Q2 2021 Nextier Oilfield Solutions Inc Earnings Call
Good morning, and welcome to the next tier oilfield solutions second quarter 2021conference call.
As a reminder, today's call is being recorded.
At this time, all participants are in listen only mode.
A question and answer session will follow the formal presentation.
For opening remarks, and introductions I'd like to turn the call over to Kevin Mcdonnell Chief administrative officer and General Counsel for Nextera. Please go ahead Sir.
Thank you operator, good morning, everyone and welcome to the next tier oilfield solutions earnings conference call to discuss our second quarter 2021 results with me today are Robert Drummond, President and Chief Executive Officer, and kidney tissue Chief Financial Officer.
Yeah.
Yesterday, we announced the strategic acquisition of Alamo pressure pumping, a leading Permian well completion service provider.
Before getting more into this transaction and its significant benefits to next year I'd like to review, our second quarter and ongoing results.
Activity continues to recover and visibility into the second half of the year improved along with the plans of some of our legacy customers.
We're now set up for growth and excess of 25% for consecutive quarters and the visibility gave our team the confidence to make some strategic decisions to ramp the hiring of people and prepare equipment ahead of a hot Q3 growth expectations.
These decisions, though impacting Q2 results.
Put our team and a great position to capitalize on and visibility of growth and to the back half of 2021 and into 2020, 2 where we expect and much more linear rebound and relative activity growth.
We deployed 3 additional frac fleets during Q2 and.
Including 2 salmon frac fleets and exited the quarter with 21 fleets deployed.
As noted.
And in the quarter, we also accelerated the fleet activation costs for 2 more tier 4 dual fuel some frac fleets to be deployed into Q3.
It was worth noting that some frac fleets came requires many is double the number of pumps of a normal zipper frac job.
Against this growing base of activity total revenue grew 28% to $292 million.
Our wireline cementing and coiled tubing services lines continued to improve margins and increase activity.
Overall, while we're pleased with the sequential top line growth and have confidence and the continuation of that trend into Q3 and.
Expected transitory operational factors and fleet activation costs impacted Q2 profitability.
Despite this impact to near term profitability. We are confident that the investments made will allow us to begin to harvest the benefits during the back half of the year and set the business up for great trajectory into 2022.
With that as an overview I'd like to share more about what we're seeing and the market.
Commodity prices continue to maintain strong improvement and momentum.
Relative to the averages and March of this year crude oil prices at the end of July are up 19%, while natural gas prices are up 47% over the same period.
This marks the latest stair step improvement and commodity prices as economic activity along with demand continues to grow in tune with reduced global economic restrictions.
The supply side remains very disciplined overall, thanks to the leadership from both OPEC, plus and U S shale producers.
At the end of July and compared to the average price realized in June of last year oil.
Oil and gas prices are up 93, and 129% respectively.
With this as a backdrop the man for all of our services is increasing.
And we continue our fleet deployments into Q3, enabling what we expect to be our second consecutive quarter with 25 plus percent revenue growth.
We grew our team substantially and preparation.
From the beginning of April through the end of June we added over 400 and next year employees across our product line to support our growing field operations.
This cadence and level of hiring was significantly more than we had originally anticipated.
And also core to our execution is equipment quality and maintenance.
This commitment is the foundation of our market readiness initiative and aligns with our low cost low carbon strategy.
Further the increase frac intensity associated with some of Frac operations as changing the maintenance requirements and schedules and in a manner that increases cost and requires ongoing adjustments to our commercial and operating models.
Investments and our equipment over the last 18 months are the foundation for future profitable growth and we have continued to make progress on converting our fleet to use natural gas as a primary fuel.
From the beginning of May through the first week of July we deployed over 100 and pumps the majority of which are tier 4 dual fuel.
A market that continues to be sold out.
This included a summer frac fleets deployed and early July.
We also began preparing for 2 more tier 4 dual fuel fleets in the coming months with at least 1 being for summer Frac and all 4 legacy customers returning to work.
While we have continued to invest and converting our fleet to support our low carbon strategy.
And I want to emphasize that we are removing conventional diesel powered engines from the market and the process.
In addition to enhancing the fleet with more dual fuel capability, we continue to standardize the fleet with our proprietary Frac M. D. T control system, which enables more digital interfaces with the equipment and lowering total cost of operations.
Yeah.
The market continues to improve.
And we were responding rapidly to scale our operations.
But the activity growth has not been linear over the past few months.
The market continues to improve Bonnie.
Bonding rapidly to scale our operations.
But the activity growth has not been linear over the last few months.
The industry recovery over the last year or so included extreme volatility and Frac schedules, which combined with continued increase in frac intensity is posing unique challenges across the industry.
Our team of skilled at navigating the staffing.
And my readiness and operational challenges associated with these factors.
However, the.
And the process of meeting these challenges was even more pronounced and the second quarter than originally expected and.
As we responded to and unusual concentrated level of growth.
These dynamics and in conjunction with continued increases and frac intensity demands.
Created transitory startup cost and challenges in Q2.
Well next year, it's been a leader and deploying some effect process with our customers at ever increasing treatment rates with hundreds of wells completed over the last 2 years.
More equipment on each job cannot be the only answer to its adoption across the industry.
