Q2 2022 ProFrac Holding Corp Earnings Call
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Excuse me one second welcomed to the pro Frac Pro Frac holding Corp, second quarter earnings Conference call My apologies at.
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It is my pleasure to introduce your host direct black. Thank you you may begin.
Thank you operator, and good morning, everyone. We appreciate you joining us for Pru Frac holding Corp's conference call and webcast to review second quarter 2022 results with me today are Matt <unk> Executive Chairman <unk>, Chief Executive Officer, Lance Turner, Chief Financial Officer.
Employ Randall Chief operating officer.
Following my remarks management will provide a high level commentary on the company the financial details of the second quarter and outlook before opening the call up for your questions.
There will be a replay of today's call it will be available by webcast on the company.
At Www gas Holdings Corp, Dot com as well as the telephonic recording available until August 19th 2022.
More information on how to access. These replay features is included in the company's earnings press release. Please note that the information on this call speaks only as of today August 12, 2022, and therefore, you're at any time sensitive information.
To be accurate as of the time of any replay listening or transcript reading.
Comments on this call may contain forward looking statements within the meaning of the United States Federal Securities laws, including <unk>.
Management's expectations of future financial and business performance.
Looking statements because of the current <unk> management and are not guarantees of performance various risks and uncertainties and contingencies could cause actual results performance or achievements to differ materially from those expressed in management's forward looking statements.
The listener or reader is encouraged to read pro Fracs prospectus Form 10-Q, and other filings with the Securities and Exchange Commission, which can be found at SCC.
Gov or on the company's Investor Relations site.
Under the SEC filings tab to understand the risks uncertainties and contingencies. The comments today also include certain non-GAAP measures as adjusted.
The adjusted figures exclude the contributions of Flotek.
Additional details and reconciliation.
To the most direct comparable consolidated and GAAP financial measures are included in the earnings press release issued yesterday, which can also be found on the company's website.
And now I'd like to turn the call over to Mr. Matt Wilkes Matt. Thank you Rick I'd like to begin by stating how pleased we are to report exceptional results for the second quarter to which laden Lance will speak more about in their remarks, I will highlight that we outperformed what we said we were going to do.
I'm extremely proud of our $28 million of annualized EBITDA adjusted EBITDA per fleet and more excited about the future opportunity that than ever.
The macro environment in oilfield services has not changed and we are extremely well positioned for the current U S frac market, where supply of pressure pumping horsepower.
And incremental horsepower is bottlenecked with many of our peers completely sold out and having legacy footprints that need to be upgraded the supply chain is extremely strained for maintaining and upgrading the existing fleets with the ability to build new capacity and as we all know capital is more expensive.
And together these dynamics strengthen if that there is a great deal of link in this cycle and margin expansion will continue through this cycle.
We believe this is the drop that we've seen since we started in the shale industry over 20 years ago, and we see this lasting for quite some time.
In terms of bit of the board I see opportunity for growth in multiple areas in pressure pumping that lag will discuss.
But I also see opportunities for continued execution on our growth strategy.
As I've mentioned before we have a two pronged growth strategy acquire retired replaced on the equipment side and the desire to scale, our vertical integration on the supply chain.
It is important to state that our M&A strategy is we will continue to be based on a very strict criteria for what is considered an accretive transaction and to maximize cash generation. We will continue to put all potential acquisitions under the same technical and financial microscope and although we believe the market is ripe for consolidation.
<unk>, the space and expanding our vertical integration, we will not buy.
Our balance sheet for any deal.
We remain extremely full about our overall leverage and believe that we are on track to maintain our target of below one turn of debt to EBITDA. So.
So that we can continue to enhance our ability to return cash to shareholders.
We expect that the excess cash flow, we generate after interest and maintenance capex will be sufficient to fund growth Capex delever, the balance sheet and return cash to shareholders.
If those are priorities to us to continue illustrating our strategy I'm very excited that our acquisition of the Monahan West, Texas sand operations in late July and that our pending acquisition of U S. Well services is on track to close in the fourth quarter.
As you have heard and seen from US already we are constantly thinking about strategic efficiencies enhancing value of the supply chain in vertical integration for our company to maximize profitability and returns for our stakeholders. Our vertical integration reduces overall cost of services and cost of maintenance to a level that is unmatched.
