Q1 2022 Solaris Oilfield Infrastructure Inc Earnings Call
[music].
Good morning, and welcome to the Solaris first quarter 2022 earnings conference call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing Star then zero on your telephone.
Pat after today's presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two please note. This event is being recorded.
I would now like to turn the conference over to.
Yvonne Fletcher Senior Vice President Finance and Investor Relations. Please go ahead.
Good morning, and welcome to the Solaris first quarter 2022 earnings conference call I'm joined today by our chairman and CEO Bill Gartner and our.
Evident and CFO .
Longer.
Before we begin I'd like to remind you of our standard cautionary remarks regarding the forward looking nature of some of the statements. We will make today such forward looking statements may include comments regarding future financial results and reflect a number of known and unknown risks.
Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks.
I'd also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP reconciliations to comparable GAAP.
<unk> are available in our earnings release, which is posted on our website at Solaris oilfield Dot com under the news section.
I'll now turn the call over to our chairman and CEO .
Thank you Yvonne and thank you everyone for joining us this morning.
I'm proud of the results of Soliris team delivered this quarter at the start of what is shaping up to be a key year for both the company our industry and global commodity fundamentals.
During the first quarter are fully utilized system count increased roughly 20% sequentially to 75 systems and adjusted EBITDAR grew 60% to nearly $16 billion, we paid our 14th consecutive dividend and ended the quarter with $25 million of cash and no debt.
During the quarter, we grew activity with both existing and new customers and believe that our growth outpaced. The overall completions market. We saw increased demand for nine and 12 pack configurations, withheld, which helped our customers navigate through supply shortages and delays that became prevalent during the first quarter. We also work for 10% more oil and gas operators than we were.
Four in the fourth quarter. Some of this new customer growth was a direct result of demand from our new technology offerings, such as our top door system.
In the first quarter, we ran multiple jobs with our top film based systems as part of our integrated last mile services, offering, which allowed us and our customers to optimize trucking.
Our top field design offers flexibility and reliability and sand transportation and delivery by using either higher payload belly dump truck trailers for traditional pneumatic trailers with this increased flexibility our customers benefit from nearly 10% to 15%.
Capacity per truckload, while preserving the ability to dispatch pneumatic trucks has additional capacity to ensure the sand is always available.
This added value helped drive our first quarter results, we had higher profitability per ton and per Frac crew under our last mile model. Despite a slight decrease in total tons delivered due to the industry wide sand shortages.
The last mile of profitability in the first quarter was driven by a higher number of tons delivered by belly dump trucks, and an improved job mix, which we secured due to our investment in our topical solutions.
<unk> of our new technologies combined with the price increase implemented at the beginning of the year helped drive our overall profit per Frac crew back to pre pandemic levels demand for our topical solution continues to exceed current availability, which combined with the improved recent results gives us increased confidence in continuing our investment in additional capital equipment.
Expect this continued investment to create a much higher revenue opportunity per well site and we've seen in the prior periods, while also allowing us to win work with new customers.
During the first quarter. We also ran an increased number of jobs with our auto blend integrated electric blenders with several units now deployed in our fleet today, well autumn land is earlier in its commercial adoption phase that are topical technology. It was also an incremental source of profitability in the first quarter. We also continue to see an increase in demand for this equipment.
From customers, who have now experienced significant use a lot of wind as well as interest from new customers. We are continuing discussions on potential contracts with multiple customers.
We are encouraged by these demand signals and believe our new offering provides an attractive alternative to operators investing capital in older not fit for purpose blenders and the multiple jobs, we've run with our <unk> system, our customers have seen a reduction in nonproductive time increase reliability minimize well site footprint and enhanced safety through increased automation.
<unk> of processes that traditionally require more personnel and potentially high risk areas. The additional equipment. We're adding on completion site is focused on helping our customers gain a significant net economic benefit.
We believe soliris can provide our customers with this benefit while also earning attractive returns on the investments we are making.
