Q1 2022 ProPetro Holding Corp Earnings Call
Yeah.
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Good morning, and welcome.
Pepco Holdings first quarter 2022 conference call all participants will be in listen only mode.
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I would like to turn the conference over to Mr. Josh Drumm, Elekta or financial Oh, Petro Holdings Corporation. Please go ahead.
Thank you and good morning, we appreciate your participation in today's call.
With me today is Chief Executive Officer, Sam Sledge, Chief Financial Officer, David <unk>, and President and Chief operating Officer, Adam Munoz.
Yesterday afternoon, we released our earnings announcement for the first quarter of 2022.
Please note that any comments, we make on today's call regarding projections or our expectations for future events are forward looking statements covered by the private Securities Litigation Reform Act.
Forward looking statements are subject to several risks and uncertainties many of which are beyond our control.
These risks and uncertainties can cause actual results to differ materially from our current expectations.
We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC.
Also during today's call, we will reference certain non-GAAP financial measures reconciliation of these non-GAAP measures to the most direct comparable GAAP measures are included in our earnings release.
Finally, after our prepared remarks.
We will hold a question and answer session.
With that I would like to turn the call over to Sam.
Thanks, Josh and good morning, everyone, our first quarter operating and financial results reflect the culmination of strategic preparation that the perpetual team completed in the months leading into 2022.
Momentum around our returns focused strategy was achieved in the quarter and our pursuit of margin over market share lead to improved capital efficiency across our asset base.
There are no additional fleets were marketed in the first quarter, our team experienced a 15% increase in revenues and an 81% increase in adjusted EBITDA. These.
These results not only provide proof that our capital disciplined approach is paying off but they also suggest that our team is focusing its efforts in the areas that maximize shareholder returns.
Execution of our strategy in the first quarter was more difficult than the results may suggest.
Weather in San related issues negatively impacted our operations in February and March with downtime experienced by multiple fleets.
These obstacles endured in the first quarter remind us of the volatility in operational risk, we assume daily both on location and in the geopolitical realm, such as the heartbreaking worn Ukraine.
Moreover, they remind us that it is vital to target economic returns that account for the risk that we bear on behalf of our shareholders.
If not for our team's willingness and our customers' desire to go the extra mile to find ways to execute around logistical issues on a daily basis, our results would've certainly different.
That said I would also like to thank all of the members of the pro Petro team for turning a very challenging quarter into one that reduced risk and limited downtime for our customers. While also generating strong financial results for pro Petro.
As we look at how the geopolitical landscape has affected global crude oil markets in the first quarter.
We see a tight energy market, becoming tighter than a call on short cycle production growing louder.
Continued rising drilling rig count in North America, coupled with high energy prices.
Just our initial estimates from earlier this year of 15 to 20 industry wide fleet adds in.
In North America into 2022 may prove to be too conservative.
While also considering the equipment attrition rates and pressure pumping and continued supply chain issues, it's possible that demand will outpace effective horsepower supply well into next year.
While we expect the backdrop to continue to be positive tailwind for and effectively sold out north American pressure pumping market.
Failing to capture a proper return and a favorable macro environment is futile.
We remain steadfast in our belief that focusing on margin expansion.
While simultaneously, providing the highest level of service and efficiencies to our customers is the optimal approach in the early stages of the cycle.
Over the most recent quarters, we have successfully repriced and repositioned a significant amount of our portfolio.
As a result, we high graded our operations, resulting in a more efficient and dedicated service offering with more reliable profitability.
In addition, as part of our fleet transition program to lower emissions natural gas burning equipment.
We began taking delivery of our tier four dual fuel units and accordingly transition to one <unk>.
Our operating tier two fleets to a tier four dual fuel fleets.
We now have two tier four dual fuel fleets operating in the field today with a third fleet expected to be converted and in service by the end of the second quarter.
As a reminder, those conversion support existing capacity.
And do not add effective horsepower to our fleet.
With that I'll turn it over to David to discuss our first quarter financial performance and our capital resources David.
Thanks, Sam and good morning, everyone.
During the first quarter, we generated $283 million of revenue a 15% increase from the $246 million of revenue generated in the fourth quarter of last year.
The increase was largely due to improved pricing and higher activity levels, including a company record 600 pumping hours for assignment Frac fleet in the month of March.
Effective fleet utilization was above our prior guidance of 12 to 13 fleets coming in at $13 seven fleets, which increased nine 6% from the 12 and a half fleets during the prior quarter.
