Q3 2021 US Well Services Inc Earnings Call
Greetings and welcome to the U S well services third quarter earnings Conference call. At this time, all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded it is now.
My pleasure to introduce you to your host Josh Shapiro Vice President of Finance. Thank you you may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us for the U S. Well services conference call and webcast to review the third quarter 2021 results joining us on the call. This morning are Joel Broussard, Chief Executive Officer, and Kyle O'neill, Chief Financial Officer. Following their prepared remarks, the call will be open for Q&A.
Earlier this morning U S. Well services released its third quarter 2021 earnings the earnings release can be found on the company's website at U S. Well services Dot Com. The company also intends to file its Form 10-Q with the SEC. This afternoon.
Please note that the information reported on the call speaks only as of today November 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 the current views of U S. Well services management, however, various risks uncertainties and contingencies could cause our actual results performance or achievements to differ materially from those <unk>.
Breast in the statements made by management.
<unk> is encouraged to review today's earnings release, and the company's filings with the SEC to understand those risks uncertainties and contingencies.
During today's call, we will reference certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release now I'd like to turn the call over to U S well Services' CEO, Mr. Joel Broussard.
Thanks, Josh and good morning, everyone. The third quarter 2021 marked the beginning of U S well services transitioned to become a fully electric pressure pumping service provider.
At the beginning of the second quarter, we will operating five active conventional fleets and by the end of August we retired the last of our active conventional fleet.
Our results for the third quarter illustrates some of the difficulty we face and undertaken this strategic transformation as well as the macroeconomic headwinds felt by the entire industry.
As we phase out conventional fleet operations U S well services staff.
<unk> decreased to five fleets from a peak of 11 fleets earlier this year.
Although this resulted in reduced headcount for field employees.
For all staffing levels remain elevated audit to ensure that we were able to ramp back up early next year, when our new clean fleets are deployed.
This challenge was amplified by rising labor costs across the industry not only did we have fewer fleets to absorb and field and corporate personnel costs, but we also implemented a wage increase for employees in late Q3, and audits improved workforce retention. Additionally, U S well services spend nearly 2 million.
During the third quarter as we transition to outsource power generation business model for certain fleets and to prepare legacy conventional diesel equipment for sale.
In early October we sold three turbine generators for approximately $35 million using proceeds to repay term loan borrowing.
In connection with that sale, we entered into a service agreement whereby labor maintenance mobilization and other key cost related to the turbine generators will be borne by the buyers in exchange for a fixed monthly fee.
We also felt the impact of inflation across our supply chain during the third quarter.
Rising input prices, along with costs, but services like trucking and logistics impact our results.
Although we work actively to mitigate inflation and pass cost increases along to our customers. It was difficult to drag the pace of inflation, but much of the quarter.
In spite of these challenges we remain very optimistic about the future of U S well services.
Over the last several quarters.
The pressure pumping industry landscape has changed dramatically.
What were once considered gimmick, but many E&P customers electric fleets and dual fuel fleets have become the most sought after technology.
Increasingly we're seeing customers require service company offer a next generation solution such as electric I'll do fuel in order to bid for work.
With this backdrop U S well services is ideally positioned.
We believe we have the most premium pressure pressure pumping fleet in the market.
Today, we have five all electric fleets that offer industry, leading fuel cost savings in greenhouse gas emission reductions.
As such commands premium pricing relative to both conventional and dual fuel equipment in late Q1 of 2022.
We will deliver the first clean fleet, a 60000 horsepower consisting of 10 Doe pumping units by the beginning of the beginning of Q3 2022, we expect to have taken delivery of our fourth natively, bringing our total fleet to nine although that could spread.
We also believe.
We are the leading technology innovator and I industry.
We're expanding intellectual property portfolio has considerable value and demonstrated by our recent licensing agreement with pro Frac.
We are the only pressure pumper to successfully powerful fleets using electricity transmit over high lines and our proprietary.
As Euro based industrial Iot platform enables advanced automation and data capture that lowers our cost improves operating efficiency and provides enhanced insight and transparency for our customers.