In the industry from designing and manufacturing fluid ends and power ends high pressure iron to our sand chemicals logistics refurbishment and new fleet construction, we see me in on margins and cost structure and Capex.
Our vertical integration pro Frac with more control over the timing and amount of critical inputs into our business and a uniquely distinguishes us with a cost advantage compared to our peers, specifically in this environment where supply chain interruption.
Pretty much everyone. We're in a better position appears to capitalize because we have our own sand mines, we have our own iron our own machine shops, and we design engineer and assemble our own equipment from Frac pump frac pumps to blenders to E fleets.
With the Monahan mine, which combined with our lamesa plant and Kermit mines.
<unk> is as close proximity sand supply to almost every well in west, Texas, which is far superior to any asset base in the region.
Pull through profit from logistics and our Frac fleet.
Our considerable in this environment and helps to ensure that our pumping is not interrupted this increases pro fracs efficiency in the region by ensuring a reliable under an uninterrupted supply of high quality sand as well as our ability to reduce truck.
Fuel consumption and emissions, which helps mitigate our cost in this inflationary environment.
To provide some perspective.
The Monahan purchase we were only producing sand if our fleets while purchasing the rest from third parties at current market rates.
After all three mines are producing we will have the capacity to supply up to 15 fleets sand and west.
We're not seeing it in.
<unk>.
We expect to go to supply a mix of third party sand to our customers. We believe there is a tremendous.
And procuring more materials on behalf of our customers.
These are exactly the kinds of opportunities, we continue to consolidate within our sand and chemical markets.
The margin contribution that comes from these types of opportunities will provide continued growth on top of any quarter over quarter price increases on our fleet pricing, which we continue good day.
Not stress this enough.
Having custody and control of our supply chain is one biggest drivers of utilization fleets.
We are bullish on the future of our industry and our company.
And as we need to execute on our acquired retired.
Strategy and vertical integration strategy, we plan to continue to redefine what is possible for an oilfield services company.
I'll now hand, the call over to led to provide additional comments about our operations.
Thanks, Matt and good morning, everyone.
Our business and our teams performed extremely well during the second quarter, we had 31 total.
Active during the quarter currently deploying.
Electric fleet into the field.
During the quarter, we experienced significant price increases is all were brought up to the current market pricing and we continue to see additional pricing power.
More important.
The continued growth in profit per fleet is more or.
Our electric fleets are vertical integration enhancement and provide more materials to our customers.
We expect to exit the third quarter at 32 fleets as we deploy our first electric fleet late in the third quarter, we plan to deploy two additional electric fleets during the fourth quarter and we did not expect to deploy any incremental conventional fleets.
We plan to focus our labor and our available chain on supporting existing fleet and our electric fleet deployment margins and cash flow.
While pricing continues to move higher we see further incremental expansion additional bundle.
When we acquired S. T S. They had effectively the bundling all of their fleet.
That can always aimed to provide stand chemical's storage and logistics as it lowers the M. P T on pads and lowers the overall cost to our customers while adding additional.
For mental EBITDA to our fleets.
In the second quarter, we provided more sand and.
And chemicals on an absolute basis, but we only provided that's only 30% of sand that compared.
Compared to 40% in the first quarter.
As we look forward, we believe we have the supply.
The proximity and costs to become the primary choice for our customers. This dynamic will allow <unk> to continue growing profit the personally and the environment beyond just pricing power.
But also traditional product offering and creating incremental value for our customers.
I cannot help but think back to when we started in the industry and at that time pressure pumping companies provided every bit of sand and chemicals used in our completions process.
It doesn't 11, our customer base was paying nearly two times as high rate as they are paying now.
And more importantly.
It was taken them three times longer to complete a well and and take that production to market.
Well to the last cycle of 2018.
We are still charging a 30% lower rate and delivering wells and 60% time.
A long way as an industry and in becoming more efficient.
But more efficiency means more wear and tear and more attrition as we need to pump more hours using more equipment and charging less than we did previously.
At a time when we're helping our members generate record levels of <unk>.
It's this perspective that makes me just on the path forward.
Moving on to the most exciting development our first electric Frac fleet is in the process of being deployed for a customer we.
We are very happy with the performance of.
And are testing the equipment out under various conditions.
The economics are unmatched and the power of these pumps are incredible we.
We have just scratched the surface of defining what as well with these new electric pump.
