Q2 2021 US Well Services Inc Earnings Call
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Hello, and welcome to U S well services second quarter earnings conference call and webcast. At this time all participants are in a listen only mode.
If anyone should require operator assistance. Please press star zero on your telephone keypad.
A question and answer session will follow the formal presentation.
As a reminder, this conference is being recorded its now my pleasure to turn the call over to Josh Shapiro, Vice President Finance and Investor Relations. Please go ahead.
Thank you operator, and good morning, everyone. We appreciate you joining us for the U S. Well services conference call and webcast to review the second quarter 2021 results joining us on the call. This morning are Joel Broussard, Chief Executive Officer, and Colin Miele, Chief Financial Officer. Following their prepared remarks at the call will be open for Q&A.
Yesterday afternoon U S. Well services released its second quarter 2021 earnings the earnings release can be found on the company's website at Www Dot U S. Well services Dotcom. The company also intends to file its form 10-Q with the SEC. This afternoon. Please.
Please note that the information reported on this call speaks only as of today August 12, 2021, and therefore time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.
In addition, the comments made by management. During this conference call may contain forward looking statements within the meaning of the United States Federal Securities laws. These forward looking statements reflect current views of U S. Well services management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those.
Expressed in the statements made by management. The listener is encouraged to review today's earnings release, and the company's filings with the SEC to understand those risks uncertainties and contingencies also during today's call. We will reference certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our.
Our earnings release.
Now I would like to turn the call over to U S well Services' CEO, Mr. Joel Broussard.
Thanks, Josh and good morning, everyone I.
I would like to thank the entire U S well services team for their dedication and focus during a period of great change.
Cause of them, we delivered strong results generated adjusted EBITDA of $36.9 million on a per fleet basis, our annualized adjusted EBITDA from hydraulic fracturing grew by 39% to $7.3 million.
Carl will provide additional detail on our financial performance in the second quarter, but first I want to provide context around U S. Well services' decision to exit the diesel market and become fully electric.
Throughout the process to become a public company in 2018, we told the market that U S. Well services fleet with someday be all electric since then our team has worked hard to make this goal a reality.
We have been studying the market and monitoring the regulatory environment all while developing.
Innovative technology to meet the needs of our customers.
Over the last several quarters pressure on E&P companies to grow cash flow and reduce greenhouse gas emissions has intensified.
And as a result demand for next generation fracturing solutions is third.
Meanwhile, the market for legacy conventional diesel fleet remains oversupplied with equipment and pricing has yet to recover to pre covid 19 levels.
We believe these trends are not cyclical.
Permanent demand for older diesel equipment and higher emissions profiles is unlikely to recover and response, we made the decision to accelerate our strategic transition to all electric Frac services and technology company.
And we continue to work tirelessly to execute this plan.
In May we announced the introduction of our newest clean fleet pump design the Knicks.
<unk> is a 6000 horsepower dual pump trailers that represents the highest spec pump the market has ever seen.
This design was informed by seven years of operating history, and its custom tailored to deliver efficient clean completions for our customers.
We recently announced our plans to build four new Niques clean fleets. Each fleet will consist of 10 do pup trailers totaling 60000 horsepower, we expect to take delivery of the first sneak sleep in mid Q1.2022.
In connection with our decision to exit the diesel Frac business U S. Well services is in the process of divesting of noncore assets, including conventional diesel powered frac equipment and certain power generation asset to date, we've completed over $21 million of asset sales using proceeds to repay borrowings on our senior.
Secured term loan.
We expect the pace of asset sales to pick up in the third quarter and that we will remain active in selling equipment throughout the remainder of the year.
Our strategy from here is simple.
We're going to continue to deploy the most advanced cost effective and low emissions fleets in the industry deliver best in class service quality and reduce our debt load as we sell legacy asset.
Now I would like to turn the call over to Kyle to review, our second quarter financial performance.
Thanks, Joel and good morning U.
U S well services averaged nine three active fleets during the quarter the utilization rate of 85%, resulting in seven nine fully utilized fleets.
Revenue for the second quarter was $78.8 million.
