Q2 2022 Nextier Oilfield Solutions Inc Earnings Call
A brief question and answer session will follow the formal presentation.
For opening remarks, and introductions I would like to turn the conference over to Mike Sabella, Vice President of Investor Relations for next year. Please go ahead Sir.
Thank you operator, good morning, and welcome to next tier oilfield solutions earnings conference call to discuss our second quarter 2022 results with me today are Robert Drummond, President and Chief Executive Officer, Kenny piece, you Chief Financial Officer, and Kevin Mcdonald, Chief administrative officer and General Counsel.
Before we get started I would like to direct your attention to the forward looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's website.
Our call. This morning includes statements that speak to the company's expectations outlook or predictions of the future which are considered forward looking statements. These forward looking statements are subject to risks and uncertainties many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by these statements.
We undertake no obligation to revise or update publicly any forward looking statements, except as may be required under applicable securities laws.
We refer you to next year's disclosures regarding risk factors and forward looking statements in our annual report on Form 10-K subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission filings. Additionally, our comments today also include non-GAAP financial measures additional details and a reconciliation to the most.
Directly comparable GAAP financial measures are included in our earnings release for the second quarter of 2022, which is posted on our website with that I will turn the call over to Robert Drummond, Chief Executive Officer of next year.
Thank you, Mike and thanks to everyone for joining the call.
Macro conditions for U S. Frac completion services strengthened considerably since our last earnings call.
We believe the Frac market was already nearly sold out at the start of Q2.
Since then Frac demand has taken another move higher.
It is clear to us that record high industry wide utilization is restricting our ability to keep up with completion demand.
Simply put we believe that the availability of Frac fleets is one of the main bottlenecks impeding U S land oil and natural gas production growth for at least the next 18 months, which is a very bullish factor for extending the length of this cycle compared to previous ones.
We believe there's a significant pent up demand for our services due to the near sold out nature of hydraulic fracturing services.
Capital constraints.
With supply chain inefficiencies are inhibiting our industry's ability to increase the supply of frac fleets to match demand.
In addition, significant underinvestment over the last several years, coupled with increased operational intensity that is driving wear and tear on this equipment is further limiting our ability to respond to demand.
We believe that it could take the industry several years to correct. This imbalance likely extending the current favorable pricing environment beyond 2023.
While we remain optimistic on Frac fundamentals, we cannot ignore the emerging concerns in the economy with high inflation and growing top of global recession.
As a result of our structural production deficit brought on by years of global under investment.
Energy prices are a core driver of the current inflationary environment.
These structural issues will need to be addressed the forward commodity price inflation can ultimately.
We brought back under control.
We believe U S shale is well positioned to help fill this global supply deficit signaling a continuation of strong well completion demand over the medium term.
We firmly believe that affordable energy is critical to a fair and prosperous society and she'll be at top consideration when contemplating global social goals.
So there are no quick fixes to the current structural supply deficit.
And more reliable energy policy is badly needed to help society avoid potential worst case scenarios.
Importantly, we believe U S shale must play a role in solving the world's energy needs.
And ensuring future energy security.
So now to our second quarter results.
For next year, our second quarter improved significantly from Q1.
And with a strong June we exceeded both our initial guidance and our operational update for mid June .
It was a record quarter for next year, both in adjusted EBITDA and adjusted net income per share.
Adjusted net income of $99 million was a record for our company as was adjusted net income per diluted share of 39 cents.
Our sequential revenue was up 33% and for the fifth consecutive quarter. We grew our revenue over 25% significantly outpacing overall industry frac activity.
Our revenue was up 189% compared to the same quarter last year.
We did not deploy any additional horsepower in Q2, and we don't expect to deploy any additional horsepower for the remainder of 2022, while continuing to deliver growth.
As mentioned total revenue grew 33% sequentially to $843 million.
Revenue growth outpaced our initial expectations with both gross and net pricing accelerating faster than we previously anticipated.
We also saw efficiency gains relative to Q1, as a strong demand environment and a loaded frac calendar over the prior quarter seasonal and transitory disruptions.
Additionally, we continued to gain market share with our well site integration strategy, adding value for next year and our customers.
We expect revenue to grow 8% to 10% sequentially in Q3, despite not adding additional horsepower.
We doubled our adjusted EBITDA from $83 million in Q1 to $166 million in Q2.
An increasing from $5 million in the same quarter last year.
We achieved strong adjusted EBITDA incrementals of 40% on our top line growth.