And as Sam noted this was achieved without deploying additional fleets.
We effectively scaled our business without adding operations overhead and the investments we made enforced shrinking projects and fleet repositioning during the fourth quarter and year to date.
G to compress white space and improve our price deck and fleet profitability.
This requires discipline and our team delivered in a big way.
Our guidance for second quarter average effective fleet utilization is a range of 13 and a half to 14 and a half range, which assumes no additional fleet deployments and accounts for impacts related to the continued repositioning of our currently operated fleets.
Cost of services, excluding depreciation and amortization for the first quarter was 197 million versus $187 million in the fourth quarter with the increase driven by higher activity levels, and inflationary impacts, including sand and logistics costs.
First quarter General and administrative expense was 32 million compared to 24 million in the fourth quarter.
Adjusted G&A was within our prior guidance at 19 million and excludes $13 million related to nonrecurring and noncash items, namely stock based compensation of $11 million.
Depreciation was 32 million in the first quarter.
The company posted net income of $12 million or 11 cents of income per diluted share compared to a fourth quarter net loss of $20 million and a 20 cent loss per diluted share.
Included in those figures as a net benefit of $6 million from a nonrecurring state tax refund of approximately $11 million offset by a one time 5 million dollar expense of noncash stock compensation.
Finally, as we described in our prior call adjusted EBITDA margins expanded significantly with adjusted EBITDA coming in at $67 million or 24% of revenues for the first quarter, which increased 81% sequentially compared to 37 million for the fourth quarter.
The sequential increase was primarily attributable to improved pricing increased activity and additional cost recovery on jobs, while also being partially offset by weather and sandy related issues.
Adjusted EBITDA margins improved almost 900 basis points sequentially, and we experienced 82% sequential incremental margins.
We achieved these more normalized margins well ahead of plan due to careful planning by the team late last year with strategic investments and through our disciplined fleet deployment strategy.
I would like to congratulate the perpetual team for its accomplishments in expanding margins in the pursuit of full cycle cash on cash returns across our operating footprint.
The improvements provide our company with momentum as we move into a strengthening upcycle.
That said it will not get any easier from this point board.
Our challenge will be to continue to stay ahead of supply chain constraints inflation and other issues that pose risk to our ability to further expand our margins and provide premium service to our customers.
We expect these areas of our business to remain extremely volatile given the lagging impacts from the war on Ukraine, and the continuing effects of the COVID-19 pandemic, particularly in China.
We will not put further strain on our business by marketing any additional horsepower unless we believe we can achieve returns that compensate for these risks, particularly at this point in the cycle.
During the quarter, we encourage 72 million of capital expenditures.
Of that amount 28 million was related to tier four dual fuel conversions with the remaining balance being predominantly related to other routine maintenance capex.
We continue to redirect capital to support the transitioning of our fleet to lower emissions and natural gas burning alternatives that not only further our ESG goals and the goals of our customers, but also generate improved profitability.
Actual cash used in investing activities as shown on the statement of cash flows for capital expenditures in the first quarter was 64 million with negative cash flow of 39 million.
This figure differs from our incurred capex due to differences in timing of receipts and disbursements.
Based on our current plan and projected activity levels, our outlook for full year Capex spending remains unchanged with a current bias toward the upper end of the range given the pace of market improvement and compression of white space from our calendar.
However, as you are aware market conditions remain dynamic and our full year capital spending will ultimately depend on a number of factors, including changes from our projected activity levels, the worsening of inflation or supply chain impacts.
Or if we identify new opportunities to invest in next generation equipment in a manner that meets our financial objectives.
Notably we had been investing in tier four dual fuel conversions to support the strong demand and higher relative pricing from our customers.
As of March 31, 2022, total cash was $71 million and the company remains debt free.
Total liquidity at the end of the first quarter of 2022 was $127 million, including cash and 56 million of available capacity under the company's revolving credit facility.
While our cash position decreased 41 million during the quarter, which is consistent with our prior guidance. This decrease was offset by a $43 million increase in net working capital through an increase in our accounts receivables balances.
We believe our AR balance and net working capital will normalize in the coming quarters.
And as noted in our recent press release, we extended the term of our ABL facility into 'twenty, 'twenty, seven and improved certain terms in pricing, which enhances availability.
As of April 30th 2022 our liquidity was 145 million.
As Sam alluded to in his opening comments the commitment to capital discipline is critical to our success.