New technologies must be applied to achieve optimal edge activity and improve the overall performance and utilization of the equipment on location.
And the second quarter next year launched a new offering from our lateral science's portfolio called some of Frac stage pairing.
This technique reduces the operator's cost per barrel by taking existing drilling data.
And allows them to downhole rock properties.
And matching the 4 or 6 wells across the summer frac pad to create optimized pair for every summer frac stage.
We believe utilization of this technique will ultimately improve the and injected with either frac treatments improve.
And prove the long term production of the treated wells and lower equipment costs for each operation.
All with minimal changes to the current summer frac processes and workflows being utilized today.
And I'm, a frac stage pairing will help connect our extensive salmon and frac operational experience to real reservoir properties.
We believe that this technology will allow nextera to deploy a more cost effective solution that delivers higher production to the operator.
Associated with the growth and frac intensity or incremental cost and enhanced maintenance requirements for some of the equipment.
And Q2.
We tested the boundaries of our summer frac experience and push to achieve rate higher than we had previously reached which.
Which we underestimated and our Q2 commercial agreements.
We are addressing these issues with our customers as we exited Q2 and entered Q3.
Compounding the financial impact of concentrated growth and the second quarter was an isolated fire related and that's not a 1 of our fleet, resulting in a total loss.
Due to our team's training quick action and adherence to strict safety protocols and I'm glad to report that there were no injuries to any parties at the well site.
And the lesson learned from the potential root causes had been applied across the overall fleet and supplier base to further de risk future operations.
We responded quickly and have already taken possession of the replacement equipment, which is largely being funded by insurance proceeds.
To quantify the impact.
Our second quarter results included approximately $10 million of EBITDA degradation associated with these combined startup inefficiencies and operational factors.
We believe this rapid ramp and activity during Q2, and Q3 is unprecedented and transitory.
The cost incurred as our equipment and employees are deployed and have significant impact on startup asset utilization and ultimately our financial performance.
However, the associated operational adjustments.
<unk> are already benefiting the business.
As an example of the lessons learned late in the quarter, we made a strategic decision to accelerate preventative maintenance processes and preparation for additional Q3 summer Frac fleet deployment.
We expect Q3 revenue to increase at least another 25% sequentially and have already deployed the first of these fleets.
The associated out of period fleet activation costs taken in Q2.
Our estimated at approximately $7 million.
We made the decision to get ahead of the growth preparation rather than try to maximize Q2 profitability.
Yeah.
Pricing continues to improve after a very low base, resulting from concessions made during the downturn.
At the same time, we have seen the benefits of gradual pricing improvements are being offset by ongoing white space and the calendar.
Yeah.
While pricing is improving overall economics and contract structure are below our requirements for deploying additional horsepower.
Yeah.
Except for the 3 previously mentioned fleets from tier 4 dual fuel equipment addressing legacy customer demand we.
And do not anticipate deploying additional horsepower are increasing head count throughout the remainder of the year unless the economics are much improved.
We now plan to maximize the earnings opportunity created by the significant revenue growth we are experiencing.
We have a significant amount of capacity deployed with a major cost to deploy already funded.
Which we believe positions us for a strong half 2 and beyond.
Yeah.
We believe we are now and incredibly well positioned as a leader and natural gas powered equipment.
Constitute a large portion of our deployed horsepower today.
We remain strategic throughout the downturn to best position next year for the eventual market recovery.
With the recovery underway, we are positioned with 1 of the industry's largest fleet of tier 4 dual fuel equipment and a fully integrated completion solutions offering.
This includes our power solutions business, which began commercial operations in July and supplying compressed natural gas and making it easy for our customers consume their own field gas.
Our investments go beyond just gas powered horsepower and surface equipment.
Through the downturn, we remain focused on the long term ROE that digital will play and our future operations.
And this focused approach primarily investments and our next hub digital and infrastructure and M. D T control systems.
Has allowed next here to reduce overall well cost improve.
Improved well side ESG performance and optimized completions to drive increased production.
However.
We believe we have only just begun to scratch the surface of the benefits of our digital investment.
And the reason you are T C conference, we announced the launch of our strategic technology partnership with copper the leader and real time drilling and completion and analytics.
We expect this partnership will allow nextera to forego millions of dollars and development and immediately deliver a best in class customer portal to each of our Frac fleets.
We believe this partnership allows next here to rapidly increase our deployment of digital offerings and harnessing the power of data and visualization to deliver on our low cost low carbon strategy.
We believe the recent significant investments and our equipment and staffing will be harvested in 2020, 2 and 'twenty 'twenty 3 as market conditions continue to improve.
Which combined with an expected pricing reset should drive further momentum and our earnings power next year and beyond.
I'll now and I like to pass the call over to Kenny to discuss our second quarter results.
Thanks Robert.
Second quarter revenue totaled $292 million compared to $228 million and the first quarter.
Mark and a sequential increase of 28%.
And by primarily by increased activity levels and added capacity across all our product and service lines.
Total second quarter, adjusted EBITDA was approximately $5 million compared to $1 million and the first quarter.
Mainly driven by revenue activity growth and all our business lines, partially offset by approximately $10 million and costs related to operational inefficiencies, including the impact of the fire incident.