Our value proposition is undeniable and it drives the demand for the premium pricing for our fleet relative to alternative technologies.
For instance, a recent project with a customer operating in West Virginia.
Over the course of two pads, we displaced approximately $1 5 million gallons of diesel fuel saving roughly $3 6 million and cut the customer C. O two equivalent emissions by 25% versus conventional diesel technology.
Finally, I would like to comment on our balance sheet transformation since the beginning of the year U S. Well services repaid nearly $90 million of our senior secured term loan and fully converted our series B convertible preferred stock into common equity.
Reducing our debt load and simplifying our capital structure are critical elements to our strategy.
We believe ongoing debt reductions will be a key source of value creation for our shareholders.
Before I turn it over to Carl I want to thank the U S well services team for their hard work during such an important time in the Companys history, the sacrifices and efforts. Our team continues to make is what separates us as an operator in ables us to be on the forefront of pressure pumping technology innovation.
Thanks, Joel and good morning, everyone.
We averaged five seven active fleets during the quarter with a utilization rate of 89%, which equates to five fully utilized fleets.
U S. Gulf services reported total revenue of $56 5 million for the third quarter, which is down 28% from the second quarter revenue of $78 $8 million driven by the reduction of our active fleet count However.
However, I would point out that our revenue per fully utilized fleet was actually 13% higher than the third quarter and the second quarter and that our service and equipment revenue per pump power was higher was at its highest level in a year.
The improvement in our fleets revenue generating potential is fully attributable to the fact that the next generation pressure pumping equipment garners higher utilization and premium pricing relative to conventional diesel fleets.
Cost of sales in the third quarter was $58 $1 million down 2% sequentially. The reduction in cost of sales was related to the lower active fleet count was partially offset by labor and material cost inflations onetime operating costs as well as noncash charges related to equity compensation.
During the third quarter U S well services felt the impact of widespread inflation.
In September we implemented a wage increase for field employees raising hourly pay rates by approximately 15%.
Because their fleets were working under fixed pricing agreements at the time are increased labor cost was not passed along to customers immediately going forward, new contracts and pricing agreements will reflect our higher higher labor costs and protect us against future labor cost inflation.
Labor cost was not the only area, where we faced inflationary headwinds we saw a significant increase for costs related trucking logistics and fuel.
We incurred approximately $5 $5 million of one time costs in the third quarter, including a $1 million of noncash charge charges related to the write down and the value of spare parts inventory related to conventional diesel powered equipment.
$1.8 million for third party labor and repair and maintenance costs related to our exit from the conventional diesel market and transitioned to outsource power generation for fleets.
$2 3 million for rental equipment and third party services.
Replace equipment damage during the course of a job. We've included these costs in an insurance claim and believe a portion will be reimbursed and finally $400000 spent to mobilize a turbine generator to provide power in Houma, Louisiana.
Following hurricane item.
U S. Well services also recognized $1 million in equity compensation expense related to share based awards granted during the quarter of which 700000 was attributable to the first half of 2021 due to a January one 2021 vesting date.
SG&A for the third quarter was $11 $1 million compared to $7 $2 million for the second quarter.
Excluding share based compensation SG&A was $6 $5 million for the third quarter versus $5 $5 million in the second quarter.
The sequential increase was primarily related to increased professional fees associated with the smart sand litigation and ongoing IP litigation.
Adjusted EBITDA was a loss of $465000 for the third quarter of 2021, and we incurred approximately $1 $2 million of maintenance capital expenditures on an accrual basis.
During the third quarter U S. Well services spent approximately $22 $6 million of growth capital expenditures related to the four newbuild nicks clean fleets and additional long long lead items.
Yeah.
We expect to spend between five and $10 million in growth Capex during the fourth quarter. The majority of the capital expenditures for these new fleets will be incurred closer to when the fleets are delivered beginning in late Q1 of 2022.
Now turning to our balance sheet. The company ended the third quarter with $47 $5 million of total liquidity, consisting of $36 million of cash and $16 $9 million of availability under our ABL.