We look forward to that fleet generating a full quarter of revenue and profitability during Q4, which we expect to return higher profitability due to the lower repairs simpler design and the higher value add to our customer.
Another operational update that I'm very proud of the team for is the speed at which we've been able to.
S Tsi.
Operationally, we are fully integrated with one team and one process.
Sales to procurement to maintenance to operations.
Customers have commented on how engaged our crews are on both sides. Another huge win is having all of our equipment running on a single software that is interchangeable.
As one company.
Together culture ideas collaboration to improve the company all while.
We've been able to accomplish this with various one time costs and are seeing the benefits in real time.
Before it all over to Lance to review the quarterly results in more detail I'd like to restate, our commitment to pro Fracs mission, which never changes for us.
It is one to be the best and safest company to work for field service industry and two to amaze, our customers with the <unk> and services utilizing the most cost effective and then suddenly friendly solutions and.
And three to achieve superior returns for our shareholders.
With that I'm going to hand over to Lance.
Thank.
Thank you Ed.
Good morning, everyone. We're pleased to announce our second quarter 2022 results.
On a unit basis revenue for the second quarter totaled 500, benign <unk> 8 million compared to the first quarter of 345 million as reported and $421 6 million on a pro forma adjusted for the F. T S acquisition.
The increase higher average pricing on a quick in our materials, providing more materials for our customers and to a lesser extent higher efficiency on our fleets as measured by pumping hours per fleet.
Net income was $70 1 million for the quarter.
Net income excluding the stock compensation with a deemed contribution from a related party.
<unk> $108 9 million compared to $24 1 million in the first quarter.
Adjusted EBITDA was $210 6 million or 218 million when excluding the amount attributed to Flotek results.
This resulted in $12 1 million of EBIT fleet on an annualized basis, excluding the impacts from Flotek.
This quarter included a couple of new developments that I would like to highlight as this will impact the quality of our results for the first quarter.
You will notice that we now have and other business needs in our business segment information.
This is new in the second quarter and relates to the reserves attributable to Flotek in.
In May we expanded our supply agreement with Flotek in exchange for an additional $50 million in convertible notes.
We also received the ability to designate four of seven directors to Flotek sport.
Because of our right to appoint directors to the board without a direct equity interest in Flotek, we determined the proper accounting treatment is to consolidate their results.
As a result subsequent to may 17th we have accounted for this transaction as a business mission and Flotek financial results had been added into our financial statements for the second quarter.
After may 17th.
We will refer to certain measures, excluding flotek that will make these measures more comparable to the first quarter and more representative of our underlying operations.
You will also see the $8 8 million in stock compensation related to a deemed contribution from a related party.
Compensation relates to shares sold by Dan and ferrous Wilkes tumors and Ladd Wilkes.
This transfer was completed in conjunction with the IPO and was structured as a purchase.
However, the accounting treatment resulted in stock based compensation funded directly by the Wilkes.
I want to highlight that this was a transaction, but family members and did not result in any additional shares issued and therefore did not have a impact on other shareholders.
The accounting treatment is nuanced because it is a related party transaction.
Dave or was deemed to be considered stock compensation collected in the company's financial statements.
During the quarter and resulting from the IPO proceeds. We also had an $8 $8 million loss on debt extinguishment $5.8 million was noncash.
Selling general and administrative costs increased <unk> seven points.
Which included $40 3 million in total stock compensation expense $4 2 million related to flotek during the quarter and $4 1 million in acquisition related costs.
The second quarter costs increased beyond these three items due to having a full quarter impact of the F. T S related expenses as well as incentive compensation costs, driven by outperformance of the business during the quarter.
Looking at the third quarter of this year, we expect continued improvement in our profitability per fleet.
Pricing discussions preceding the third quarter went well with customers and remain constructive at this point in time. In addition, I mentioned, we believe there's more profit to be captured by providing more money for more of our customers. We believe this bundling has the opportunity to exceed that of price increases over 12 months.
Turning to our business segments. The since the stimulation services segment generated revenues of $576 6 million in the second quarter up 7% from the first quarter.
Adjusted EBITDA for the segment was $196 1 million.
The increase from the prior quarter was driven by F. T S contributing to the full quarter compared to one month of contribution in the first quarter as well as increased pricing and a higher amount of materials provided during the quarter.