And start up costs to support the high level of activity growth.
In addition, we faced and impact of approximately $7 million from future readiness and startup costs.
And mainly of labor and Maine.
And it's opex.
And our completion services segment second quarter revenue totaled $269 million.
$109 million and the first quarter, a sequential increase of approximately 29%.
Completion services segment, adjusted gross profit totaled $20 million compared to $15 million and the first quarter.
During the second quarter, we operated the equivalent of 18 fully utilized fleets.
Exiting with 21 fleets deployed with additional capacity and people and equipment for 2 additional fleets and 1 of which was a tier 4 dual fuel some frac fleet the port and the first week of July.
On a fully utilized basis annualized adjusted gross profit per fleet, which.
Which and crews frac and bundled wireline total $4 million.
Slots and the first quarter.
Mostly due to startup costs and occurrence of deploying the additional Q3 fleets already mentioned.
And our well construction and intervention services segment.
Revenue totaled $23 million.
And increase of approximately 21% compared to $19 million and the first quarter.
Adjusted gross profit totaled $3 million compared to $2 million and the first quarter.
EBITDA for the second quarter was $15 million.
When excluding management and net adjustments of $10 million adjusted EBITDA for the second quarter was $5 million.
Management adjustments included a gain on insurance proceeds from the fire <unk>.
A reduction of pre merger and tax audit estimate and a gain on our financial and investment.
Partially offset by stock compensation expense.
Bad debt expense related to the wall support services divestiture and estimated legal expenses related to pre merger litigation.
Approximately $9 million of total net management adjustments or cash.
Also related to the insurance proceeds.
Second quarter, selling general and administrative expense totaled $21 million.
Compared to $16 million and the first quarter.
Excluding the management and net adjustments adjusted SG&A expense totaled $20 million down from $21 million and the prior quarter.
We continue to hold our SG&A flat, despite despite our strong revenue and activity growth.
Turning to the balance sheet.
We exited the second quarter with $250 million of cash.
Compared to approximately $272 million and the first quarter.
Driven by ongoing capital and investment and all.
Low cost low carbon strategy, partially offset by strong sequential recovery and collections activity.
Total debt at the end of the quarter was $334 million net of debt discounts and deferred finance costs and exclude and finance lease obligations.
Compared to $335 million and the first quarter.
Net debt at the end of the second quarter was approximately $84 million.
We exited the second quarter with total available liquidity of approximately $372 million comprised of cash of $250 million and availability.
<unk> of approximately $122 million under our asset based credit facility.
Cash flow provided by operations was $15 million.
Driven mostly by strong cash collections.
Cash flow used in investing activities totaled $34 million.
But most of them by additional investments and our tier 4 dual fuel carbon reducing technologies maintenance capex and investments and our power solutions business.
This resulted in free cash flow use and $19 million for the second quarter.
With that I'd like to pass it back to Robert to discuss our acquisition of Alamo and greater detail.
Thanks Kenny.
Yesterday, we announced the agreement to acquire 100% of the pressure pumping operations of Alamo pressure pumping.
We are incredibly excited to get the power of our combined platform and our ability transaction that fits hand in glove with the low cost low carbon strategy, we have been communicating for the past year.
I encourage you to take a look at our investor presentation posted on our website.
Let's start with a brief overview of Alamo.
Headquartered in statin, and Texas, and the heart of the Midland Basin, and founded and 2017 Alamo is positioned today is the largest private pressure pumper and the Permian as measured by active fleet.
And 1 of the largest Permian pressure pumper as measured by next generation horsepower.
The company, primarily operating in the Midland Basin and has a superior track record for safety and execution.
On behalf of its high quality and efficiency focused customer base.
Company's assets are primarily comprised of 9 hydraulic fracturing fleets and the large majority of which are powered with the latest cat tier 4 engines and most of which are naturally gas powered are easily converted to tier 4 DGB.
And total the company's fleet is comprised of approximately 460000.
Some of our industry's newest hydraulic horsepower.
Nearly all of which is fully utilized.
We'd like to share several key strategic highlights of the transaction.
The acquisition of Alamo accelerates and magnifies the impact of our next generation technology strategy and is entirely complementary with our low cost low carbon ESG focused approach.
Over the last several quarters, we have invested and the conversion of existing horsepower to tier 4 dual fuel technology today.
Today's acquisition of Alamos highly utilized chat tier 4 fleet with significant D. C V capabilities combined with our own secures the leadership position and its important and sold out portion of the market.
Pro forma for this transaction.
More than half of the combined next year fleet will be natural gas powered and standardized around and cat platform, providing comprehensive engine management and an enterprise telemetric, a seamless operational system and a low total cost of ownership.
We think we have the most gas powered fleets deployed and the market, which includes all dual fuel and E Frac combined.
Pro forma our fleet will be a Permian leader for low carbon well completions as a result of this combination next year will be the third largest deployed fleet and the U S land and and leader in the Permian.
<unk>, adding to our presence and is growing margin.
And almost predominantly Midland basin focus Permian position combined with next year's exist and Delaware Basin centric position provides attractive intra basin diversification within the Permian.
This do not this new dynamic strengthens next year's overall attractive geographic diversification that.