Up 3% sequentially not included in this number is the $22.5 million of income generated.
<unk> Pro Frac converted its license linked note purchase in our June 2021, offering into three seven and a half million dollar options to license the clean fleet technology.
Looking at our service and equipment revenue, we saw a 5% increase quarter over quarter on a revenue per fully utilized fleet.
Revenue from our from the sale of materials, including sand chemicals, and trucking sand storage grew over 80% sequentially, a greater share of our customers opted to source materials through U S well services.
Cost of sales for the quarter was $59.3 million down 5% from the first quarter cost of sales of $62.6 million.
Well. This sequential decrease was primarily related to lower fleet activity I will note that repair and maintenance expense on a per pump hour basis declined 7% quarter over quarter as electric fleets made up a larger proportion of our total working fleet.
During the second quarter, we continued to feel the impact of rising inflation across various points in our supply chain, most notably with the increases in trucking costs fuel and lubricants, we're working with our suppliers to keep costs increase under control and in many cases will pass some or all of the cost increase through to our customers.
SG&A was $7.2 million for the second quarter down 2% from the prior quarter, excluding stock based compensation SG&A was approximately $5.5 million compared to $5.9 million in the first quarter.
Sequential decrease was driven mostly by a reduction in professional fees.
Adjusted EBITDA was $36.9 million for the second quarter included in this figure is $22.5 million of income attributable to the licensing of the clean fleet technology technologies and patents.
Adjusted EBITDA from hydraulic fracturing operations was approximately $14.4 million for the second quarter up 25% from the first quarter adjusted EBITDA of $11.5 million annually.
Annualized adjusted EBITDA per fully utilized fleet was $7.3 million up from $5.2 million in the previous quarter.
Maintenance capital expenditures on an accrual basis were $4.8 million for the second quarter.
On an annualized basis, our adjusted EBITDA less maintenance Capex per fleet was approximately $4.4 million.
Looking at our balance sheet. The company ended the quarter with total liquidity of $77 million, consisting of $12.6 billion of availability under our ABL facility and $58.1 million of cash.
I want to add some additional color on our plan to use asset sales to reduce our term loan balance.
At the end of the second quarter, our total principal balance on our senior secured term loan was $233.7 million.
So far in the third quarter U S. Well services has completed $19.2 million of asset sales after.
After applicable prepayment penalties are principal balance.
Reduced by $18.9 million.
We expect repaying additional $14 million in borrowings in the near term pending transactions close.
If we were successful in reducing our term loan balance to $110 million by the end of 2021 U S. Well services will paid zero percent interest on our term loan for the first quarter of 2021, and 2% interest on the remaining three quarters of the year.
Additionally, it's a loan balance is less than $103 million by April 1st of $2.22, our interest rate on the entire term loan will be 1% for Q2 through through year end.
Before Joel offer some final remarks, Mike to provide details on the transaction. We completed at the end of June and how we anticipate our capital structure will evolve over the next several quarters.
The initial transaction, we issued $125.5 million, 16% convertible senior secured second lien Pik notes and received $86.5 million of gross proceeds.
What are you two and a half million dollars of the notes were licensed link notes convertible into $375 million of licenses to build and offer a clean fleets. Prior to the end of the quarter license linked notes were converted in full and U S recognized U S. Well services recognized 22, and a half million dollars of income.
$103 million of the notes are convertible into U S. Well services common stock at a weighted average price of $1.42 per share.
$39 million up $103 million of the equity linked notes represents an exchange of our series a convertible preferred stock into convertible senior notes, reducing the outstanding balance of our preferred days to $25.2 million from $62.2 million.
Since the end of the quarter U S. Well services has issued an additional $11 million of notes convertible into common stock at a weighted average price of $1.13.
The convertible notes automatically convert to common equity once or preferred shares are converted or redeemed and a 20 day volume weighted average share price exceeds $2 for 10 out of 20 consecutive trading days.
This offering not only helps us fund our upcoming growth capital expenditures for our new clean fleets, but also when combined with our asset sales discussed earlier is a huge first step towards our goal of delevering, the balance sheet and simplifying our capital structure.