With our adjusted EBITDA margin, increasing over 650 basis points compared to Q1.
We see further margin expansion in Q3.
And for the second consecutive quarter, we achieved positive free cash flow.
Our free cash flow generation grew considerably in Q2, and we expect free cash flow generation will improve again in the second half.
The recovery for the Frac industry is a function of the strengthening market backdrop.
Our ability to thrive in this strong market as a function of our people and next year has one of the best teams in the business.
The resilience of our people does not go unnoticed.
Many of whom work in high intensity environments and extreme weather conditions.
Next year's top priority is keeping our employees safe.
In Q2, we forfeited some potential efficiency upside to ensure our employees stay safe in the triple digits summer heat.
We will continue to tell our employees to adapt their pace to prioritize their safety in line with these conditions.
This is just the right decision for next year and our customers.
Net pricing recovery accelerated in Q2.
<unk> a strong demand in a near sold out Frac market.
The full impact of the most recent round of pricing negotiations won't be seen in our reported results until the beginning of 2023.
Even then net pricing will still averaged over 15% below pre COVID-19 levels.
Meanwhile, the quality of our technology deployed has improved dramatically since pre COVID-19.
We see a continued path to recapture all COVID-19 related pricing concessions.
Which combined with our latest digitally enhanced lower cost operating model will result in improved profitability and margins relative to prior cycles.
As we clearly laid out in our June update we.
We believe profitability and margins this cycle are set to outperform previous cycles.
Our counter cyclical investments to increase well site integration and convert more than half of our fleet to utilize natural gas or.
We're significantly enhancing our returns.
In short, we see improved psychodynamics compared to prior cycles.
And we are very confident significant upside remains even from expected Q3 levels.
At our March Investor Day, we highlighted that our integrated service platform could add $7 million per year of value on a fully integrated completions well site.
Our integrated services platform continues to gain traction across our frac footprint.
And we still have significant runway to expand our market share in the services.
Over the past several years, we have divested noncore assets and businesses that are not suited for advancing our integration strategy and used the proceeds to accelerate our well site integration capability and the most capital efficient manner.
Bidding this thing.
We are divesting our coiled tubing assets in an all cash transaction valued at approximately $22 million.
While we see value in participating in the CT tube market.
We see an opportunity for this capital to be repurposed.
Within our wealth side integration platform.
We are pleased with the performance of our core businesses and the divestiture of our core TV assets will not have a material impact on future operating results.
If you remember one year ago, we announced our agreement to acquire Alamo.
And this transaction has been a great success.
Alamo is nearly fully integrated with the next tier team.
The business has operated with minimal interruptions and our teams have learned a tremendous amount from each other.
We're very pleased with the operational and financial performance of these integrated enterprise.
As we hit the one year anniversary.
We are also very happy to say that the retention of Alamos customer base has been a success.
With respect to Alamo join in next year.
The whole has proven to be truly greater than the sum of the parts.
This transaction accelerated our winning strategy and aligned with our approach of allocating capital to high return investments.
In the case of Alamo, we used our strong and liquid balance sheet to convert more of the combined fleet to be powered by natural gas and an extremely capital efficient manner.
This transaction also made us the number one pressure pumper in the Permian basin by active fleet count a title that we still carry today.
And next year, we have a history of adding value through opportunistic M&A transactions.
Given the state of the oilfield services market today.
With a strong multiyear outlook and limited capital dollars. We believe we are positioned well as an attractive counterparty for potential future transactions.
Our strong and liquid balance sheet is a huge strength for us, especially at this point in the cycle.
We are excited by the industry dynamics entering Q3 with strong demand from a healthy and profitable customer base and record half Frac fleet utilization.
Seasonally the third quarter is typically the strongest quarter of the year and we expect this historical trend to continue this year.
Our fleet today is sold out and we do not have plans to deploy any additional horsepower until we activate our first electric Frac fleet early in 2023.
Demand and pricing momentum remained strong and we are already having conversations with our customers on their 2023 plans much.
<unk> earlier than the normal cadence.
For next year.
We're making final plans today to optimize our frac calendar for 2023.
By aligning with the most efficient customers who value integration.
The commercial landscape also provides opportunities for reoccurring discussions on market pricing and ensures inflationary pressures are pass through.
Though still early we are nearly booked for 2023 and are very excited about the outlook.
As announced when providing our operational update in late June our first electric fleet will be deployed early in 'twenty three our view that frac capacity is one of the main bottleneck restricting U S oil and natural gas production growth gives us conviction in this capital commitment.