And we are firmly committed to ensuring we maintain a solid financial position that provides maximum financial and operating flexibility pricing.
Pricing and fleet deployment. This one will also be critical in enhancing our earnings power going forward as we continue to deliver top tier pressure pumping services to the marketplace with that I'll turn the call back to Sam.
Thank you David.
As David mentioned capital discipline, and a focus on returns are pillars of our business strategy today and moving forward.
Our team spent significant time in the down cycle working to understand what variables will support the creation of a through cycle return in pressure pumping during this cycle and in future cycles, given the high intensity manufacturing environment in which we now operate.
We believe we are measuring our business properly.
And as a result of that endeavor and our strong profitability this quarter validates our work.
One of the most important changes noted by our team coming out of the pandemic was how the evolving needs of our customers, we're creating a wide range of equipment profiles on location both in the form of Cape capabilities.
And fleet configurations.
This rapid change suggested that we could no longer simply look at EBITDA per fleet to determine if we were being profitable through cycle.
As a result, we began focusing on the replacement cost of all the assets required to support customers well site.
And the cost to maintain high level of efficiencies our fleets create.
We not only evaluated assets in Frac services, but also in our ancillary services, such as pop down cementing and other asset heavy operations.
The rationale here is that those business units have their own respective replacement cost that need to be accounted for with their own returns profiles.
It's simply not reasonable to allow those services to subsidize the EBITDA of our working Frac fleets.
We also considered this for our cold stacked equipment.
Historically decisions to activate and redeploy equipment have typically been based on the marginal investment to reactivate rather than the full replacement cost of that equipment.
Additionally, our sharpened focus on through cycle returns requires us to address the realities that are equipment does not last forever and energy cycles always come and go.
We began accounting for the nutrition rates and volatility impacts to determine the level of profitability required to operate in this business.
So as we combine those factors and move forward into the early days of this returns focused strategy. We've had to accept that our approach will at times result in missed opportunities with certain customers as it already has.
Although passing on work when they expected return profiles do not meet our threshold has tested our metal.
Particularly as we saw appears deploy equipment more rapidly the results we see in the fourth in the first quarter only strengthen our resolve that we are on the right path.
A path that ultimately has driven a transformation of our asset base that.
That has not only become more capital efficient and supportive of higher margins.
But one that seemingly has runway to continue to improve.
Well our team is excited about the road ahead, we are not yet satisfied with our current profitability levels, particularly given that the pressure pumping markets are working at effectively sold out levels.
We applaud the rate of change in our company's financial performance, but the bar pro Petro measures itself against will not be set comparative to prior cycles or pandemic lows.
We believe that it's not only acceptable but required for oilfield service companies to produce sustainable returns, particularly for those reducing risk and increasing uptime and inefficiencies.
For our E&P customers.
With that in mind I'd like to once again, thank all of my perpetual teammates and our customers for another fantastic quarter with best in class safety and operational performance.
We'd now like to open it up for question and answers operator.
Thank you well now begin the question he was the person.
Asking the question you May Press Star then one on your Touchtone phone.
You're using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
This time, we'll pause momentarily to assemble the roster.
First question comes from Steven.
Then go up people. Please go ahead Sir.
Oh, Thanks, and good morning, everybody.
Oh I see.
Two things for me if you don't mind, maybe I'll start with you know.
From a pricing perspective, you talked about the impact a positive pricing in the first quarter can you give us a sense for you know kind of where your fleet stands relative to leading edge prices and how we should think about that.
And the impact on profitability over the next couple of quarters.
Yeah, Stephen the Sam Good morning I'll.
I'll take a shot at that David might want to chime in as well.
It's a it's a range right now and I think that's why you hear us continue to talk about.
About analyzing where our fleet is and how it's priced.
So I think I I think we do have.
A number of fleets that we would we would qualify as on the leading edge from a pricing and profitability standpoint, and we have.
A number of fleets that are maybe lagging what our current goals are so.
Near term, our our objective is to kind of bring up the bottom end of our portfolio, whether it be through pricing or repositioning.
Or better cost controls internally and this is these are things that we've been doing here over the last you know.
Number of months.
So we'll just take a a continued effort to get kind of into the through cycle pricing and closer to leading edge with more and more of our fleet.
Yeah, I think Stephen this is David just to add to Sams comments I think.
When we look at pricing, we all sort of looking at customer efficiency, which can impact that so what I would say is that you know, we've probably got 30% of our pricing at a headline.