The manufacturing segment generated revenues of $34 9 million in the second quarter up eight 9% from the first quarter.
Between 88% of this segment was intercompany revenue.
Compared to 84% in the prior quarter.
Adjusted EBITDA for manufacturing was $9 4 million in the second quarter down slightly from 10 million in the first quarter.
This segment experienced slight manufacturing costs due to increased cost of production as well as a lesson to both product mix, which should normalize in the third quarter.
Production segment generated revenues of $17 5 million during the quarter up 41% from the first quarter.
Approximately 6% segment was there any revenue.
Compared to 69% in the previous quarter.
Adjusted EBITDA for the proppant segment was $12 6 million up from $7 9 million last quarter.
The improved operating results were due to higher production levels with a higher average price we offset these production costs.
Business activities, which solely at Flotek generated revenues of $15 4 million and negative $7 5 million.
Presents at partial quarter of <unk>.
And eliminates activity between Flotek and pro Frac.
Turning to <unk>, we continue to adapt our capital program to the current environment. We expect the full year capex to come in at the high end of the range that we previously provided that is between $265 million and $290 million.
The increase relates to a higher quantity of engine replacements and upgrades in the back half of the year.
The budget for our electric fleets remains the same between 65 and $70 million for all three fleets, which is that the cost of the licenses that were paid in 2021.
In addition, we expect our lamesa plant to be completed and operational in the fourth quarter and estimate the total cost to be approximately $2 million.
<unk> capital structure and cash flow.
Excluding the amounts attributable to Flotek, we ended the second quarter with $477 5 million in outstanding principal.
And $88 million in liquidity when.
When we talk about liquidity, we exclude the loss attributable to flotek, because while we do consolidate their results. We do not have the ability to use their cash or liquidity in our operations.
Subsequent to the second quarter, we announced an upsize of our term loan and we closed the acquisition of our Monahan sand plant.
Including the subsequent events our debt, excluding flotek would have been $627 5 million with approximately $131 million in liquidity.
Operating cash flow was 30.
$5 million during the quarter, which was impacted by a large working capital build due to higher fleets higher pricing and higher efficiency.
We expect this to normalize back half of the year and are focused on working capital initiatives to help help offset future working capital builds driven by improved operating results.
With the improved financial results, we expect cash flow to accelerate meaningfully as these results convert to cash in the third quarter.
And that's well service acquisition progresses, we will assess our liquidity needs to ensure a successful closing and integration.
And with that I'll now turn the call to the operator to take your questions.
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One moment, please while we poll for questions.
Our first question comes from Dan Kutz with Morgan Stanley . Please proceed with your question.
Yes.
Hey, Thanks, good morning.
Good morning.
I wanted to ask.
It might have been you had mentioned.
You saw that kind of the.
Earnings uplift from bundling up sales could be a bigger.
Opportunity relative price I guess I, just wanted to dig into that a little bit more as to kind of step.
C.
Kind of per fleet profitability growth opportunities from here as it relates to pricing efficiencies.
<unk> increment.
Increments.
Versus kind of the vertical integration benefits and the bundling of materials. Just wondering if you could expand on that comment a little bit.
Okay.
Okay.
Yes.
I think my comment on the bundling is when we look over the next 12 months I think the point is as we see accretion we see improved performance.
Just threw in pre increasing prices.
If you look out into next year.
And.
As we said we were only about 30% bundled or on the sand side, and we think theres a lot of opportunity there.
And you know as it relates to the short term, we do continue to see pricing discussions and pricing improvement we.
We do intend Inc. In proved the bundling in the short term.
But it's really a longer term picture when you look at year that we've increased that the percent of materials that we provide materially.
Yeah, and then you to expand our supply chain.
We're having greater and greater success in bundling services and I think that.
So for example, with Flotek in Q3, we expect to average around 16 fleets with <unk>.
Flotek chemistry.
And expect to be at full contracted volumes.
Early in 2003 on sand, we're really excited about bundling on there and continuing to see more and more fleets.
We're further sand than we are on the chemistry.
And just as an ample frac fleet on average will consume about half a million tons per year per fleet.
And if you look at getting a gross margin of $20 a ton thats $10 million contribution margin per fleet and so very quickly becomes a substantial contribution.
Across the platform.
And of course on the equipment, we are seeing very very constructive conversations and market continues to tighten.