And now covers most major producing basins and the U S.
In addition.
And the most customer base is highly complementary to next years, making the combined company's customer portfolio truly best in class.
Yeah.
We also believe this acquisition will be easy to integrate into next year, while providing significant pull through opportunities.
The animal President and CEO, Joe Mckee, and we'll continue to run the animal operations under the animal brand without disruption to their existing customers or employees.
Joe and I will pursue customer value added opportunities to plug into next year's well established digital capabilities.
And last mile logistics and newly established power solution capabilities.
This will be a relatively simple and low risk integration process. Since our most operations are based on and see single high performing operating base.
We expect to create an estimated $10 million and synergies and generate additional revenue associated with integrating wireline and pump down perforating and.
And last mile logistics.
And the value of this merger is not driven by cost synergies, but by accelerating and providing for long term cash flow generation.
And we have successfully launched our power solutions integrated fuel services there.
The addition of significant low carbon natural gas power and hydraulic horsepower to the next tier platform expands the potential for additional value creation for next year and our customers.
Before I turn the call over to Kenny to discuss the financial rationale of the deal.
I want to point out that we were very successful at conservative conserving our cash during the COVID-19 downturn, so as to give us the ability to make strategic moves like this 1 at the right time.
We have frequently stated that the strength of our balance sheet was a key differentiator for next here and now is the time, we shift to using it offensively.
I believe that this is exactly the right time for this acquisition.
With that I'd like to ask Kenny to provide more details around the financial merits of this acquisition.
Thanks Robert.
And I'll share the financial rationale from the transaction.
First attractive valuation and accretion.
And the transaction valuation of approximately $268 million, we are acquiring roughly 460000.
Our predominantly and Nextgen are easily convertible horsepower for $582 per horsepower.
And a multiple of approximately 3.4 times based on expected achieved EBITDA earn out thresholds.
Which is significantly below next year's current trading multiples and that of our public peers.
Second accelerating free cash flow generation.
Today's transaction accelerates next year's path to positive free cash flow and early 2020, 2 driving shareholder value and improve and next year's already strong liquidity position.
And third maintaining a strong and flexible balance sheet.
Pro forma for the transaction, we are positioned with $272 million of total liquidity.
Additionally, with the accelerated path to free cash flow generation will meaningfully improve our ability and to drive cash flow back onto the balance sheet with a high performance set of assets.
We remain positioned with no near term debt maturities, which combined with our strong liquidity position allows us to continue to remain both offensive and defensive.
Before parts and things back over to Robert for closing comments I'd like to comment on our outlook.
As macro conditions and commodity prices further improve.
And become increasingly constructive we're seeing further improvement and demand for completion services.
Standalone next here, our calendar and is expected to be effectively full for the third quarter.
We expect to operate 21 fully utilized frac fleets during the quarter and forecast that exited the quarter with 23 deployed fleets.
In addition, we won't be adding highly utilized capacity from Alamo.
The transaction close date expected at the end of August.
Combined and based on this forecast of transaction close timing.
We expect to generate total revenue of between 390.
And $420 million.
This forecast reflects a sequential increase of between 35 and 44% drip.
Driven by the addition of Alamos business for approximately 1 mall and previously mentioned increased tier 4 dual fuel work.
That cash and improve profitability.
On this base of activity on a combined basis, we expect to generate at least $30 million of adjusted EBITDA and the third quarter.
The increased cadence of profitability and the next year at the back half of the quarter.
And the addition of Alamo Q3, mostly exit run rate is expected to reach approximately $18 million to $20 million.
With our fleet upgrade program largely completed during the first half of the year and addition to the fleet. We added in early July we.
We're expected to convert to additional fleets to tier 4 dual fuel during the second half of the year stand alone next year.
We will provide additional details on almost upgrade program.
Following the completion of the transaction.
For the full year of 2020, 1 we reiterate that the second half of the year, we'll see increased strategic capex investments as compared to the first half of the year and addition to the increased capacity from maintenance Capex of additional fleets from next year and the Alamo transaction.
Our investments for the year are primarily comprised of tier 4 dual through upgrades and <unk>.
<unk> and our power solutions business and maintenance.
We are seeing success and our ability to integrate additional scope at the well site and our customers are realizing the value created through integration.
We are working closely with our partners to improve our commercial agreements to address the changing some of Frac environment, which is expected to show up and our Q3 profitability.
We believe macro fundamentals are setting up to be foundational and stronger and more supportive of a stable commodity price with global demand, increasing and balanced long term supply fundamentals.
Our investments made in 2000, and 2020 'twenty, 1 on enhancing and standardizing our fleet combined with our acquisition of Alamo accelerates, our free cash flow and strategic plans to deliver higher efficiency lower cost integrated completion operations with a byproduct of reduced emissions for our.
We believe that we are now positioned for the right part of the market at the right time with that.
Operator, we'd like to open up the call for Q&A. Thank.
Thank you.
Thank you at this time, we will begin the question and answer session and warehouse.
A question you May Press Star then 1 on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing and the keys to a true.
Your question. Please press Star then 2 at this time, we will pause momentarily to assemble the roster.
And the first question concentrate from Oklahoma with Bank of America.
Yeah.