As of September 30, we had approximately 201.
$4 million of outstanding principal on our senior secured term loan to date in the fourth quarter U S. Well services has repaid an additional $44 $6 million, bringing the balance on our term loan down to $156 $8 million.
As a reminder, if we're able to reduce the outstanding principal balance below a $132 million by the end of 2021, the interest rate on the term loan will be at zero percent for Q1 of 2022. Moreover, if we can reduce the balance below a 110 by the end of the year or below a 103 by the end of Q1 2022, the interest rates.
Q2 through Q4 of 2022 will be 2% or 1% respectively.
We are continuing to market the sale of our legacy conventional fracturing assets as well as our remaining fleet of turbine generators. We believe the value of these assets exceeds the amount required to be.
Sold in order to continue enjoying interest relief from our senior secured term loan.
With that I'll turn it back over to Joe for closing remarks.
Thanks Kyle.
Since we introduced the first all electric fleet in 2014 U S. Well service has been vocal advocates of electric pressure pumping technology.
No. Other technology offers the same combination of economics, ESG and Hs as a benefit.
Which is why electric fleets continue to grow as a share of the overall U S PREPA pressure pumping fleet.
Well services has the fleet technology expertise and personnel to deliver for its customers and create value for its shareholders and we continue to believe that the future is very bright for this company.
I'll turn it over the operator for questions. Thank you.
Yeah.
Thank you we will now be conducting a question and answer session.
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Our first questions come from the line of Ian Macpherson with Piper Sandler. Please proceed with your questions.
Good morning, everyone.
Good morning.
Hey, guys I was going to ask a few I'll just tell them all upfront.
First I want to ask about.
Visibility into the back half of Q4 for typical seasonal slowdown and what that might mean for your expected utilization rates.
On your four to five active fleets this quarter.
Carl you mentioned.
You'll be recovering some of your 15% wage increases.
In the fourth quarter. So I just wanted to get a framework for how to think about EBITDA recovery.
With some of the nonrecurring items.
Take trailing off from Q3, and then also more.
Wage recovery and your contracts.
And then the last one I'm going to ask about is just maybe any more color on the palette with regard to.
Potential disposals that you could close before the end of the year.
Thanks.
Yeah.
Thank you Anna I'll start off with.
With the last question first.
While the channel in the quarter to date, we've paid down $1 six to nine of outstanding debt on our outstanding share basis.
And we potentially have another 78 per share an outstanding share basis. So we are.
We are a little bit more equipment left to sell.
Most or all of it was idle assets pretty much.
The majority of that quarter.
And getting back to the.
The future, we're keeping our key people in place gone from 11 to 10 fleet Im sorry, 11 to four fleets for a five four and a half.
The labor market is tight.
The people in place to expand our growth through the first quarter and second quarter and we feel this transition period. The company has gone through.
From exiting all our diesel equipment.
Two growing our electric fleets back too.
888 or nine fleets.
We are.
We're expecting it to be.
Be challenging.
Until we deliver those fleets and deploy those.
First half of next year.
Guy you want to take the remainder of question.
Sure Yeah, I think on the recouping of the labor cost is going to be 2022, before we see material movement on that front.
Largely due to a combination of carrying extra head count like Joel just mentioned in anticipation staffing up those fleets and.
Rolling over from existing contracts to new contracts most of most of our existing contracts go through the end of the year. So we won't see some of that.
Recoup of expense until until 2022.
Okay.
Thank you both I know that part of your early.
Tranche of horsepower disposal ended up ultimately in the hands of the competitive.
Public player.
But I would imagine that's more of the exception than the rule for the rest of what you have that you'd like to sell I would imagine.
There are a lot of opportunistic buyers.
Even the current tightness of the conventional market that that could.
Make a good bootstrap business out of secondhand horsepower as opposed to.
What we would think of is it durable long standing business plan out of it. So can you speak to how you think that the economics for.
I don't know if you want to call it blow down, but just sort of.
Short term.
Cash on cash and economics for the conventional horsepower given the tightened a tighter market than we have now relative to the summertime.