Leading edge numbers.
Customer efficiency is not always the same we've got you know maybe half of our fleets that are at improved pricing with high customer efficiency.
So it's really a combination of factors when we think about ultimate profitability per fleet, but the goal as we've mentioned in our commentary is to try to increase the levels of profitability across our fleets, regardless necessarily a pricing.
Okay, great. Thank you for the color and then just the second thing I wanted to ask about was what when you're thinking about Capex and how your fleet profile evolves do you do you have a sort of.
The money that you've sort of earmarked for this year that it's $2 50 to 300 by.
By year end, where do you think your fleet profile stance.
Yeah, I think the goal is to be a pushing towards or be in excess of four a dual fuel fleets.
With the with the remainder being just the conventional tier two fleets and we've we've Oh, we look to continue to push into the dual fuel arena as we've seen.
Continue to see and have seen differentiated pricing for those for those assets, but I'd say at least for dual fuel fleets by the end of the year. Okay. Great. Thank you for the color gentlemen.
Okay.
Thank you. The next question comes from Tom The torture Tudor Pickering and Holt. Please go ahead.
Sam and team. Thanks for taking my question. My first one is on on the strategy not to market any additional horsepower in Q2, I was saying that I think you said, you're it's not testing your metal a little bit in and having to pass on some customer opportunities, but at the same time I really strong margin improvement in Q1, so I like what I'm just curious on as is.
How much demand incremental demand you see out there in the Permian you know maybe over a six month time horizon.
What's the sort of magnitude of opportunities youre, having to pass up on and you know where can we see demand in the Permian shake out in the.
Quarters ahead.
Yeah, Tyler Great. Great question, I think you know maybe you can give a little bit more context to the comment that that's it's kind of tested our metal or tested our resolve is that in prior cycles like this when we see when you see demand increasing in and.
Capacity in the in the Permian Frac sector being virtually sold out.
Petro and other companies like us have has traditionally grown.
Fleet capacity into that environment, and you know for for many reasons in prior cycles. It was probably a bit easier to do that.
As we look at the circumstances that exist.
Today.
One we're having to take into account.
What it takes to achieve what we're calling you know a through cycle cash on cash return and couple those opportunities with the right customers and the right timelines.
So where we are we are pretty confident that that demand here pretty soon if it hasnt already is going to outstrip.
Just overall frac supply, especially in the Permian.
Market and I think we're looking at that as an opportunity to continue to high grade our portfolio as it exists today.
Without.
Pushing any more risk in the pro Petros system.
And and really continuing to hang our hat on that operational execution that we feel like we've been known for and that we feel like is a competitive advantage of ours.
So really it is just a laser focus on on maximizing returns through you know coupling our teams and our assets with the right people the right customers at the right pricing and and generating a return that is theres, probably more incremental and more incrementally.
Two our profile than just adding fleets.
And Tyler this is David and Adam May want to add to this but you know some of the <unk>.
Anecdotes from the market that we're getting are things like look maybe this isn't a blank check but you know just tell us what you need to to come Frac are well or are you know things like Ah can east can you at least send over a bad crude will take anything so I you know Adam they want to make sure some of that.
But in terms of just customer sensitivity and urgency.
It continues to escalate and I think that's consistent with what.
What we're hearing from other our other folks in the market.
Yeah, I would just add.
Oh and Echo what David assembled said I mean, just.
To make a comment on some of those customer.
Request you know in.
In the past, we probably would've jumped that opportunities like that but as Sam said, we're we're really watching those more closely now and if it's going to you know.
Put risk in our business and in what we're trying to do as far as accomplished and in trading.
Creating value in a N a return there.
Yeah, we're just having to say no to those opportunities.
Yeah understood and a good to hear thanks to all three of you for that follow up just on the on margins the last call you.
You pointed to a really strong start to January and then obviously you dealt with some winter weather in our supply chain constraints over the back half of I really final two months of Q1. So I'm curious I mean are we back to the sort of profitability levels here in April or maybe exiting March on a run rate basis that that you saw in January or.
Are you still having to fight through some of these supply chain challenges and not quite all the way back there yet.
Yeah first of all I just wanted to you know I think it's I think it's more than fair to talk a little bit about some of the headwinds we face specifically in February .
Hum.
I can't say enough about about our how our team navigated through that internally here and how many of our customers navigated through that as well. This is a you know being.
Being.