Hey, good morning, everybody.
Good morning, Jason.
And Jay Congrats on congrats on a nice deal here and you know obviously, there's this accelerates our you know the enhancement of the Nextgen fleets, you know and you guys were probably going to be spending a little bit more of a capex Oh and some upgrades. If you didn't do the deal. So maybe just kind of if I can ask the question about.
And you know the Capex that you plan to spend on upgrades over the over the medium term and following kind of the Alamo upgrades or deal I mean, it looks like maybe after the deal you probably have 13 to 14 and you know tier 4 fleets.
And you're going to have 31 active at the end of the quarter.
And so I don't know if maybe you could just talk to you know plans for upgrading the fleet. After the deal closes you know for the pro forma fleet you don't necessarily have to speak to just Alamo and then maybe the costs to upgrade some of these from a tier 2 to tier 4.
Thank you for the question, Jason Youre right 1 of the strategic benefits of this deal for us.
And accelerating our already a strategy focused on increasing the amount of our fleet and that eases and natural gas.
When you're converting tier 2 to tier 4 DGB, we're taking care to horsepower out of the market that's a relatively expensive conversion.
Compared to simply take and tier 4 pumps and making them tier 4 DGB.
About half the cost to do that.
But it's come from the.
The fact that the market and really looking for this kind of equipment right now and if you were trying to do it organically, there's extreme limited inventory and AR.
And we mentioned having to replace our fleet last quarter, we basically scraped up the inventory that was around the U S from cat tier 4 DGB to do that.
And you noticed Alamo and made an acquisition of some of the.
The other market horsepower than another competitor was getting rid of during the last quarter as well. So the point being is that the only way we could accelerate this strategy was through an acquisition like this and we're very.
Please that we were able to get debt over the hump.
Yeah Chase I would just add we called out we're gonna be adding 2 additional tier 4 DGB fleets. This is on the next tier side.
Late Q3, and then the 1 and Q4 those are tier 2 to tier 4 conversions.
If you look on the animal side, they've been basically same strategy has us they've been converting their fleet. They are and the process of converting another fleet right now and then there's another fleet that would be converted likely by the end of Q1 of next year. So basically we have at least 4 fleets that are and the conversion process as we speak that are all going to be tier 4 DGB.
Okay, perfect and if I could follow up on the semi Frac commentary and you know obviously you guys are picking up a lot of time, you're fracking our fleet from.
And from some of your customers and we hear a lot about it on the E&P conference calls and so maybe could you just speak to the profitability of those fleets you know maybe EBITDA per fleet I think you said the horsepower requirements you know it could be up to kind of 2 weeks of a typical fleet. So are you getting kind of 2 X. The EBITDA per fleet per day Asami Frac fleets.
And if not then you know what do you think needs to happen for you to be able to get to that is it kind of better supply chain maintenance.
And there's a better pricing like what do you think needs to happen to ensure that you get the adequate profitability on some of these semi fracs.
And that's good question Jason.
Sam and Frac uptake and the market has been on the increase particularly in the Permian area, our customer base and it's been a quick to do so and I would say that it's been a process of continued increasing levels of AR.
The intensity around it around that process up to the point as I mentioned and our I'll call them.
And as much double the amount of horsepower on location.
The issue there is during the startup process. You know you got a lot of moving parts around the support around that and huge volumes and number of lot of number of trucks a lot a number of pumps.
And you get your cadence working with the full supply chain.
We caught a lot of pressure during Q2, we were and the process of extreme rapid deployment of which a couple of and we're really big summer Frac jobs.
I would say in general profitability is very is very good and you have to build your commercial.
<unk> and round and volume of horsepower, but when you have a big process like that you have to look at the white space that can be occurred with any kind of hiccup around the support structure and when and when I mentioned in there that we're working with our customers to really look at our commercial agreements are part of that is around that area and you've got to.
Wireline operations embedded in the middle and you have all the trups doubled up and volume around the support and the things. So I would say once you get your cadence going.
Thank you and the other.
Thank you and the next question comes from Steven and again Garro with Stifel.
Hi, Thanks, Good morning, gentlemen, and congrats on the deal.
Steven.
2 things if you don't mind.
And 1 and just a follow up on Chase's question.
As you as you work through these sample frac jobs.
Is there a risk you get.
More profitable per horsepower per fleet, while operating and maybe that 2 times level for 2 times and horsepower, but then mobilization cost kind of eat into that and and Hershey or do you think you can manage through that where these jobs will be.
Or at least equally if not more profitable as you sort of get that cadence going that you referenced.
And we fully expect it to be.
Equal or greater profitability, because the customers who are using some efrat our efficiency minded customers account customers that work well with us and that we like to work with the upside associated with ever increasing.
Pop times per fleet.
And you've got to get the cadence working any sometimes you don't come straight out of the box and I'll remind everyone and we.
And we just came out of 1 of the most incredible downturns ever and as we've re deploy.
And a few bugs that I'd call it grow and pain that we suffered in Q2 that we are as we speak now.
GAAP past so.
Aye.
I think youll see that that works is just hit some effects are continuously pushing the envelope to determine what that deal from.
Well treatment versus the amount of equipment on location and things like that so it's a process. It gets tweaked with each with each customer as they gain experience.
