commitments from customers and those discussions have been very productive to date.
Not to get ahead of it but in.
In 17.18, we were.
But a long queue of people that were waiting for 6 packs and we were building on order we're definitely not there at this point, but the early momentum is starting to feel a little bit like those days. Because this is really represents differentiated technology that just isn't out there today and so the the conversation.
It.
This change from what am I picking for race fans storage system to who's going to deliver the most efficient hydrated stream to my current to my high pressure out of the wealth side, So really constructive conversations still early days, but we're really excited which again draw.
Drove the decision to start ordering from the.
I'm on the the 2 additional blenders.
That's you got it from Israel.
Great. That's very helpful. And then the market share gain commentary of the list of encouraging I'm, just 1 person of adding up the systems by the end of the quarter was the encourage you as well.
But that's.
That's part of the strategy of the Pittsburgh.
Long lead customers to grow and take market share and gain work from folks who are using computing systems.
Well, it's a mix I mean, you still have folks out there that do have assets on balance sheet that they've been using and you know I think over time people of recognize that what we've been able to do is really provide a higher value.
The offering and a more comprehensive manner, whether it's automation in the way the system works, whether it's software in terms of remote monitoring or now. This most recent evolution with the blenders. So I think what it demonstrates is our laser focus on the low pressure side of the well site and.
And our team's ability.
The innovate there and.
We're really excited about what the implications are of this new sort of evolution in the company's growth and I think George I'd add 1 more as it's the actual system and the service that we provide the the reliability has been really good as we've come out of the.
The slowdown.
Systems back to work and ramp the people side up.
Responding Lee.
And the reliability of the systems Ultra low we track it on a regular basis and we actually track time to repair if theres a problem. So we're laser focused on ensuring that our customers keep keep completing as fast as they want to compete.
I'll sneak in 1 more if I could assemble fraction in the big topic as we talk with the.
Investors of Investor clients.
Any color on what percentage of your system of the doing work on some of for options given how locked down on how much sand. They keep on side I would imagine it's good interest in deploying all of systems for some of the Fracs of ongoing.
And it certainly changes every day, depending on the mix of not only our customers, but the their sort of plans not every pad is conducive to sign on frac and typically it's going to require a little bit larger footprint and you know just the.
The number of wells on location of our are gonna be a driver of that as well, but so I don't know if it's you know 10 to.
<unk> were sent in in any given day is probably within the range and in some days. It may it may be higher than that but anecdotally it is slowly increasing.
Thank you Bob.
Thanks.
Again, if you have a question. Please press Star then 1 on.
'twenty question will come from Jon Hunter with Cowen. Please go ahead.
Thank you.
So I just wanted to ask on.
The activity outlook into the fourth quarter I mean, clearly you have some encouraging signs of as you exit the third but I'm curious.
Our next way of thinking about a potential activity uplift in the fourth quarter.
And then as it relates to 2022.
We've heard some indications of a modest increase in frac activity next year.
So curious how youre thinking about.
The improvement in the fourth quarter.
Our apps on 2022.
We see the ramp coming.
Rig count is the leading indicator we have not seen recently a corresponding increase in the in the Frac fleet count. So that's building building back of DUC inventory that may have been worked down over the first half of this year. So.
All signs are and certainly with the economics of the oil price today is pretty good incentive to go in and complete those wells and as soon as they are drilled so it really is the timing issue and I can't predict when beginning that ramp starts whether it's the next week or you know in November I think it's driven by individual.
<unk> capital budgets, where they are on their cycle.
But certainly looking on into next year, we see a.
<unk> coming and we've had inquiries talk from our customers that they're going to need more of more equipment coming into the fourth quarter and next year, It's really just the timing issue.
Thanks, Bill that's helpful.
And then my follow up question is is on.
On dollars of margin per system.
You had a bit of an.
An increase from <unk>.
I am curious on on flat activity would you expect your margin per system to be flat as well or are there any other.
It takes I need to be considering.
As I look forward in of the third quarter.
Yes, I think for now Jonathan but I think we're expecting it to be relatively flat. If you look at the pick up from Q1 to Q2. So we probably did $65000 of gross profit per system that was closer to <unk>.
64000, and so that increment part of that was getting the some storm recovery help and then the the latter part of it even though the systems were flat.
It was really doing a lot better on our last mile business and so assuming that we can continue that performance into Q4, I mean, the Q3 and that that should translate.
It into a flat contribution margin per system.
Great. Thanks for you Ron I'll turn it back.
Yeah.
Thanks, Sean.
We appreciate the end of the question and answer session I would now like to turn the call back over to Mr. Bill <unk> for any final closing remarks.
Thank.
And thank you all for for listening the call and thank all of our employees customers and stakeholders for another good quarter all of the efforts that have gone into the new product development, we really look forward to continuing executing on our core business plan on continuing to make those products and services better as well as <unk>.
Successfully adding.