You know a really quality execute or on location is it is it is a dance it's not just what we do it's what our customers do as well so working together with our customers.
Through a month like February and part of my March.
It's just really impressive and I.
Just like to congratulate our.
Our our team our operations and logistics team and and our customers for what I think is working through that may be in a very differentiated way.
That said, yes, Youre right you know, we we we called out the January EBITA margin of numbers on our on our Q4 call on purpose, because we thought that that could be a sustainable.
A sustainable level of profitability and something that we could actually build on so I'd say, yes here in here in April going into May.
We're back in that ZIP code, if not if not exceeding it.
Tyler This is David just to give you a little bit of color during the quarter, we actually saw EBITDA performance drop off about 40% month over month before recovering. So I just kind of gives you a sense at how strong are the the overall pace.
What was going on on a normalized basis, excluding the weather impacts in and some of the logistics impact. So you know, we're seeing we're seeing good market activity and and.
Beginning to see some normalizing of supply chain activity as well. So you know where we're hopeful that we see that play out through the rest of the quarter and the rest of the year.
Awesome, Thanks for the answers.
Thanks Tyler.
Thank you next question will be from John Daniel Once the minutes. Please go ahead.
Hey, guys, good morning, and perhaps a quarter.
Let's see them or Adam with the engine lead times are.
Then to extend can you say when you.
You would place the next order for tier four DGB engines and.
Assuming you placed it today, if you haven't already placed it when would you realistically be able to have that fifth fleet deployed.
Yeah, John I mean is it.
Quantitatively. That's that's as you can appreciate a bit of competitive information because sure.
Part of part of competing in and supplying to quality service and getting our customers the right products and services as is our ability and our competitors' ability to access supply chains and in timely.
And cost effectively manners manner. We we started this DGB conversion program you know basically this time last year.
And we we did a really thorough analysis to ensure that we're working with the right partners.
And the right suppliers to help us execute.
On that conversion program and we've been.
Although there's been challenges we've been quite pleased with our ability and our and our and our supply chain partners ability to execute in that arena.
Without quantifying specific numbers, we we really like our position in the supply chain right now and our ability to make good on some of these conversions that we've promised our customers.
And and to continue to provide the products and services that our customers are.
Are asking of us gear here in the near future near future you know going into beyond say.
The four to five fleets of dual fuel conversions that we spoke about.
Earlier.
Hard to say you know if theres more.
Beyond that right now he can say that the lead times are not getting any shorter for things like <unk>.
D G B engines.
So the competitive advantages of companies like us and others that do have good access to the supply chain will only become greater.
Because because of those lead times extending.
Would you say, that's what customers are asking for more frequently today than three to four months ago.
No doubt about it okay, yeah, Jonathan I'll, just I'll just add to that like I said you know, we we delivered roughly 90000 hydraulic horsepower at the end of 2021, which is already.
In the field working at the you know at the higher relative price Little then we'll let you know we plan an additional 120000 hydraulic horsepower.
It hit us.
At our fleet and get to work first half 2022 so yeah, it's definitely going to be a priority for us to continue that fleet conversion of our diesel burning more gas burner and just to just to just to clarify what Adam said right. There all of that horsepower. He's talking about is dual fuel tier four dual fuel horsepower that is convert.
And no net no net addition to our fleet grasping fair.
Fair enough and then I guess the last one for me.
In the prepared remarks, you mentioned that.
I view that Frac crew activity would rise 15 to 20 crews over the course of the year that that would be I'm, assuming across the U S. Not just the Permian, but that are biased higher.
Let's assume that plays out.
If you wanted to reactivate the 15 fleet.
Whether it's tier four it goes I don't care, what it is but just how long would it take you to go and buy back to market.
Yeah, that's a good question John .
No.
Don't know if I'm ready to answer that here.
I would just probably point back to what our focus and our strategy is right now and that's to get all of our fleets above what we would call you know mid cycle or through cycle cash on cash return, we're not there yet I think in my prepared remarks I.
I noted that we're not yet satisfied with how we're positioned from a profitability standpoint that said we do have.
Some leaders in the pack from our fleet basis that are they are performing significantly.
It's.
That that is something that we continue to analyze I don't have a timeframe for you right now.
A little bit down the priority list in terms of what our focus is okay fair.
Fair enough thanks, guys.
Thanks, John .
Yeah.
Thank you our next question from Ian Macpherson Simmons. Please go ahead.
Yeah.