Great. Thanks.
As a follow up and this is maybe a 2 parter.
You did you gave a lot of really good detail and your and your Powerpoint you posted on your website and the 2 questions around it were your next to your adjusted legacy kind of EBITDA number you used the consensus and I'm curious is that is that in any way you guys blessing.
And consensus and maybe more importantly, the $80 million of Alamo incremental EBITDA I think it suggests 9 or $10 million of EBITDA per fleet is that a is that a reasonable expectation and sort of what needs to happen to pricing to get to those kind of numbers.
So Steve and a good question and we were careful not to try to guide Q4 and the future.
Of Q2.
But I would say this and we did point out kind of the exit of Q3 run rate of our newco with just 1 month of Alamo and if you extrapolated debt and took a look at that you could see.
The assets that question is that.
We are and net ballpark for sure.
And I would also say that and are bringing animal onboard. These guys are very good and what they do and they were able to keep yourself fully loaded through 2020 downturn and.
And they are on a good solid run rate and and not in a process and really ramping up although they are adding a couple of crews. During this transition period, so I think debt.
It requires very little difference from our current run rate for that demonstration on that slide and be accurate.
And I would just add.
Because you asked about the Alamo side.
And we published a page to show the day.
Now it would be indicative of attractive valuation just to kind of underpin that $80 million and there were confident with the synergy capture of 10 and so so.
But the 90, there and 1 more follow up you mentioned pricing.
There will have to be some pricing increase and 2022% to reach the 205 consensus that's put out there.
Okay, Great now thank you for the color gentlemen.
Thanks, Steve.
Thank you and.
And once again. Please press Star then 1 if you would like to ask a question.
And the next question comes from Connor Lynagh with Morgan Stanley.
Yes. Thanks, I just wanted to stay on that pricing topic, and and reconcile some of the comments you guys have made around that front. So I think you had said basically to reactivate additional fleets the economics aren't really there.
Just wanted to understand so you are reactivating some fleets and the near term here is that because there are customers you know and you know the efficiency is going to be there that you don't need pricing and the next fleets, it's a little more uncertain.
What their pricing that you gained on those basically if you could just help me understand the dynamics of.
Pat.
Thanks, Karl and good question so.
The added fleets are with customers that we have legacy.
Relationships with and had been guiding towards that.
Towards deployment.
We did get price with those deployments.
And Tim and what we're trying to get to.
But even though at the same time that we're getting price as we rolled into Q3.
Its also good.
And against inflation somewhat and so I would just say is it.
We're in the first step of price move coming out of this downturn and we just discussed and we had to get we had to get more.
And we've moved up all of the pricing that we deploy.
And on any new opportunities.
And <unk> work.
So I mean, we would expect either we lose it or debt or we can pick up work that is more accretive and net pricing, including net price increase.
So you know I, just don't know how fast that's going to occur depends on I think the supply and demand of the overall market and what some of the diesel providers due and the market because we do get a differential.
And between gas power fleets and diesel powered fleet.
But diesel powered fleets can define the low end of the market.
So that's moving and I think if you look at moving into next year and we have say 250 to 260 fleet deployed with a significant portion of those be and some frac more and more being the case, we reached and a point, where we're getting close to consume and the horsepower that's in the market and.
And that will provide the basis for recoup and the price that we had yielded during the worst part of this COVID-19 downturn.
Makes sense it sort of seems like the consensus is moving towards there being some potential for pricing power as you're moving to work programs for 2020.2.
I guess, the big variables that could drive that to your point are our higher tier equipment being sold out.
And just outright increasing or just people pushing price.
And sort of natural renegotiation periods, I mean, which of which of those 3 do you think is really most important what's what's sort of your view on on how significant industry pricing and I was gonna be its people and negotiate for 2020.2.
And 1 of the reason we did this deal was because in that upper tier of tier 4 emission friendly equipment and also Barnes and natural gas.
And that part of the market is sold out now and we continue to be sold out and obviously in that environment, we need to be.
And proven.
Returns to recoup our investments so that's 1 thing, but I'd also say as we roll into next year.
Most of the desperation, and I think that occurred and the market might be on the low and around some of the some of the diesel power fleet has been relaxed a bit and people can.
Competitively began to move their price up so I think it's kind of like a number of factors, but the big 1 being supply and demand and consumption of horsepower and.
And the increase in and demand around it I think supply demands coming together, so fundamentally market's getting healthier and provides a platform for everybody to take advantage of.
Makes sense and I'll turn it back thank you.
Thank you Sir.
Thank you and the next question comes from Derek <unk> with Barclays.
Hey, good morning.
And on the deal just curious your thoughts on the best practices that you can call from Alamo and adopt on their legacy next year and then what you can bring over to the Alamo team to help make their operations better just want to know just your high level thoughts on what you bring to the table and what Alamo brings to the table on a combined company basis.
And I appreciate that question because it has a lot to do with what we might be worried and we made decision.
And when we looked at the whole market out there and do kind of a formal assessment of who would be a good partner for us we've done that twice with the C and J deal. It was a rich opportunity around synergies and then and this past we looked at whose strategy overlaid with us and fit perfectly and we were able to get lined up with a company like al.