Nevertheless, even with this conviction.
As well as the attractive return profile, we see for this investment.
This was not a decision we took lightly.
We remain firmly committed to capital discipline, and we fully intend to balanced potential investments in high return projects against our top financial priority for sustainable free cash flow through the cycle.
We continuously in the future for Frac, moving more and more towards natural gas power.
We intend to continue to move our fleet in that direction responsibly over time.
Our leading position in natural gas powered equipment will help us profitably reach this long term goal, while still generating sustainable free cash flow.
Our disciplined approach to investing is already yielding strong benefits, we expect to see accelerating free cash flow in the second half.
Driven by both higher profitability and less impact from working capital headwinds.
We believe we are positioned to generate free cash flow in excess of $225 million in 2022.
And this is an improvement from our late June update as we gain greater visibility in our second half outlook working capital requirements and supply chain inflation.
We also see significant upside to free cash flow again in 2023.
For 2022, we continue to plan to use this free cash flow to bolster our liquidity and reduce net leverage.
Rather quickly to our ultimate capital structure goal of zero net debt, which we believe we can achieve early in 2023.
We will remain flexible with our capital allocation strategy thereafter, prioritizing maintaining a strong and liquid balance sheet affording us significant optionality through the cycle and providing opportunities for continued investment in the highest return projects, including accretive M&A transactions.
<unk>.
The market backdrop for Frac.
Better than it's been in years.
Demand for our services is strong.
And given the capital and supply chain constraints, we see a multiyear up cycle unfolding for U S land well completion services.
Our prior fleet enhancing counter cyclical investments has us well positioned to capitalize on the cycle with expanding returns and strong free cash flow.
I'll now pass the call over to Kenny to discuss second quarter results in more detail.
Thanks Robert.
Quarter revenue totaled $843 million.
Compared with $635 million in the first quarter.
Sequential revenue increased 33% with growth significantly outpacing the market for the fifth consecutive quarter.
Revenue improved in both our completions and well construction and intervention services segments.
Total second quarter, adjusted EBITDA was $166 million.
This adjusted EBITDA result was double the $83 million, we achieved in Q1.
The improvement in the profitability of our core business can be attributed to the following.
First we saw the impact of strong net pricing improvements with pricing traction, reflecting the tight supply demand dynamics and product.
Second there were fewer seasonal and strategic disruptions in Q2.
Whether in sand related downtime in Q1 gave way to a strong and efficient market.
Meanwhile, Q2 benefited from our strategic repositioning of our fleet in Q1.
And finally, we continue to have success integrating more services around frac fleets.
We rolled out the second phase of our power solutions growth during Q2.
Our last mile Logistics solutions continues to gain traction in our wireline franchise secured several new customers.
In our completion services segment second quarter revenue totaled $801 million compared.
Compared to $603 million in the first quarter.
Sequential increase of approximately 33%.
Completion services segment, adjusted gross profit totaled $185 million.
Compared to $106 million in the first quarter.
In our well construction and intervention services segment second quarter revenue totaled $42 million.
An increase of 29%.
Compared to $32 million in the first quarter.
Adjusted gross profit totaled $8 million more than double Q1.
Second quarter, selling general and administrative expense totaled $36 million, which was consistent with the first quarter.
Excluding management net adjustments of $9 million adjusted SG&A expense totaled $27 million roughly flat with the prior quarter and down over 100 basis points as a percentage of revenue.
Yeah.
EBITDA for the second quarter was $136 million.
When excluding management net adjustments of $30 million adjusted EBITDA for the second quarter was $166 million.
Management adjustments include $8 million in Stockholm with.
With other items totaling a net of $23 million, which.
Which are nonrecurring in nature.
Approximately $22 million of total net management adjustments or casually.
Included in the management adjustments as of $24 million accrual related to the earn out associated with last year's acquisition of Alamo.
The earn out is proof that the transaction was a success.
Now on the balance sheet.
We exited the second quarter with $158 million in cash.
Up from $100 million of the end of the first quarter.
We exited the second quarter with total available liquidity of approximately $492 million.
An improvement from $349 million in the prior quarter.
Our liquidity was comprised of cash of $158 million.
At $334 million available on our asset based credit facility.
It remains undrawn.
Total debt at the end of the second quarter was 368 million.
Note that discounts and deferred financing costs and excluding finance lease obligations we.
We have no near term debt maturities.
Net debt at the end of the second quarter was approximately $210 million a decrease from $272 million.