Thanks, Good morning, everyone.
Right.
You've been pretty purposeful and you know clarifying we're not out of the woods, yet with all the operational challenges, even if you're not.
You know trying to grow activity fast you're not necessarily seeing total relief in all of your your pinch point. So I wanted to dig in on that a little bit and ask you are you seeing this play out more with regard to.
The high churn components when your fleets your power and influence and things like that are you are you speaking more to towards the labor side or maybe your customers consumables and sand.
Chemicals et cetera or is it just.
Everything and do you still have prescribed fixes coming on the way that could help you elevate your your margin improvement as you sort through these.
Yeah, Ian Fantastic questions Sam again.
I guess I'll I'll take a shot at talking about your question, a little a little bit more of a holistic manner.
And no.
No I don't I don't think I can appropriately answer your question without reiterating how hard this businesses. This is.
This is the front lines of the oil and gas operation.
Today.
Labor materials.
Operational challenges.
This this business is tough that that said.
We think we think we have the best team to execute in the best Basin.
So I think it's a bit of a combination of excitement about our ability to continue to differentiate competitively because of you know our team our asset base of customers.
But also an appreciation for the headwinds and crosswinds that still exist in the system.
So we're trying to be as realistic as possible.
About how we're looking at the future you know that said are there going to be opportunities for continued pricing relief, yes at the same time or theyre going to continue to be cost inflation pressures yes.
So it's it's quite of a you know a broad sweeping.
Set of circumstances that have to be balanced in managed.
All the time so.
We think there's upside to go from here are we just want to be realistic about how hard this businesses and also you know I don't think I can say all of that without saying, we think we're a little bit ahead of the curve.
As well.
Where traditionally at the top end of the pricing scale and I think from a profitability per fleet perspective, you could you could you.
You could actually say that we're a quarter if not two quarters ahead of some of our competition from a trend.
Standpoint.
Okay.
It's helpful. Thanks, and then with that and maybe falling a little bit more pointedly on.
Prior question for.
For Q2, it seems to me that it would not be out of bounds I think that you could again get to mid teens revenue growth over Q1, and I would assume that based on.
The EBITA margin hit that you experienced with the transit factors in Q1 that getting towards mid twenties margin EBITDA margin in Q2 would not be.
Beyond possible would you agree with that.
You know I think that given given or.
What I would call a differentiated strategy around fleet deployment I think that.
We're not looking so much around top line.
As we are margin expansion and improvement so I think that might be more a bit more.
Bias to a number inside of what you mentioned regarding topline.
As far as margin expansion.
You know I think I think that we do have some room to run there as we reposition bleach as we continue to see the price deck lead.
And and increase we have you know.
Much of our business still has.
Rice openers, where we can go back in and recapture some inflationary impacts. So so I think that we've got some room to run there.
That's great. Thanks, David.
Yep.
Thank you next question from Orcher Fayad ATB capital markets go ahead.
Thank you good morning.
So Sam your pumping.
Bumping up productivity ease you know about 70% to 76% I think Q4 was 76% higher than Q1 19.
I'll be going to kind of start flatlining around that level do you think there's a lot more still to gain from productivity you know could you maybe comment on that.
Great Great question Waqar, we've been asked us.
I don't know, how many times in the past and and.
No.
Just like a broken record as soon as I personally think.
We can't push it any higher.
Our operations team in combination with our customers' proves to be wrong.
Yet again so.
Are there are there are opportunities to continue to increase pumping our productivity sure I think it's more.
Along.
You know.
And the ZIP code of the bottom end.
Of our operating portfolio I think the top end.
Of our operating.
Portfolio is best in class.
So I think I think there will be continued Gainesville car I think it'll be at a slower rate.
I hesitate to call that a plateau, because I've been proven wrong by our team so many times before.
But I, but I think it will continue to grind higher and Waqar. This is David just to highlight one of the callouts on our earnings release, and what we mentioned earlier one of our some of Frac fleets hitting 600 hours pumping hours in a in a month and that's not something that.
Other folks have been talking about and I think that is reflective of the fact that we've continued to see improvement even even as much as recently as in March so.
I think Sam makes a good point that we've seen significant improvements and you got to think when how much blood can you squeeze out of that turn it but.
But we seem to be a surprising.
Ourselves each month as we continue.
Yeah.
Great.
Another question.
We hear from some of your competitors that did awesome kits to upgrade tier two equipment.