We'd like to frame our investment opportunity around the return potential relative to each frac crew, we work with today using our sand systems with the Topco system and or an auto blend unit on every location, where we have our sand system deployed we would have approximately two to three times the investment deployed per Frac crew and we would expect two to three times.
The contribution margin over a single six packs and system on a frac crew.
Additionally, we believe both auto blend and Taco equipment can drive meaningful pull through sand system revenue when deployed with customers who may not be currently using our sand system, we believe that adding additional kit to current customers and the benefits of the tocqueville in auto blend combined with sand equipment for new customers will deliver increases in reliability.
Direct cost savings increased speed and superior safety to our customers.
As we look to the second quarter oil and natural gas prices have been volatile recently, but remain well above levels that continue to incentivize operators to bring production to market. We expect growth in completions activity combined with new technology deployments to drive incremental work with both current and new operators as a result, we expect soliris as system activity in the second quarter of 2020.
Two to be up approximately 10% to 15% sequentially.
With a strong start to 2022 under our belt. We're excited for the months ahead as we focus on providing the highest level of customer service to drive consistent execution meeting our customers' anticipated growth pans and continued investment in building and deploying our new technologies to grow our revenue and margin opportunities, we expect our growing offering to drive incremental mark.
Opportunities in competitive shareholder returns and look forward to sharing our progress in the quarters ahead.
Given the excitement around the growth we are seeing so far in 2022 I'd like to extend an invitation to our customers and partners for our second technology Open House in late May at the Petroleum Museum in Midland, We plan to showcase our suite of equipment, including auto blend and our topical solution and look forward to demonstrating the benefits of our full offering runnings. So.
Accumulated operations interacting with all of you.
Spots from last year's event was overwhelmingly positive and we look forward to seeing everyone. Again. This year. Please reach out to us if you're interested in attending.
We'd also like to take a moment to welcome Laurie Argo, who joined our board of directors in the first quarter. When it comes to US with over 25 years of experience and leadership in the energy industry. We look forward to the valuable insights who bring to soliris as we continue to grow and develop innovative solutions that drive value for our customers and shareholders.
With that I'll turn it over to Kyle for a detailed review of our financial results and guidance.
Thanks, Bill and good morning, everyone I'll begin by recapping, our first quarter results, we generated approximately $57 million in revenue and adjusted EBITDA of about $16 million. We averaged 75 fully utilized systems, which represents a 19% sequential increase from the fourth quarter. This growth exceeded our initial expectations.
Due to stronger than expected commodity prices incremental growth in our customer base and increased demand for nine and 12 pack configurations of our equipment.
Our gross profit margin per fully utilized system was up 21% sequentially in the first quarter.
Drawing incremental margin increase was driven by a combination of improved last mile profitability increased pricing fixed cost absorption due to activity growth and contribution from our new technologies.
Operating cash flow was approximately $6 million during the quarter working capital built by approximately $10 million to support activity growth and accelerated trucking payments associated with our integrated last mile services offering.
After total net capital expenditures of approximately $11 $5 million free cash flow was negative $5 million in the quarter.
We returned a total of $5 million to shareholders in the first quarter and dividends, which is flat from the prior quarter since initiating our dividend in 2018, we have returned approximately $97 million in cash to shareholders in the form of dividends and share repurchases.
We ended the quarter with approximately $25 million in cash and $50 million available under our Undrawn credit facility for a total of $75 million in liquidity during the first quarter, we signed an extension of our credit agreement of which the terms remain essentially the same as our previous agreement. This facility will run for a term of three years.
Turning to our second quarter outlook, we expect the number of fully utilized systems operating in the second quarter of 2022 to be up approximately 10% to 15% as a reminder, first quarter incremental margins benefited from a price increase for the 2022 year, while we expect continued improvement in system margin throughout the course of the year.
We expect the primary drivers to be contribution from our new technologies continued execution in our last mile logistics offering an improved system cost absorption with anticipated activity graph.
SG&A expense for the first quarter was approximately $5 million inclusive of noncash stock based compensation.
For the second quarter of 2022, we expect SG&A to be approximately $6 million inclusive of the normal quarterly expensing of noncash stock compensation.