At the end of the first quarter.
Cash flow from operating activities was $118 million for the quarter were improve profitability was partially offset by the need to fund working capital.
We aggressively managed our working capital during the quarter and saw improvement in customer collections. However, given our strong topline growth working capital still use of cash.
Our cash used in investing activities was $50 million in the second quarter.
Capex totaled $57 million, mostly driven by maintenance capex.
Tier four dual fuel upgrades and investments in our rapidly expanding power solutions business.
This was partially offset by $6 million in proceeds from the sale of assets.
This resulted in an overall positive free cash flow of $67 million for the second quarter.
Now on the outlook, we are pleased with the momentum that we're carrying into the quarter.
Seasonally Q3 is typically the most profitable quarter of the year.
And we expect that will be the case again this year.
With additional net pricing coming through.
We expect to once again improve our profitability on a sequential basis.
It is important to mention that we are seeing inflationary pressures on both labor and equipment.
Which will partially offset these pricing gains.
With our continued push on well site integration and our most recent round of pricing agreements. We expect total revenue will increase by approximately 8% to 10% sequentially.
We also expect a further increase in profitability and continued margin expansion.
Our well construction and intervention services segment will see the impact from the sale of our culture and business during Q3 <unk>.
Nevertheless on the strength of our improving cement business, we still expect overall segment financial performance to be on par or slightly improved from the prior quarter.
Overall capital expenditures for the first half of 2022 totaled $87 million slightly below our guidance for $90 million to $100 million.
This was driven primarily by supply chain delays and the conclusion of our dual fuel conversion program pushed into Q3.
I want to reiterate our guide to free cash flow of more than $225 million for 2022.
We are operating the business within a framework that provides a high conversion of adjusted EBITDA into free cash flow.
We anticipate the operations has increased with record operational performance. Meanwhile, supply chain delays are still significant especially on major components.
Working within our strong free cash flow conversion profile, we plan to bolster our maintenance spend in the second half of 2022.
To ensure that we sustain our high performance into 2023.
We plan to spend $100 million of Capex in the second half of 2022.
Which includes increased maintenance capex, the carryover to complete the tier four conversion program.
And continued funding for power solutions.
This planned spend for the full years and still in a tight range with 2021 demonstrating.
Demonstrating our commitment to capital discipline and generating free cash flow early in the cycle.
Our free cash flow generation accelerated in Q2.
And we expect that second half free cash flow will be more than double of.
For the first half.
We anticipate working capital headwinds will slow in Q3.
Although given the trajectory of the top line it will likely remain a drag on cash.
Balancing free cash flow, while responsibly move and are pleased to be further powered by natural gas remains a priority through the coming cycle.
We see significant upside remaining to our financial results, even without adding incremental capacity.
Given by additional pricing power.
Further integration and through our constant drive to improve efficiency.
We will continue to be diligent with our capital deployment decisions going forward as we balance our goals both remain competitive and to maximize returns.
Ill now turn it back to Robert for closing remarks.
Thanks Kenny.
Now I want to close with a few key takeaways.
First we have high conviction and our strong outlook for 2023, even given the current global economic uncertainty.
Our customer base is healthy and generating very strong returns and we believe there is considerable room for commodity prices to fall before customers returned with declined to a level that would impact the demand for our services here in U S land.
Second we are still working to capture COVID-19 related pricing concessions.
Given our sizable base of operations and the impact of our next hub has had on lowering operating cost even.
Even small incremental gains in net pricing will have a big impact on our profitability.
We see considerable upside to the earnings power of our company even beyond.
Q3 and into 2023.
Third we believe the macro supports a multi year high return cycle.
Capital constraint and supply chain inefficiencies are restricting new capacity additions across all of the U S. Frac market and we believe this means the current favorable pricing environment will continue through 2023 at least.
And finally.
Our prior fleet enhancing counter cyclical investment strategy is starting to benefit our financial results.
And we believe our free cash flow profile differentiates us from our peer group.
We did not sit idle during COVID-19, we worked tirelessly to prepare the company for the recovery we knew would eventually unfold.
Last mile Logistics has been one area, we have seen great success.
And we see further high return opportunities to grow our market share in this service line.
Our strong free cash flow early in the cycle is a function of these opportunistic high return investments and we expect to lead in 2023.
With that wed now like to open the lines for Q&A.
Thank you at this time, we will begin the question and answer session.
Last question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Stephen <unk> with Stifel.
Thanks, Good morning, gentlemen.