And most of it.
<unk> been doing the same thing, we're doing deploy and tier 4 and making a gas powered.
They also have a very strong position and the Midland Basin.
And the Permian basin being divided and loosely between Midland Basin, and the Delaware Basin.
And we have a bigger position and in the Delaware and I have a bigger position of their fleets and the Midland basin and what the customer base. They have they're very efficient and they do an excellent job. So it's not like we're doing a deal here to teach Alamo anything about what they do however.
When you look at the opportunities around revenue synergies.
Where we have the biggest wireline fleet and the U S and it's deployed on about 75% of our Frac fleets, where our proficiency levels are much better when we work as a team like debt opportunities to do the same with Alamo are there.
And do the last mile logistics and sand delivery.
The majority of our fleets and they currently do not so the opportunity to use the scale, we've built around our digital tools for.
For logistics is an easy fit.
And then the next hub digital things that we called out about bringing visualization to the fleet not change and the way they operate and just given more visibility to the customer has been something that customer base has been very attractive too.
And then lastly.
And I didn't mention it, but a little bit and our earnings call because we've got so much information going envelope, but when went commercial with our power solutions business recently and has come out of the come out of the box working very well supply and compressed natural gas to our own fleet. While also facilitating the use of customers on field gas.
A mixture of the 2.
So these things are very easy to bring to the combined company and it doesn't interfere with any of the excellent technique debt.
And the Alamo already has and Frac and bottom line is when you look at maintenance practices.
And the 2 of us theres going to be upside at all around that we think how do you get maximum.
Benefit IV fluid ends and how do you give massive benefits and empower and things like that so it's just rich with opportunity, but we're not compelled to do this deal around cost synergies, there's going to be some easy ones around supply chain and some of the things that debt.
To deploy with their fleet, we have and in stock and our organization that can make that easy.
We will do the back office.
And payroll and some of the comp and Ben things that are easy, but this is not the same kind of integration that we had to do with C and Jay.
So we're excited about it being easy to integrate and I'm glad you asked that question.
Great. That's very helpful. I appreciate the color and then maybe a question for Kenny on getting a little more color on the Capex guidance could you could you provide us where where you see it falling for the second half of the year and then just thinking about 2022, you talked about harvesting some of the investments that you may just thinking about a more normalized environment post the convert.
And that you already laid out maybe help us around kind of where you see maintenance capex being given now you have the increased capex per fleet thinking about simultaneously versus non Simon.
Just a little bit more color and if you could provide any more concrete details around that would be helpful.
Yeah. So look on Capex, we we called out that H, 2 is going to be greater than H..1 as it relates to the next tier fleet, we're continuing to make strategic investments and dual fuel I just called out 2 additional ads and addition to the 1 that we made in July.
We're rounding out our power solutions investments.
And then we're taking on Alamo. So if you look at our maintenance Capex per fleet, we've been able year to date and we expect the same and H 2 to be below our $2.5 million per fleet hurdle that we set a lot of that has to do with and health monitoring.
And even though even and the fact that we've been doing more summer frac work and Thats on a per fleet basis. If you look at all and mostly it's a younger fleet. They operate primarily in the Midland Basin, which has less intensity on the equipment. So the capex the maintenance Capex per fleet for them is substantially lower than that $2..5 so whenever you look at next year.
Most of the strategic investments that we've made and 202020 'twenty, 1 will be wound down and there'll be some fleet enhancements that we do on the <unk>.
And the Alamo fleet that I mentioned earlier, those will be just converting tier 4 to tier 4 DGB. So less capex. So we see next year as being significantly less capex as it relates to the strategic side I think on the blended side, we will have reduced maintenance capex per fleet and we plan to just harvest the cash flow and put the cash back on the balance sheet.
And that we're paying for Alamo.
Got it very helpful. And then just 1 more if I could sneak in and.
Any updates around your E frac offering some of the field trials that you've been you've been announcing any update there and then I know you're also doing a direct drive solution that you've been investing and just any any color around that just kind of where that is versus the frac side.
So good question.
And we're still out there.
And doing some selective field testing of our easily Paul.
Right now as we speak today on how long and power test.
The solution around <unk>.
E. Frac is always going to be around what is the best most commercially effective power source and the turbines versus our gen sets the bar and gas.
Caterpillar type of engines.
Our hotline and power all the customers are looking at all 3 of these simultaneously and each has a little opportunity set.
No.
We're still in the process technically of proven and all of that out we're in good shape everything, but we like the way.
Technically everything sorted out now and it is a commercial solution around getting a lot of site to return on investment.
And I think and and I think.
Sort of the story and a frac and general.
Our direct drive pump system is was also used and a and.
Net field tests and most recently, but we do not have a contract for either of those 2 at the moment. We are in discussions for many different opportunities around it for 2022 type application.
Got it okay, great. Thank you very much.
Thank you.
Thank you and the next question comes from John Daniel with Daniel and Energy partners.
Hey, guys good job on the deal Robert just 1 question.
Sort of a real big picture, but there are those who say that the tier 4 dual fuel is just simply the bridge to electric and direct drive solutions.
D. Since that is the view of some of your customers.
Look I think that everybody is still trying to do but the ultimate destination and looks like largely about the discussion and I was just having around around and power solutions.