We expect the increase to be largely driven by higher head count and administrative expenses to support expected growth.
Turning to our capital outlook for the full year, we continue to expect maintenance capex to be in the $10 million range last quarter, we spoke about our commitment to growth capital of between 20 and $30 million for the first half of 2022 driven by our investments in our top fill in auto blend technology give.
Given the success, we're seeing with our initial technology deployments, we anticipate committing a similar amount of growth capital in the second half of the year for full year growth capital expenditures expected between 40 and $60 million.
We expect capital expenditures to be more heavily weighted to the second and third quarters.
Our distributable cash flow defined as EBITDA less maintenance capital resulted in a dividend distribution coverage of about three times in the first quarter of 2022 the combination of our outlook for growing profitability and stable maintenance capital expenditures should result in a continued improvement in our dividend coverage on a distributable cash flow basis throughout 'twenty.
'twenty two.
We anticipate cash flow from operations excess cash our balance sheet and has temporarily needed borrowings on our credit facility will be sufficient to fund our working capital and growth needs in 2022.
In summary, we believe the strong results. We've shared today are a testament to the initial success. We are seeing in our new technology investments and continued strong execution across our full offering. We believe these developments will drive revenue and earnings growth for the company on a per Frac crew equivalent basis. We are excited about the housing backdrop of tightening industry fundamentals that is mature.
Realizing for the year and are looking forward to sharing our progress above and beyond that backdrop.
We believe our growing offering is a key component of the industry's push to electrification of oil and gas well sites driving higher standards and automation safety and sustainability. We also believe that Soliris is offering drives lower total cost for operators helps to alleviate many of the supply chain challenges in today's market ultimately driving efficiency in <unk>.
<unk> timelines.
As always we remain committed to capital discipline by focusing on new technology that can grow our earnings per Frac crew, we service driving incremental returns for shareholders, maintaining our dividend and maintaining our strong balance sheet and liquidity position.
With that we'd be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If you were using a speakerphone please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
The first question comes from Ian Macpherson with Piper Sandler.
Please go ahead.
Thanks, Good morning, Thanks for taking my questions.
Bill and Kyle I think we're beginning to see the multiplier effect of your added services from the integrated.
Blender and top fill but I suspect, we're only beginning to see the the tip of the iceberg with regard to the to the.
Multiplied revenue opportunity per per pad. So I was wondering if you could expand on that opportunity and how you see your you know your revenue.
Per spread improving as you get fully ramped and what maybe the cadence could look like in terms of penetrating beyond I think you said you had seven other blenders in Q1 I don't know if those were all fully commercial yet or or en route to that.
Oh, we didn't give a number on the first quarter, but it actually is closer to four in the first quarter. There are okay, but we're wrapping that up and and you know you can imply from the capital forecast on what we're gonna do there'll be a mix of tocqueville units as well as additional blenders and I think.
The point is that we are effectively believed that we were able to grow our Tam per frac fleet up to three times, where it is today on top of additional air tracking additional customers that may find the top fill deliberate and much more attractive solution for them versus you.
The pneumatic trucks in certain markets and certain customer base. So we do see that that is thank you you hit it has a multiplier effect, but were really putting more capital per frac crew I'm using our new designs that on and that is all.
Actual products to go out there and deliver we believe both value to the customer and in value and return on capital I think the only thing I would add is you know this is several years in the works and it's sort of tightening up very well with the industry activity, increasing the tightness, we're seeing in trucking the tightness, we're seeing in sand.
The only thing I'd add to it as the last mile value add offering that we're putting together is what will lead to more accounts for a number of years that is.
That has increased and the new technologies that we're.
We're using with the top bill is helping to drive adoption there as well so I think they're kind of all.
Coalescing at the same time, which is really exciting and really like your words.
You use a multiplier I think that's the right way to think about.
Good good.
Good. Thank you both and then.
I'm curious, how what you're watching in terms of governing your rate of capex towards these these opportunities going forward I know you want to see.