Good morning, David.
So you've you've talked a bit about obviously the profitability improvements that you have seen and expect to see.
You referenced the $7 million of uplift potentially from the integrated services offering can you talk about.
The impact that's had so far maybe how much of that you've realized so far and how much of the rest of the improvement kind of been pricing utilization driven and as we sort of start to think about potential for 'twenty three and beyond.
Yes.
Significant portion of what we've experienced so far has been related to pricing and efficiency.
In <unk> prepared comments he mentioned the growth that we're experiencing in power solutions, which is a key part of that integration strategy has been.
<unk> expectations as we.
Proceeded through our effort to triple that business size.
During this year I think we're up to like seven of those fleets now and we're headed towards 11 or 12 as we get into the early part of next year. He also mentioned that our wireline customer base is growing and these are all feeding into our integration and last mile logistics is something that that we really.
That we really like the opportunities to continue to grow in and I would say as it has been so far I would say were probably you know the.
The second or third inning.
Of that integration.
Capture going forward I don't expect to ever get to 100% on cross every fleet, we certainly probably would not have the power solutions capabilities for example to do that and in some of our customers prefer still to do.
Not integrate everything.
But the trend is definitely strong upward and as we are allocating our fleets to customers in 2023 their willingness to.
Embrace integration is one of the factors in our in our discussions and decisions.
Great. Thank you and just a follow up on that and my second question linked to that.
You mentioned in their remarks.
Right and quickly.
We're in discussions on 2023 with customers already but you said something about being nearly booked for 'twenty three or am I hearing that right and what kind of pricing discussions or are you seeing as you as you look out to 'twenty three.
Yes, you heard it right.
We are in a position that we could be fully booked in 2003 I would just say the tail end of the of the booking we're still in negotiations with some of the customer base around things like pricing contract terms and in <unk>.
Willingness to accept the integration model, which we think provides the most value for both of us.
So I would just say that that is.
Our unique position to be in at this particular time and I think the whole market is a bit like that.
I think theres going to be a shortage of frac capacity in 23 despite.
All of the efforts anybody wanted to try to make to grow capacity in the market. So I think that that is not unique to us necessarily but our position is very good now and being able to do that and I'd say you asked about pricing.
We are in the process of establishing contractual terms for pricing that will begin in January and then it would have links to.
Opening up.
Opportunities to move market price and cost pass through of inflation. So we feel really good about the way things are coming together and us and our customer partners are negotiating those terms going forward.
Very good thank you.
Thank you.
Thank you next question. Please yes. Thank you and the next question comes from Chase Mulvehill with Bank of America.
Hey, good morning, everybody.
I guess first thing is just obviously, a good quarter here and thinking about the EBITDA per fleet, you did $19 5 million in <unk>, but.
But as we kind of think about it.
<unk> re pricing.
How much of that is actually kind of reflective of leading edge price.
And then how long do you think it will kind of take before leading edge price kind of flows through your EBITDA per fleet.
So look I think that.
You are going to continuously see EBITDA per fleet, increasing as we go into the rest of this year and into next year, we've been signaling and some of that recent publicly stuff. We put out that we see it approaching 30, and I think that the leading edge of that is always going to be the leading edge and is always going to be a <unk>.
<unk> of moving.
Our fleet economics from the worst performing fleets towards.
The top and Thats, an ongoing effort around everything from keeping the schedule full.
Efficiency two two purely pricing.
So I think that the.
Leading edge of the fleet.
There is always going to be the gas power part of it we spent a lot of effort money on getting our fleet to grow our percentage of our fleet that can use natural gas in that direction, but even that part of the fleet is driven by what's going on in the macro driven still by diesel fleets will bring in.
So they they move in concert, it's just that the leading edge natural gas power part of the fleet has got a nice premium to it associated with a corresponding savings to customers can get out of out of using gas versus diesel.
I hope that addressed to chase.
Absolutely.
And the follow up question can.
Can you talk about your <unk> strategy.
Obviously, you don't have any electric fleets today.
I don't think you have any on order.
We've seen a few people order some electric fleets here more recently.
But just kind of talk about equally strategy. If you plan to kind of order any new builds as you look out into 2023 I.
I think you said 18 months lead times was that an electric frac or was that the tier four DGB.
I didn't really say I didn't mean to say anyway 18 months lead time, but I'll just say this I would just say that more of like 12.
But I would say regarding <unk> deployment for us, it's very much a capital allocation question.
And we've been sticking to the playbook around deploying.