Into kind of dual fuel, but that system may have the same kind of emissions profile.
If not better than tier four.
D E. BS have you heard anything.
To that effect do you think there is some merit to that.
Yes, I think I think that may be a little bit debatable waqar, we're through testing that we've done directly.
And in what a lot of it in engine manufacturers would say tier four is a better emissions profile I you know I think that's why it was government mandated.
Also a big part of this is the diesel displacement.
These tier four DGB engines.
We're purposefully designed to displace more diesel and we are seeing with our own fleet and I think against some of the some of the anecdotes, we're hearing from customers and competitors.
That these that these caterpillar a tier four DGB dual fuel engines have quite a bit higher displacement rate and we've been really pushing the envelope.
With with some of these new units are we have which is an emissions improvement as well as significant cost savings to us and our customers.
Yeah, we're seeing I think in the neighborhood of 50% to 60% displacement on the tier two DGB kits, whereas we're getting.
Some cases in excess of 70.
Even upwards of 80% displacement and.
Car just to add one more thing I think it's fair to note that.
All of these conversions also have an effect on engine life of asset life.
So you have to maximize the tradeoffs of.
You know how much diesel can we displace an and and how long will that conversion or modification.
Last and could it be detrimental to two a large component of our fleet.
Yeah.
Fine.
David just one last question could you maybe talk about you know what the working capital cash inflow and outflow could be for Q2, and then for the remainder of the year and then any comments on the free cash flow for the year.
Sure.
Working capital.
Increased net working capital increased during the quarter related to some delays in getting some tickets signed we resolve that very very quickly and so I think that there'll be some unwinding.
Of that to our benefit going into the second quarter and generally we've been able to maintain fairly fairly flat changes in working capital as we progress and again keeping in mind, what I would call our more capital efficient approach to the market.
Again, not not looking for topline, but rather focusing on bottom line you know we don't.
We don't see dramatic changes on the revenue side, and therefore working capital so.
As it relates to free cash flow, we had guided last quarter that we would in the near term have some negative cash flow as we invested.
In our fleet and in the conversions.
That will I think.
Begin to moderate as we work through the year, although we underspent our original plan in the first quarter due to supply chain constraints some of Thats going to show up we hope in the second quarter. So that we continue to get the equipment that we need but then but then we'll be looking to 2023 to deter.
And what type of spending profile will have in the in the second half of the year. So.
I think it's still hard to say.
But I would be biased toward.
You know neutral or or even negative for.
For the year and again, it's just going to be dependent on how the market plays out.
Great. Thank you very much appreciate the answers.
Sure. Thanks Waqar.
Okay.
Thank you next question comes from.
Hey, Aaron Hey, Ryan JP Morgan. Please go ahead.
Yeah, Good morning, Arun <unk> with J P. Morgan.
Sam.
A bigger strategic question for you as you're aware your primary peers or pursuing a bit more of a vertical integrated strategy regarding.
You know.
Stimulation.
And you guys have generally held firm to just being a pure you know pressure pumping company. So I wanted to get your thoughts on some of the pros and cons.
You know a more integrated the vertically integrated offering to customers if that makes sense just given how we're seeing a much higher mix of privates in the market, who you know maybe could benefit from that more integrated offerings. I was wondering if you could talk a little bit about that and any future plans that you may have to do.
Some things outside of just pure Frac may be in terms of sand logistics wireline et cetera.
Sure.
Great question it's.
I think this is something that we ask ourselves quite a bit internally here.
As we analyze.
You know more.
Our market opportunities too.
Improve our service and product offering.
As well as you know what what our customers may or may not be asking.
Of us in combination.
With making sure that we're continuing to focus on what the core of our business is in.
I guess I would say from a far my perspective is a couple of our.
Few of our competitors that are more integrated and into things like.
Like wireline per se that is offering a more integrated well site service I would say that the core of their business from a profitability.
And our spending perspective is still pressure pumping you know same as us so.
We look at that and say if we were to add ancillary services that would integrate us better into the completions well site can they compete for capital in the same way as our core business can they bring through cycle cash on cash returns that we're targeting with our core business.
I don't think we have all the answers to that yet, but I think you know just to give you. Some some context in terms of how we're looking at that and we continue to analyze.
Opportunities on an ongoing basis.
We have a high bar and we want those those things if those opportunities materialize to be accretive to our offering not dilutive in any way and we want to put ourselves in a position in.