I'll take I'll take that question.
On selling it to a competitor we don't feel that we sell any of the diesel horsepower. We sell is going to compete with us because most of the customers want.
Electric fleets, that's who we are dealing with so and I wouldn't say that we're not going to sell to another strategic any of this equipment because people are still strategics and newcomers are both.
Actively pursuing the rest of our horsepower.
Thanks Joel.
Thank you.
Thank you. Our next question is coming from the line of Stephen <unk> with Stifel. Please proceed with your questions.
Hi, Thanks, good morning, gentlemen.
Show me, what I'd start with is you given whats going on with diesel prices are you seeing.
A increased premium on the bids for electric horsepower.
We remain.
We haven't seen that yet and simply because gas prices has gone up with diesel. So we think it's pretty much the same economics as it was in the past.
Okay, Okay and.
As we think about the cost structure thats in place and obviously youre going to be burdened with higher costs near term.
If we deliver and if you could just kind of remind me the exact timing of about four new builds.
You said that all be in place by the middle of next year do.
Do you think in the second half for next year I mean, when you think about the pricing youre seeing and how the cost of all that you'll be doing sort of a mid teens EBITDA per fleet number in the second half of next year.
Yes, Sir.
Okay.
And then just one other one for me.
When you think about the Capex required in 2022 can you just remind us what's left in 'twenty two on the on the new builds.
On the four fleets, we have building it's approximately Josh.
Josh helped me out.
Okay.
Yeah sure. So it's about between $85 million to $90 million for the suites that we're building.
And we are.
We've been in discussions with various equipment lender, so actively going down that road.
To get financing to help support that capex.
And we're going to do that we could do that with a combination of licensing sales.
Financing and equity.
Okay, great. Thank you and congrats on the progress so far.
Thanks, Steve Thank you.
Thank you our next questions come from the line of Daniel Burke with Johnson Rice. Please proceed with your question.
Yeah, Hey, good morning, guys.
Good morning, Hey, good morning.
Let's.
Let's see among the factors.
<unk> for the.
The challenges or the higher costs at least on a per fleet basis in the third quarter was elevated.
Elevated repair and maintenance costs and I was just wondering if you could talk a little more about that given the ongoing transition of the fleet towards the electric side.
Hey, Josh I'll take that one.
Yeah sure. So some of that Daniel was simply as we phased out tweets from diesel fleets from conventional operations and brought them and prepare them to sell.
We have elected to make some repairs and anytime youre rebuilding an engine or transmission.
It's going to add up pretty quickly, which is part of our reason for getting out of the diesel market in the first place, but we wanted to prepare those to have better value for potential buyers and I think we've done that thus far as we've been monetizing he's I think we've gotten.
You know a pretty nice premium to what other equipment and asset sales you've seen in the market is and simply because our stuff has been.
<unk> maintained and really ready to go to work and so that's been part of why repair and maintenance expense so elevated.
Okay. That's that's helpful to hear it's more related to the planned maintenance expense right Josh.
Yeah, that's correct.
Obviously shifted maybe over to our balance sheet and the debt load. You you guys are certainly incentives to get that that term loan balance down can you remind me if there's any covenants regarding already operational levels you need to consider in terms of what what cash balance needs to be at year end.
No there arent.
Are there any covenants related to our to our cash balance.
The agreement does not include any financial covenants of any kind.
We have the standard limitations on distributions.
Name change M&A.
M&A et cetera, but there aren't any.
Any metrics that we need to hit with regards to cash our primary focus.
The main milestones really are those.
Debt levels to achieve the continued interest release.
Got it thanks call and then I guess the last one just to follow up on <unk> questions. I don't I don't mean to focus too much on near term ism here, but you know.
With regard to Q4 it didn't sound like there was much reason to expect.
The quarter to look a lot different than the adjusted EBITDA performance. We saw in Q3 is that is it fair there.
If anything maybe it could be a touch light if year end seasonality is is a little more pronounced but are there any factors I'm not thinking about starting from that adjusted EBITDA figure.
No I think thats right.