That multiple prove up but historically you've been much more of a capital light business now you have a tremendous gross capex opportunity, but I wanted to.
Get your thoughts on how you're.
What you're watching in order to you know rate your your capex growth going forward beyond the first half.
It's obviously a balance with the tightness in supply chain in terms of procuring.
Components as well as securing labor to build the equipment, but what we're looking for is consistent use by customers. Our backlog. If you will are we have been developing a backlog for the top dozen lenders for quite some time and we're managing our manufacturing cadence in line with that to date, we have not signed any.
Contracts, but that is certainly a part of our strategy to underwrite this capital.
And I think I think we haven't been a capital light business I think we have got a new capital light business over the last couple of years. After we spent considerable capital building out the initial sand fleet and so where we're able to take advantage of this like a true infrastructure business, where we're putting capital in the ground and using it on a rental basis with.
Relatively high margins and return on that capital, but we are investing in steel and investing into equipment that we think is extremely long lives and when we look at them. The top fill as an example, we can use that in our last mile business. So we are a sort of a baseload of demand there and we're seeing obviously the frac market.
It's very tight potential reactivation, certainly new fleets being built as far as the electric elements are concerned and so that becomes a natural backlog for us as well on the lender.
Yeah.
Good stuff. Thanks for the clarification, there gentlemen, and congrats on the progress. Thank you. Thank you.
Thanks Ian.
The next question comes from Don Crist with Johnson Rice. Please go ahead.
Good morning, gentlemen, how are you all this morning.
Excellent. Thanks.
Can you just tell me, how many and I know youre, making access margin on logistics or providing logistics to a to.
So the pads can you remind us how many.
Of your fully deployed systems Youre, providing logistics on Tonight.
Yeah, you know it ebbs and flows by the day.
Hey, it's anywhere from 10% to 15% of our activity on average.
Okay.
And just as a reminder, can you tell us can you remind us how much capex is for a top health system and electric blender and kind of what the mix would be assuming that you spend you know $40 million on growth Capex for those two systems. This year like what the numbers might shake out to be.
On how many lenders you made up.
Versus.
Those systems.
It doesn't have like I said the law the blenders had the longest lead items until we've procured at you know capacity for this year, but some of the items are as long as six months away. So if we're not putting it into Q&A next month or so or next two months I guess.
There wont be additional capacity there for the remainder of the year. The top sales are a little less constrained as far as that goes but I think if we look at the balance of the capital. This year the top fill it probably has a little bit heavier weighting towards that and some of that is driven again by the.
Adoption cycle that we referred to in the prepared remarks, the top sell a solution is something that is at this point in the industry very well accepted as far as sand delivery.
Okay and just one final one for me I know you know given the sand issues over the first quarter that kind of let a little bit into the second quarter.
More nine packs and 12 packs were going out do you have a kind of a mix almost 75 deployed systems. How many were you know.
Six nine or 12 systems.
It was definitely a meaningful in the first quarter and it continues today.
So we haven't really gotten into the details of it I don't think it's it's.
I think that's going to go away.
We're continuing to see tightness despite some.
Some of the commentary we're hearing in the industry and I mean, the way we kind of think about the tightness is.
As opposed to going to one sand mine people are using two three or four other single job and that sort of volatility is way. The buffer is really awful yeah. No I think you're looking at it from a rate perspective of sand going downhole and to the extent that you're simultaneously. We're running you know tend to tend to plus 10 to 15 million pounds a day.
Day, having a buffer of two sets of silos of about 5 million pounds available stores right there at the well.
Days supply of hours of supply basis is sort of consistent with historical practices around inventory management.
Okay.
Okay I appreciate the color I'll turn it back.
Thanks.
[laughter].
Again, if you have a question. Please press Star then one.
The next question comes from Steven.
And Darryl with Stifel. Please go ahead.
Thank you and good morning, everybody.
Hum.
Things for me one was pretty simple when you when you talk about the 75 deployed that that.
One would be six nine or 12 packs it youre not doing sort of a six pack equivalent on that.