We expect to see that tightening continue on through 2023.
As of now what we're looking at is.
A very healthy uplift and.
Double double digit percentage quarter over quarter from Q2 to Q3.
Great. That's really helpful. And then just wanted to ask about capital allocation.
So now that you guys have some frac fleet, new builds that you're doing.
You're kind of you still have the upgrade program for some of the legacy conventional fleets I know that you know managing debt and hitting the leverage target that you.
So it was.
Obviously up there and and you know when to ask all shareholders fits into that.
Essentially any incremental M&A, just wondering what your kind of <unk>.
Capital allocation.
Looking forward.
Definitely.
I'll touch on this and then hand, it over to Lance but.
Our number one product.
I meant that we have today to be as good or better.
At the end of the year.
At the beginning of the year and so we want to make sure that we take good care of our equipment and what we're also in an upgrade cycle, but diesel where.
The old tier two old diesel fleets.
Considerably expensive for our end customer so as we look to tier tier four DGB or dual fuel systems.
Four to reduce our overall diesel consumption.
We see substantially higher on on that equipment on those fleets as well.
Really excited about the fleet program.
But.
Beyond that we prioritize our equipment and then its holder return.
And behind that is our growth.
And so we want to make sure that we take the lead on returning capital to stakeholders. We think that this is very important for the entire oilfield services space to make it a priority that this isn't just a a sector that you trade that this isn't a sector that you can invest in and when you prioritize profitability it because.
Investable and we believe in that and this is this is why this this is why this business and.
We think that this is an incredible industry to invest in.
And taken the lead on returning capital to stakeholders.
<unk>.
It is exactly how you deliver.
Rather than a trade.
Got it alright.
Alright, great.
Really helpful. Thanks, a lot guys I'll turn it back.
Thank you. Our next question comes from John Daniel with Daniel Energy Partners. Please proceed with your question.
Hey, good morning, guys.
Early in the process.
Matt The Big Picture question for you guys is it just your view on power generation, who owns it the best approach to generating it just.
Any color there would be thoughts would be helpful.
Definitely good morning, John .
Yes.
Or do we think that right now there's a lot of a lot of power producers out there that are providing providing equipment.
But as we look forward.
We're taking a wait and see approach, we're not quite at a spot where we would like to outline our specific plans.
Just like everything else that we do we have a.
A very focused effort on making sure that the reliability of our equipment and the supply chain is in our custody. So that we can control the moving pieces control the lead times troll, the Timeframes and I wouldn't expect this to be this part of our business to be any different.
Okay Fair enough and then the last one for me just on the sand side.
You'd noted I heard correctly capacity.
I'll cover fleets.
Fleets in the Permian I think that's.
About where you guys are 13 fishing fleets I'm curious do you have a big presence in other markets like the Eagle Ford and Haynesville do does the logic apply to having.
Vertical integration on sand and those markets just.
Just your thoughts.
Yes, I think I think each market is a.
You evaluate whether it makes sense what can you purchase it for locally compared to what your costs would be owning it and so we continue to evaluate but.
We have nothing to report.
Any expectations or intentions at this time.
Okay.
Queue up again, if not that no one else ask questions. Thank you for your time.
Thank you.
Our next question comes from Chase Mulvehill with Bank of America. Please proceed with it.
Yeah.
Hi, guys. This is thought of bond for two goodbye.
Okay.
So just quickly following up on John's question on sand.
I think he said 15 clean so I'm just trying to do the half a million tonne per annum for fleet right. So it sounds like you can pretty much through news at all of that 8 million ton nameplate capacity in anything for you on nameplate is basically the <unk>.
Market.
The amount of time that you can produce due to clarify on that trend.
Yes.
Yes.
The way that these are built physically they can each produced.
Just right at or just above 3 million tons each.
Our lamesa is permitted for 2 million, but the.
The equipment is rated for four more than that so once its up and additional we expect to go in and look to expand that permit so that'll game as an additional million tons of nameplate capacity.
Okay, Okay, no that makes sense.
He played and marketability.
So that makes sense. Thanks for that clarification, and then an index reclassification of thinking on the first question. You said you expect I think I heard the word profitability to go up double digits <unk> to treat you right, but I wanted to clarify does that mean, even apples linked to blow up double digits.
So we're talking 28 to 31.