With that I'll turn the call back over to Joel.
Thanks Kyle.
U S. Well services has always been on the leading edge of hydraulic fracturing technology solutions IMAX.
I am excited for what this team will deliver over the next several quarters as we continue to execute our strategic plan and transition towards full electrification.
Operator, please open up the call for questions and answers. Thank you.
Certainly, we'll now be conducting a question and answer session if you'd like to be placed in the question queue. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he'd like to move your question from the queue for participants using speaker equipment may be necessary to pick up your handset.
Before pressing star one one moment. Please what would you poll for questions. Our first question today is coming from Ian Macpherson from Piper Sandler Your line is now live.
Thanks, Good morning, Joel Kyle.
Josh.
It's granting seed value of your IP validated here and monetize in a really strong way so congratulations on that.
Thank you.
When we Cascade down from where you are too.
Where you will be call it three quarters from now.
Fully disposed from diesel.
<unk>.
Up and running with the probably the <unk>.
First leaks.
How much of can you help us think about the glide path of your EBITDA in other words.
Was with conventional.
Horsepower a meaningful contributor to the EBITDA, we saw in Q2, if if so how much of that do you need to sell away immediately or can you accomplish some of your.
Second half asset sale objectives without immediately selling away your remaining EBITDA contribution from.
Your last maybe couple of of working conventional fleets can do you can you talk to that at all yes.
Yes, sure you know the EBITDA contribution from the diesel fleets for the first half of the year was minimal due to <unk>.
Diesel pricing.
Not recovering as quick as we thought.
Okay.
We currently I think June we had.
Sure.
One and a half decent fleets working we currently have one left today.
That is going to be finished in a 26.
So we will be wrapped up these about the 26th of August.
Okay. Okay.
Can you elaborate on that a little bit.
Yes, sure I mean, I think what Joel said theirs is right that the contribution from.
Diesel fleets was fairly minimal throughout the first half.
We would expect to see at least fleet level profitability stable.
Stay where it has been and then improve as we start deploying the mixed fleets and absorbing more overhead.
Okay, Yes.
And then G&A will drag down the profitability until we get back to 10.
An electric fleet yeah.
Yes got it.
That.
So.
Following the company and that's just part of the transformation process.
Yes, we have some transition quarters ahead for sure with absorption I get it.
When you're you've announced several.
New customer trials, and I know that you've got probably a pretty significant upgrade your offering with <unk> can you talk about the perspectives economics and.
Really the return objectives that you have for your next new builds and how they compare it to the EBITDA per fleet youre, earning on on your earlier generation clean fleets today.
Yes.
Sure.
On the on the new fleets economics, we expect.
Four month payback on the first the first rebuilding.
And thats on a cash basis.
The trials that we've done.
Every person we trial for us so far is interested in going on electric power.
And we feel that the four fleets we are building will have.
We'll have we have more demand than than equipment.
A new generation of electric fleet.
Not surprisingly I have a few more I can take up with you guys offline. Thanks very much.
Thank you thanks Ian.
Thank you. Our next question today is coming from John Daniel from Daniel Energy Partners. Your line is now live.
Hey, guys. Thanks for including me I guess the first one regarding your drill just clearly the demand for this equipment is on the rise.
But we're seeing sort of coupons right.
People go into electric and then some others opting for tier four DGB, what do you think is driving.
Uh huh.
The customer preference between the clear at this point.
Yeah.
I can take that one.
Yes, sure. So John I think what we're seeing here is customers are gravitating towards next generation solutions, whether that's electric or tier four DGB.
And the reason is twofold, it's the fuel cost savings and emission reductions right.
And from our view really the tier four DGB offers a partial solution on both of these.
And as far as fuel costs the.
Hired a few.
Rate of diesel substitution, the more cost savings customers will enjoy with the dual fuel, but no dual fuel fleet really eliminate diesel entirely and most are using CMG. When they are operating burning natural gas.
So there is some fuel cost savings versus a conventional diesel fleet, but not nearly to the same degree as a customer would enjoy if they're using one of our electric fleets and Vernon field gas.