It is more of an equivalent metric so a nine pack and a 12 pack is referred to as two systems.
Okay. Okay.
Thanks for that clarification.
My main question was when I, when we think about what we're hearing out there as far as.
At least where I think this is true that more of the sourcing of sand is going back towards the pressure pumper is versus the M. P self sourcing.
Does that impact you at all and if it does is it a plus or minus.
I think one thing we've noticed.
Notice that we're all seeing is the consolidation in the pressure pumping space has changed the dynamics somewhat so when we look at our customer base. It has grown I would say as far as the pressure pumping mix.
I think that's really driven by the fact that this consolidation and yes, I think through consolidation. They are looking for a re bundling opportunities and being much larger buyers of the consumables than any of the standalone e&ps. When we look at sort of the top four or five pressure pumper.
The magnitude of their market share today was not there three or four years ago. It was far more fragmented now we still have a lot of small frac companies, but.
That consolidation has had an impact I think on re bundling efforts.
But there's still a healthy mix of operators going out and doing price checks and securing their own supply as well.
Great. Thank you for the color.
Thank you.
The next question comes from Sean Mitchell with Daniel Energy Partners. Please go ahead.
Good morning, guys. Thanks for taking my question, a great quarter and really tuned for me number one.
Can you give us any color around the mix of the on the increase you went you want you know had a nice jump in systems. During the quarter is the mix more private or public related number one and then number two just you are going to be adding people.
And more it sounds like top health systems, and you have an SG&A number that's going higher so you're gonna be adding labor how tied is the labor market for you today and then just you mentioned a little bit on lead time for I believe the blender being six months, what's the lead time to get a top health system.
I'll take the first part of it Shawn is as far as a mix yeah, I'd say, it's twofold, we referred on the call that we are working for larger group of operators and I would say the preponderance of that increase is probably in the private side, but that being said there are a large publics that we have not worked for historically.
That are very interested.
Interested in are using the top dose. So I think we will see growth in both sides.
But two different dynamics driving this.
So with respect to labor, yes, it's a challenge across the board I mean, I think we have upped our recruiting efforts and end up our tactics on that end and are finding good talent. It takes a little bit harder to find it maybe that it did a few years ago, but I think there we have an attractive place to work and I think we pride ourselves in the culture and you know it's it's that is.
One of the key drivers for us to continue the success. Obviously is as you know a couple of years ago, We beefed up our R&D teams specifically now we're seeing the results of that in and I think now, adding the additional field level oversight and management as we have a more complex offering in the field is a key draw.
River and we spend a lot of time training our folks on the various equipment and ensuring that we can provide them reliability to the customers and that's what we want to make sure we're known for which is that delivery reliability in the field.
Got it Okay, and then Carl maybe just lead time on.
It's not fill system versus you said six months I think for the Blender what do you think it is.
The order one today, how long does it take to get a topical system.
Yeah, I mean, we've got a cube built up and and so we're kind of filling that out at this point.
We're building out the supply chain. So it's kind of a moving target in terms of the capacity I'll go back to the sand systems.
And our internal capacity, we were building roughly four a month back in 18 sort of timeframe.
At this point or.
Internal capacities excellent top builds and we're starting to work with third parties to help accelerate that so I at citizens that moving target I'm not sure it's really.
Number of note today, but I think we're going to look to opportunities to continue to compress that piece as we build more of them.
Got it alright.
Alright, great quarter, guys. Thanks, nice job thanks, Sean.
Yeah.
We have reached the end of the question and answer session.
Now I'd like to turn the call back over to bills aren't learn for any final closing remarks.
Thank you drew I'd like to conclude today by thanking all of our employees customers and stakeholders for helping us deliver a very strong start to 2022, our people technology and services continue to both deepen our relationships with our long standing customers and driving new partnerships. We're proud of our team and our results and look forward to sharing updates on our growth initiatives.
As the year unfolds I hope to see you all in Midland at the shows thank you and stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Okay.
Okay.
Okay.
Yeah.
Okay.
[music].