And I would say no no matter what day aspirations are around <unk> for example.
And if you've got 250 fleets and the market I think you know the count and lease fleets today, it's a very small portion of that we had and.
Highlighted and Investor day.
But if we were to go to if the market wanted to go to electric immediately it would be billions of dollars required to deploy.
Those those fleet. So I think commercially the market has to change a lot and I would argue that theres still some testing going on that actually measuring the emission rates around all the different type of Nextgen solutions and 1 thing we believe is.
And that for sure and tier 4 dual fuel is in the sweet spot of all of those factors and how long will that be I would say I think it would be for a long time I think what what happens on the fleet attrition is going to come out of diesel and the low end and you fast forward a number of years and we get into a point where the fleet.
<unk> and tier 2 tier 2 diesel maybe then the investment around electric would be more prevalent. Okay. That's that's my view and job fair enough and then last 1 you know you guys have done a good job of jumping ahead of the peer group in terms of a day.
Proportion of our fleet, that's tier 4 DGB I'm just curious if you could tell us today. If you if you decided to go to fleet 22 and.
And wanted to conversion and what's that lead time to get.
And the tier 4 DGB engines right now.
Well I think that you can only there's only convert what's what's in the market.
But if you had to go I think and try to go by tier 4 engines.
I mean, there's not an inventory and I.
Think it's like and the neighborhood. So you have a year for 6 months before if you try to make a big order I think before you could get the answers and then you had to begin the process and.
Build and NASA.
And the assembly.
And John I would just add.
And we're gonna be receiving.
Pro forma.
Significant amount of tier 4 pumps, so for US really it's just about getting the kids to convert those to a tier 4 to tier 4 DGB.
So we have we also have some acceleration there on the ability to get ahead of anything that comes out and the market. Okay. I. Appreciate it. Thank you very much.
Yes.
Thank you and the last question comes from Waqar Syed with Alta Corp capital.
And thank you. This is a real cost saves from <unk> capital markets.
A quick question.
And your disk.
Numbers as reported and in the back of the press release, you mentioned that there was a loss on equity securities investment of $1.3 million could you maybe elaborate what stocks were you wanting and what's the strategy around owning a public company and equities.
Yeah look located I appreciate the question so look during the Covid downturn.
Had a unique opportunity to trade.
And some aged and potentially bad debt receivables.
For stock and ER, and we did that and and that investment just moves with the market. So.
And we fully recovered.
The value of those receivables and we still have on the balance sheet.
The remaining.
Okay, Great that answers my question. Thank you very much.
You're welcome.
Thank you and the next question is from a staffing and garner with Stifel.
Hi, Thanks for taking a couple of follow ups just quickly can and do you have a sense for incremental EBITDA per per quarter or per year from the Alamo assets.
Well, we called it out and the and.
And the presentation, Stephen and <unk> seen it but if you if you just take the the earn out which we believe is indicative of the future earnings potential for for Alamo.
And they are not starts at 80.
I'm, sorry, I meant to ask what the depreciation just D&A depreciation and net that'll have a lot of that will shake out with the purchase accounting, but today their DNA is somewhere around <unk> 48 as provided by their company financials, but obviously there'll be some purchase accounting as we roll out and but that's where they're at today, sorry, but state and then.
And 1 other quick 1 on the pricing side.
We've heard from a from a couple of your competitors already and it just and it sounded like pricing has been kind of slow to develop and and you had mentioned how sold out and how high the demand is for some of the higher and assets.
Do you think is any of this related to sort of the debt.
Timing of the public E&ps, maybe ramp and spending next year or the urgency that they have because it it feels like.
Hi, and assets should be seeing better pricing momentum, but I keep hearing it hasn't quite materialized and I'm just curious your take on and sort of the dynamics there and how you think it evolves.
Well I think if you look at what has occurred from the bottom up.
The Covid response to the Big freeze period, we went through and the whole process.
<unk> assets and people.
It's a process that is playing out price begins to move and.
And our customers' balance sheets are being healed up a lot they're generating a lot of cash.
And I think they can understand the situation that we're dealing with them and inflation as well as the underperformance of our sector in general.
Frac and the need for price.
So I think that we're seeing it but we've got to have more.
And and I think debt.
And I'm pretty sure that speak for companies on that and I hope to see that that happens.
But I think that our customer base.
Was more back half centric on their plans to return.
It's been pretty well known and the market that the privates move quicker and the first half of this year.
And with rig count and Frac deployment versus the more publics and that's playing into our favor and the back half of the year. So as we get reestablished and I think the.
Opportunities to begin to change price on the reopener that you have with many of your agreements is on the increase.
Great. Thank you.
Thank you.
Thank you and.
And that does conclude.
And the answer session and I would like true the Florida and Mr. Robert Drummond for any closing comments.
And thank you Keith and the.
And I just want to end up I think this day. Thank you to all of next year employees and for their dedication to our customers and our company and to their collective safety as we've been ramping up and activity and I will also want to publicly welcome the Alamo people to our team. We're very excited to have Joe and net management team John and our group these guys.
Very good and we're going to go up and make a great day together. So thanks very much for participating in today's call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.