We did get hit by a decent amount of standby and MPT time in Q3, which is unusual for this time of year and I think that's.
You usually stuff that we see more more in Q4, given the seasonality so I think that.
Yes.
<unk> four is probably going to look pretty similar to Q3.
Okay Alright.
Alright, guys well look I appreciate the time. This morning. Thank you. Thank you again.
Thanks, Dan.
Thank you. Our next question is coming from the line of Derek <unk> with Barclays. Please proceed with your questions.
Hey, Good morning, guys I was hoping you could maybe spend some time on expanding around your comp.
Conversations with your customers I think one of the.
Big push backs around this recapitalization cycle towards electric that were seeing unfold is and it's all going to rest on the shoulders of the service companies and it's not going to be shared economics with your customers. So can you just maybe spend a little time talking to us about what youre seeing with your customers. How those conversations are going are all these fleets coming out backed by contracts what are the paybacks.
Like how many years you need you pointed to a double digit EBITDA per fleet happening sometime mid next year I think that's compelling, but just maybe help spend some help us walk us through why it doesn't have the service companies of Paas, where they would take on all the cost for this was actually a true shared economics recapitalization cycle.
I want to take that one.
Please.
Down to we're able to achieve those goals.
Our business plan really has been focused on.
No.
Coming out with a price that is it works for both the E&P and aim for U S well services.
That's what we've been able to do historically, if you look at our financial results over time, you'll see that kind of we're almost counter cyclical right I mean, we because of our contracts.
We tried to mellow out the peaks and troughs in financial results.
And we've been pretty successful at that so.
Once we get back to scale, and we're able to absorb a lot of our fixed costs.
You'll you'll really start to see that incremental cash flow coming from the new fleets.
The economics will prove themselves out.
So you said your targeted at two two and half of it is that the payback you're getting at.
Should we assume that's kind of the length of the contracts that you're signing that youre not taking re contracting risks with these new assets that are coming out that you achieve your payback within that first contract.
So most of the contracts that were going out with right now.
Our foray.
One year term with multiple extensions.
Usually at the election of the E&P so.
We are not getting full payback just on the initial phase.
Term, but.
When you look at our re contracting rate historically, we haven't had a.
We had renewals in almost all of our fleets, where we've been able to put them to work with another client almost immediately.
Got it Okay. That's helpful. And then just wanted to switch over to power Gen market and how you saw the new turbines to a third party.
Can you just remind us how many more you have left and then maybe spend some times I know the next fleet has more power agnostic just talk to us about how you've seen that market evolve over the past few months and any color into what you see unfolding into next year. Obviously, there have been a lot of new market entrants a lot of different types of power.
Be helpful to spend a little time around that and what you're seeing from your seat.
So again when we first started this there was no body.
And the part.
The generation business for Frac right, we were the first electric fleet.
Alright generators now like as you mentioned, there's a bunch of entrants into the market.
We currently have two more.
Turbine to sell.
And we have one that was damaged that would be an insurance claim so with ACA.
Actually three to sell our once one is fixed or total.
We feel that.
We will leave it up to the client where they want a turbine a reciprocating engine or whatever whenever they would like that's what we're that's what we're going to source.
We note that the first two fleets coming out the customers want.
Turbine.
So.
If the third and fourth people, we're talking to Nick currently talking to decide they want reciprocating engines will will do what they wanted to.
Okay.
Got it and then just on the on the Recip side would you still be the.
Stay more capitalizing and work in a third party as far this resets or would you be open to going out and purchasing those resets and owning the power.
Some of a lot of our costs in the third quarter was due to power generation people and outside people.
We sold three of them were operating two of them. So we're trying to get.
Out of it totally.
As soon as we sell these next two will be out of the power generation business and labella cut cut cost.
So you know where.
Then a third party all power generation.
Got it okay helpful. Thanks, guys.
Thank you.
Thank you there are no further questions at this time, ladies and gentlemen, we appreciate your participation. This does conclude today's teleconference. You may disconnect. Your lines at this time and have a wonderful day.
Thank you.