Our capital in a manner, which had the best returns and that was first obviously for us, especially doing it early.
When our supply chain was plentiful and prices were low converting tier two tier four tier four to tier four dual fuel.
And we've just about consumed all of that.
Capability, Kenny mentioned that some of that capex to wrap that up will leak into Q3.
But for us after that as we do replacement of our fleet. It will be in the arena of next generation next generation, meaning some some.
Form of consuming natural gas to power it.
<unk> electric has a very good option for that and we have announced publicly that we will be deploying our first electric fleet early in in Q1 like in January and that obviously, because the supply chain, we've already made that order.
And everything is on track at this point at least for for that to be the case.
But if you think about the fleet are trading at about 10% across us and everybody else.
Future investments in replacement for our fleet will be in that category of nexgen and with that.
Need to make some orders alone way, probably too to address that.
So easily for US summarizing early Q1 for the first one.
As we said we don't have any intension is really trying to grow horsepower.
In the short term.
But.
So it maybe extend that answer to the question maybe that's on the horizon is what does that look like for growth.
And we are not really in a mode to try to grow market share and our return cycle, we believe.
But when you think about the fact that the market is probably going to grow about 10% next year and Frac fleet anything that we did the <unk>.
To do in the future would be any category of Nextgen.
Okay Alrighty makes sense alrighty.
Alright, I appreciate it and more Eagle.
Thank you.
Thank you and our next question comes from Derek <unk> with Barclays.
Hey, good morning, guys. So free cash flow is accelerating here this year and next year you talked about your target ratio of leverage of getting down to zero times can you address your capital return program. What you see out next year given the ample free cash flow you are generating could that be in the form of a share buyback or dividend, whether it's fixed.
Special variable.
Color on that would be helpful.
Yeah look I appreciate that question. If you don't mind will kind of walk through our thinking about it I mentioned a minute or two ago, we started early and.
Focusing on free cash flow conversion.
Through the cycle and made a bunch of counter cyclical investments consumed.
<unk> money to pick up on our DGB conversions early on and Thats been paying off very nicely for us at this point.
Also mentioned that we would use capex to replace the attrition of our fleet with Nexgen.
Which.
The return profile by lowering overall maintenance capex.
But our objective before we really try to make any investments around growth, we intend and are on that path to improve our return on capital greater than our cost of capital.
And to drive to zero net debt.
So we're going to that's what we're going to be doing continued continuing to address the balance sheet with the initial phase of this cash flow generation that we're creating.
Have.
A lot of internal projects with very accretive return on investment opportunities power solution has been mentioned.
We got fleet enhancements, where we can invest for example in next generation blenders.
Our very instrumental to efficiency profile of your Frac fleets that have a great return on investment and lower maintenance Capex and then in the arena of last mile logistics getting the sand from the mine to the Frac fleet in the most cost effective manner. When you control that and you have a <unk>.
Next hub operational that we have we can do it better we think than the market from a cost effective standpoint.
So the Bottomline is a lot of.
Projects that have a better return than just kicking out a dividend or buying share shares.
I would just say is that we would compare what we think the value add.
Share repurchases.
These internal opportunities and lastly, I would just say is it.
The cyclical M&A opportunities.
There are there.
At an accretive price.
There are a number of those around our integrated platform.
Not not necessarily purely just in frac horsepower, but in all of the things we've been talking about that allow us to expand the fleet earnings capability of our fleet.
The bottom line at the very bottom consider us to be.
Considering everything.
A lot of Optionality in it and we have not made a declaration about.
Direct return to shareholders via buyback or dividend yet Ali.
Although with the earnings profile that we got free cash flow come in in 'twenty.
2023, we're going to have to get to that point pretty quick.
Got it I appreciate the color that makes sense you hit you hit it on at the end about the M&A I wanted to piggyback off of that.
So it sounds like it wont be strict could not be strictly frac pumps something around your well site integration, but can you maybe expand on that as well and if it were to be frac pump would it be solely next generation pumps, whether that's DGB electric or even direct drive turbine or other areas of the world stay integration power solutions business specific you can give some more thoughts around.
The M&A just given that you mentioned it a few times.
Well, we have a good track record with M&A I think and in the ability of the team is very good at integrating.
Our net additions so we are looking.
And a lot of people know that we have the balance sheet and that track record. So we get to see a lot of things.
I would just say that any.
Growth that we were to acquire in that manner.
<unk>.