Really the same thing goes on emissions.
Tier four DGB engine is it it's a tier four engine and those engines, while were not designed to reduce carbon dioxide emissions. They were really designed to reduce nox particulate matter non methane hydrocarbon type emissions until the performance of the tier four engine versus <unk>.
<unk> engine on <unk> pretty similar.
While the tier four DGB engine will provide some benefit here.
It does suffer from things like methane slip.
Incomplete combustion of the natural gas and so the emissions might be better amount of tier four diesel, but but not nearly to the same degree as our electric fleets. However, I think were customers preferred the DGB is there more readily available today.
Today Electric fleet, we estimate that there are less than 10% of the active fleet.
And so being able to access some portion of these benefits.
Hi.
It will drive them towards the DGB over an electric.
I think the preference for electric and stronger given the more complete package.
And that's why I'm, just I'm curious more about is like.
Another route.
Because maybe.
You guys are looking for multiyear sort of backing for your project, where other solutions might be less expensive for mass market I don't know if it didnt come on like that that's all.
We're actually looking for a 12 month commitment now John so okay.
And also.
We operate a tier four engines.
I know how much of those costs are.
Capex basis to operate.
Electric is just so much cheaper and.
Sure.
The next question I wanted to conclude because we referenced through lower maintenance costs this quarter given.
The transition away from conventional congrats elaborate a little bit more on sort of like for like the maintenance cost correctly claimed the curve now.
Just anything there would be helpful.
Josh.
Yes, sure I mean, historically, we've seen 35% to 40% all in cost advantage for the electric versus the diesel and I think youll start to see more of that play out in the numbers.
We're able to eliminate diesel operations from our financial results We report.
Alright fair enough.
Okay and final one.
John that really showed up in this quarter earnings when you look at our our EBITDA versus maintenance Capex and we stood.
A few diesel fleets working but that will begin to improve.
Why don't I, just remember from years ago into Republic that looks like when you guys talked about it was hard to see no real quick we're able to see it so okay.
The last.
From September October November we will have no diesel putting the working.
Okay and then the last one guys hopefully you can answer, but we know that some of the equipment went to Alamo because that will not be great.
Not sure if we can move the bolivars.
Been sold subsequent or what's on the docket, but can you describe for us.
The type of buyer, whether it's existing printer.
Playing or just any color along those lines would be helpful.
Got you would take that when you've been handling most of asset sales.
Yeah.
Yeah sure. So the interest has been kind of across the board there.
There have been.
Service companies intra.
Interest in buying somebody equipment some resellers.
Some refurb shops.
I'd say the interest has been pretty wide.
The bulk of.
What we sold to date in the third quarter was two Alamo.
In the transaction that we kind of publicly disclosed.
Sure.
The buyer non service company.
<unk> okay.
Thank you very much guidance this quarter.
Thank you Scott.
Thank you next question today is coming from Stephens, Inc. From Stifel. Your line is now live.
Thanks, Good morning, guys.
Yeah.
Two things if you don't mind the first.
As you referenced.
The profitability in the quarter and not having a lot of diesel contribution.
And the EBITDA line, so just kind of back of the envelope.
Do the math on how many clean fleets are out there and your current fleet.
It looks like EBITDA per fleet is Ron and Mike.
<unk> 9 million Bucks.
In the quarter for the for the electric assets is that a ballpark reasonable number.
Carl you want to take that one.
Yeah, I mean I think that's.
We don't report the electric versus the diesel but.
<unk> electric equipment is definitely at a substantial premium so that's within the realm of some kind of a reasonable range.
Okay Youre going to have to report just electric soon.
Yeah.
But but that kind of step up is not is not ridiculous thought process. As you go into the next quarter given the amount of features planned to have working seem to be all electric.
I'll caution you that as we as we dropped from.
I think we had almost eight fleets running in Q2 down two will be.
Around five youre going to have the overhead really bite into that so I think yes.
Nine nine plus million of EBITDA per fleet is kind of field level.
Results in than.
That come down with the absorption of overhead.
I understand that that's fair. Thank you.
The other one is.