And you know whatever service line that may or may not be added to our current core business that we can also be the best in the Permian basin from an operational perspective that that's maybe of utmost important to us.
It is being able to provide a differentiated quality service to our customers. So those opportunities have been few and far between over the years, but we continue to keep our heads up and our eyes open.
And look at opportunities on an ongoing basis that might meet.
All of that criteria that I outlined.
Great and my follow up Sam is you guys had been repositioning fleets over the last couple.
Couple of two or three quarters and I was wondering if you could maybe just elaborate on.
Some of the benefits from that repositioning as we start trying to think about you know our forward expectations in our model. So maybe give us a sense of how many fleets have been repositioning and some of the you know the benefits from a margin perspective from this.
This this from these moves.
Yeah, Arun quantifying that is a bit.
On the competitive side in terms of information, but qualitatively I can say that we've done a good bit of that.
And that's been challenging that's that's not just its easy for.
For guys like David and Adam and myself to get on the call and talk about that.
And difficult very difficult on our you know our marketing business development and operations teams to really execute on that type of strategy and that's a that's a bit differentiate it then then or different than how we have.
Conducted ourselves in in prior cycles, you know, we don't get we don't get the pleasure to expose our revenue stream to you know a global index.
Crude market like our customers do but we have to expose ourselves to better earnings opportunities not only through pricing, but also through putting our putting our teams and our assets with better earning opportunities and with better customers.
So it's it is I cannot say enough about how our team has worked together to execute on say repositioning.
Fleets, there's probably less of that to do moving forward, we've we've done quite a bit of it.
But it's always an option as we as we continue to chase this through cycle return.
Got it got it thank you.
Again, if you have a question. Please press Star then one.
Our next question comes with Bonkers with Johnson Rice. Please go ahead.
Morning, gentlemen.
Wanted to ask you a couple of questions about Simon So I know that's moving towards the future of the industry in and wanted to know what your thoughts are or where you see your fleet.
Moving from a simulcast perspective versus a kind of one time completion going forward.
Yeah, Dan this is Adam.
I would just comment on that.
Frank we would.
I think collectively as a management team what we've had to experience all of last year and coming into this year.
Yeah. It makes a lot of sense for both sides as long as.
The terms are correct as far as pricing and as well as the operation of the E&P as well I mean, that's a tough job.
I think Sam noted earlier, how tough this business is just simply on the zipper frac side, but as you throw steimel frac into the picture in the amount of equipment and personnel and logistics that needed to be hitting on all cylinders to make that operation.
Meaningful to both sides.
Is.
So far if you saw I would just say that there is definitely just like in the <unk>.
And the pressure from those people that do it better than others and.
Aligning yourselves with those that have the infrastructure and the logistic capability to continuing operational at that is probably what we would focus on as we look to the more subtle effect for the business.
Don This is the same just that you know one one piece of information on top of that my personal belief is that there you know say heading into 2023 sector wide there will be more similar not less.
That said I don't think we we are of the belief that it is going to be much more I mean, it's going to be very marginal growth.
This type of operation is not for everybody you have to have.
A very sizable acreage positions you have to have very very good water infrastructure and the ability to move that water around.
We're happy to work with some customers that do do that very well.
But it won't be for everybody and I think more growth in the simulcast will be very slow.
Okay, just one follow up on that.
For the fleet.
You have doing time of Fracs now are they counted as one fleet or one and a half or.
Two fleet cardio normally do that.
When you reported today, they're still counted as one fleet when we when we quote utilization. It's it's all working.
Working day measure so one working day for simulcast fleet as measured similarly, as one working day for Zipper fleet that said.
Hmm.
We account for it.
Actually.
Is is quite different because of the replacement cost of the equipment on location for something like a simulcast operations far different.
Then.
You know say.
Say Midland Basin standard zipper job.
So the returns profile needed to meet that replacement cost in that intensive operation.
<unk> significantly different so similar on the utilization.
When when we're quoting these things like effectively utilized fleet quite a bit different as we measure our economics for that type of an operation.
Alright, I appreciate the color. Thank you I'll turn it back.
Yes.
Thank you.
This concludes our question and answer session.
I like the program to conference back over Mr. Sam slated for closing remarks. Please go ahead.
Thank you and thank you everyone for joining us on today's call. We here at pro petrol are proud to play a part in an innovative energy industry, where oil and gas remains critical to everyday life across across the globe.
We hope to talk to you soon and we hope that you join us for our next quarterly call have a great day.
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