Preferable to organic growth, if it's organic growth, adding capacity to the overall market, we like to supply and demand dynamics are in the market today, and we don't want to be interfering with that progress.
And the ability to perhaps do acquisitions that move you up in nextgen curve or dynamics that improve your free cash flow.
<unk>.
It's something that we would be.
And to look at and are looking at I would say so I think that's a great question.
The last part of it being not.
Horsepower opportunities there are and they are numerous and we have to become.
Confident more and more confident in the customers.
Acceptance and appreciation of the integrated model that we deploy in our ability to control our own destiny can be enhanced through some of these inorganic opportunities that exist.
Understood I appreciate the color I'll turn it back.
Great questions. Thanks.
Thank you and the next question comes from Andrew <unk> with J P. Morgan.
Okay. Thank you good morning.
Good morning.
Robert You had mentioned how for next year in 2023. The plan is to replace equipment loss to attrition with next generation equipment. I. Just wanted to clarify does that does that mean exclusively E frac equipment or could that also mean dual fuel conversions and if it's if it's a mix of those kind of how is the decision.
How are you approaching the decision between which equipment you'd be prioritizing and then also.
You need to play some of these orders well in advance to account for the supply chain delays and taken delivery.
Well look working backwards I'd say, yes, we do have to take into consideration the supply chain.
Very much so and.
And that's one of the reasons I don't think that the overall market can grow that much.
And 'twenty three is because unless the orders already made.
Youre not going to impact until you get in the back half of next year.
And I'd also say that we have done a lot of work.
On forecasting what that looks like and we don't think that there is about <unk>.
Maybe 10%, 910% worth of growth that can whole market could deploy S. Newbuild of all kind of the next generation as well as.
The redeployment of.
Tier two type diesel equipment, that's been talked about recently by some of the competitors I would just say is that in that environment.
Even if you are.
For us if we were going to keep our market share flat that we have been saying.
Somewhere in that.
12% to 14% range that.
That would mean a couple of fleet adds for US two to three as you've looked into next year. So all we've done so far is put ourselves in a position for one electric fleet that we've announced for the <unk>.
First part of the year.
But I would just say is that we our options around.
What type of Nextgen.
We want to keep open and <unk>.
In tune with our customer partners.
But I would say.
Pending <unk>.
Solid solution for the power.
Around an electric fleet.
That is very interesting and very open in a very good path for the future and that's the reason we took our first step.
In that direction.
Hum.
Wish-wash here, a little bit and the point I'm trying to make is optionality wise.
We keep on both of those avenues open.
But.
You would you should expect us to be.
To deploy and more a fleet as replacements going into the future at this point.
And Andrew I'll, just add on your conversions question. So we do not plan to convert any of our tier two to tier four tier two DGB, we've been very efficient with our conversions.
Both organically and Inorganically with our purchase of Alamos.
And being able to.
Do those efficiently in terms of capital deployment.
Instead of spending $18 million to $22 million on a tier two to tier four conversion, we'd rather put that capital to work and what Robert said. This next Gen, which is 100 out of 100% gas natural gas powered equipment. So that's our strategy as it relates to the conversion program. We are nearly complete.
Understood. Thank you that's very helpful.
And just looking at kind of other elements of Capex for next year, you had mentioned that maintenance spending has to go up a little bit in the back half of 'twenty. Two I was wondering what kind of what's your latest look on maintenance capex per fleet trends and what that might be in 'twenty. Three and then just any additional growth capex priorities for.
Next year, such as in power solutions or some of the other integrated services.
Yeah look I will take this year's Capex Robert can talk next year I think when you look at this year's Capex you need to look at it in the lens of versus prior year and also through the lens of our of our free cash flow conversion and that's how we've been running the business to make sure that we can achieve our internal hurdles of high free cash flow conversion.
But when you look at age two we upped our forecast a bit because we have we have our crews had record performance and with the supply chain delays.
We need to invest and sustain that high level of intensity. We've also seen as I mentioned supply chain delays and so that means that we need to show up our maintenance stock levels.
And each one we were able to achieve about $2 5 million of Capex per fleet on an annualized basis for our fleets deployed.
I'd say in H, two it's probably going to be three to three five for those reasons I just mentioned.
And I'll, let Robert take take 2023, well look I would just emphasize our COO, Matt would want me to be clear about the fact that the intensity that we're running the fleet these days or not.
Does not have any historical precedents where run in the fleets on average more hours per month. Then there has been done ever I guess I think it's not only us but the rest of the market. During this very much similar.