I'm just trying to think how to ask the question but.
When I look at <unk>.
Your financial position, where you've obviously youre working to repair the balance sheet, but <unk> also committed to a lot of capex.
It feels aggressive.
From our perspective, but I was curious if you could walk us through.
Your expectations for <unk>.
Where the where the balance sheet is now what the capex looks like in 'twenty the back half of this year.
2022, and how you see the balance sheet evolving so you keep.
Yourself.
A reasonably safe position, but still fund the growth that you have laid out for us.
Sure sure.
Right. So in the June transaction, we raised through June and then.
It really part of July we've raised approximately $97.5 million of cash proceeds.
That's resulted in about $50 million after the smart city and settlement fees and expenses.
And some required debt pay downs.
So with our with our new funding.
Cash requirements for these new build fleets will be around $100 million to $115 million most of that will be due when the fleets are delivered.
In early to mid part of 2022.
We're currently selling assets to reduce the term loan balance we're targeting to get that below $110 million swing.
Little over 230 at the end of the quarter.
So we're looking at about $120 million of debt Paydown.
And then $50 million to $60 million of additional <unk>.
Funding is going to be needed to build out all four fleets, which we think will be able to source through.
We're looking at several different options, including equity equivalent financing mix.
Et cetera, So we think it said very achievable.
And.
I think what we really need to get to that get.
Get back to near 10 active fleets to have the critical mass to really start to see the.
Trucking out the benefits of our clean fleets.
Yes, I'll just add one thing to that.
We're going to do it between equity.
That and also additional licenses in sales.
Okay.
Yes, okay.
And just as you think about what we're what we're building this for.
Building these fleets floor for them what the economics are.
Should be.
The new fleets combined with the debt pay down should be highly accretive for our shares.
Okay, Okay and then.
$120 million of incremental debt pay down that you envision comes from what.
Primarily assets.
Excuse me.
<unk> assets.
Alright.
Yes.
Our asset sales.
In addition to the ones the ones that you have already.
You've already announced.
So far our U.
Correct.
Let me let me.
We've announced about $20 million of asset sales.
Well $100 million.
We will be through asset sales or scheduled amortization.
Okay.
Right.
That's very good color I appreciate you walking through that thanks.
Yeah.
<unk>.
Thank you. Our next question is coming from Daniel Burke from Johnson Rice <unk> Company. Your line is that a lot.
Yeah, Hey, good morning, guys.
Hey, Dan Good morning, Daniel.
Hey, Joel when you mentioned additional license sales do you mean to the party that already has the options to.
I guess acquire additional licenses or would it be.
Second or multiple other parties than than pro Frac.
We feel <unk> and potentially others at this point.
Okay, Alright fair enough and then.
Maybe.
Just just since we've talked a little bit about the asset sale plans. They they seem pretty key to getting that debt level down by the end of this year. So so asset sales have to proceed at a pretty good pace. I think you guys had put out a target about $130 million and total asset sale proceeds not to say that would all be completed by the end of this calendar year, but is that still a viable target.
Yes, that's still within the range of what we're targeting.
Okay, Alright, guys and then maybe.
Maybe just one other one when we think about the the new the new fleets coming in on the electric side could you talk a little bit about the power Gen strategy.
You've got in mind for the fleets.
Yes, we're going to leave it up to the decline of what they want whether whichever power generation asset they choose.
We feel the turbines are the are the best now.
And the most environmental friendly.
So.
Sure.
Whatever they recommend whether its grid power whether it.
Reciprocating engine, whether its turbine.
We'll leave it up to the client.
Okay and Jody.
I think the plan would be not to put those on the balance sheet, though is that is that fair.
Absolutely.
Okay Alright.
Alright, guys.
I think that's probably about all I had left I appreciate the chance to Darwin.
Thank you Daniel.
Thank you we reached end of our question and answer session I would like to turn the floor back over to management for any further or closing comments.
Thank you for your participation on the call have a great day.
Thank you that does conclude today's teleconference and webcast you may disconnect. Your lines at this time and have a wonderful day, we thank you for your participation today.
Yes.