So the consumption of of maintenance Capex and the keeping the fleet up to speed is very very important and even making technology tweaks like we mentioned around a blenders to be able to make an investment in those to make them a more robust is something that also drives a little bit of maintenance capex.
I think the number that king.
We got the intensity pushing maintenance capex up a little bit and then we've got the digital operation operating profile driving it down so I think the range kidney gave between three and three five and the fact that these new investments and if any new investments made in the leading edge of the fleet is this new earn it.
Requires lesser minus maintenance Capex. So I think those trends are what we're looking at and.
I think.
Our colleagues call it three and a half going into next year for the year.
And then 2023 priorities as you asked Andrew Power solutions has been a big driver of growth for US we're going to continue to fund that business.
Robert mentioned, keeping our market share on electric fleet deployments, we have one committed but what I would mention here is that there was a significant amount of capital that we deployed this year for our tier four dual fuel conversions.
Won't be next year. So those are kind of are there was a kind of our growth priorities next year.
Great. Thank you very much I'll turn it back.
Appreciate the question.
Thank you and excellent yes. Thank you and the next question comes from John Daniel Daniel Energy Partners.
Gotcha great.
Great results continuing good to see.
I want to come back to lead times for just a second and see if I can get hopefully a little bit more specificity, but.
Let's assume you guys ordered electric fleets 2345 et cetera.
What would be the expected delivery time of that.
Roughly.
The calculation when you order condoning anything.
I think ordered I mean, declaring anything less than a year would probably be.
Optimistic I would say if you listen into the market unless other people want to say most people's predictions historically lately have been drifting to the right around the supply chain.
Got it that's the answer.
Fair enough Im just trying to make sure I understood.
Robert You mentioned the positive discussions with customers for next year.
And.
I am curious are they giving you specific.
Guidance like Okay, I'm running four crews and I need to go to five I'm just trying to understand because you alluded a 10% increase in activity next year.
Just off of your specific customer discussion just any color around the rate of change in activity next year.
Yes, John we've been spending a lot of time planning for next year already.
Starting out by solving what is the.
Production call on U S land.
Looking at our global macro.
I guess kind of working on that but book to the effort to try to translate how many frac fleets are needed in U S land to address that call and all of our cases indicate that theres not going to really be enough capacity to address it.
And then you look at the customers that are still adding drilling rig count to their portfolio. They are creating an inventory. So some of that discussion is around addressing.
Potential growth and remember I mean, the customers are making individual decisions none of them are deciding for the whole for the whole macro so depends on who you're working with.
And there is potential for just about anything that happened with a particular customer so for us. The smarter. We are about partnering up the better off we're going to be and I would just say that there is a mix some customers to change providers.
Turn of the year and that's when most of that kind of change would occur. So I think people are shopping and people are also addressing.
Growth needs for their particular portfolio of assets.
Fair enough okay.
Two more quick ones, if I, if I may the cement market just there is some chatter this quarter about our.
This month rather about.
<unk> issues getting cement can you just give us your thoughts on what <unk> seen in that side of the market.
I'll be honest with you our flag has been raised to have concern about it.
And I've been asking this more than I, usually do and I would say is that our particular supply chain has done a great job of having multiple sources. So we have not lost a day our job related to not having cement, although I know there have been cases, where that's been the case, where we would get a call. So he could suffer a little while.
This particular opportunity are there, but I would say is tight.
The expectation.
In the near term, probably driven by macroeconomic outside of oilfield opportunities is probably going to get better.
Okay in the near term or as availability and just one more data point.
So if you look at our Q2 results in <unk> that improvement doubling EBITDA, our GPS I'd say was mainly the result of our cementing business.
A really good job in Q2, and we see continued growth in Q3. So that is a solid foundation of our business. We have there that we're growing.
And then the last one just sort of technical one the earn out sucked it with the <unk> when does that.
When does that end.
So the earn out is.
This year. So we had the three earn out period six months in.
In 'twenty, one and then two more so at HIMSS. This year no further one of 'twenty three.
Okay. Thanks for your time guys.
Thank you thanks for the questions.
Thank you ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Mr. Robert Drummond for closing remarks.
Thank you look.
To wrap up I, just want to say that a little bit of concern out there in the marketplace around recession, but my view, our view is and any any macro case.
We need more oil and gas production.
U S land and I just want to reiterate our optimism in the current cycle and we believe we have the right team and strategy in place. We look forward to speaking with you again next quarter. Thank you very much.
Fighting in today's call.
Thank you. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.