In fact, what moment.
Yes, I don't want to nail it down to a specific.
Number.
EBITDA per fleet, but.
Very comfortable saying that we expect to see a three handle on them.
On the EBITDA.
Okay. Okay that makes sense and then obviously you bought DSP Monahan acquisition that closed in July .
Yes.
Real quick I would like to comment on a few things there in that as we look at the performance.
Performance. There are several things that are really driving that that I think it is to highlight that.
One is our maintenance rotation is phenomenal we've got it full pit crew that allows our equipment to be out on location longer and when it does come in for a tire changer or to get topped off on fuel like Lego railcar wood and pit row.
We're able to get it back out working and so when you've got a really good pit crew there R&M expenses tend to run pretty consistently otherwise, but what you end up with is that race cars on the track longer running and that's I think that's one of the main things that drives our superior performance and.
And it allows us to get to the industry, leading EBITDA per fleet.
Whereas.
Having a uniform components is a big part of that.
The supply chain is incredibly tight.
And it's creating situations where many in the industry are having to go in and get.
Fluid ends wherever they can when you have different fluid ends from different manufacturers you end up with a very complicated SKU with your parts room to training with your personnel on location swapping out fluid ends changed changing valves and seats.
It gets it gets really complicated and if they.
C development CES or if they put their own part in you have a higher number of failures. So it's stresses your overall supply chain. Even further when you don't have uniformity and so when you. When you look at this tight supply chain, we really see this as a driving factor.
Our standout performance relative to our peer class and this is also what we believe is going to keep this from.
It really becoming a newbuild cycle too.
So we're really excited where we're positioned how we built this company and very very proud of our vertical integration that allows us to potentially generate results not just in Q2 Q3, but we're really excited about how this this disadvantage will drive material 2023 as well.
Right now.
And then just quickly last one from me on the on the <unk> side.
In the press release, you did say you are you doing to try and do trials under 40 fleet on the field right now and we expect the commercial deployment before the end of the third quarter rate could you wanted to check on that.
And that trial, how happy you are not happy.
So I think Wayne and just as a follow up.
How are you thinking about.
On the fleet side for 2023, especially now that you are acquiring U S land.
Yes.
With the easily program. These are commercial platforms and so we're really excited to get these out there.
The reason we call as this one is really getting out there on its first location just running through diagnostics, making sure that we understand all the error codes that are kicked out by the by the controls and making sure that everything is is.
Communicating appropriately so we're just.
Going through getting that knocked out and this is a much faster process than what you would see anywhere else. Because this is a proven platform.
So we're really excited to have this thing Lee.
Fully available for all of Q4.
And.
Very delighted to see what kind of.
Be able to share with with our stakeholders what kind of results. These these provide relative conventional fleets and chase I would just add to that we have.
Two of our pumps out there on location now.
In the pumping today.
Wanted to be clear that this isn't something that we're planning to put out there today.
Okay cool and thoughts on 2023 things, we want to build more more easily, especially now that you are getting a lot on the U S website.
Yes.
We'd rather not at this time our growth plans for 2023.
But very excited looking forward to closing the U S World transaction early in Q4, and bringing in and integrating that business very similar to we.
So from us with the <unk> integration.
How phenomenally well that has gone.
Do you expect the U S well transaction and integration process to go equally as successful and this is with our vertical integration the different components that we've built in specifically for these types of processes have shown incredible results so far.
And we're getting better at it as we go so is good the U S. Well integration, we expect to see those types of results carry forward.
So yes.
Okay calm for us looking forward to getting that taken care of but it's too early to tell.
I would rather not get into that at this point on any further.
Growth initiatives for 2023.
Okay.
How about I'll turn it back thank you.
Thank you.
Thank you. Our next question is from Stephen <unk> with Stifel. Please proceed with your question.
Thanks, and good afternoon, and good morning, everybody.
So I guess two things from me if I could start with <unk>.
We've heard from some of your peers about.
Equipment demand for 'twenty, three and your customers trying to lock up capacity for 23, well what are you seeing on that front and how do you think about <unk>.
Balance when Youre looking at pricing.
Yes, we're seeing.
A great deal of of early looks from.
It seems like the RF Q season has started earlier than usual.
<unk> that means.
Better margins.
And continued expansion of pricing.
We like what we're seeing on their capex budgets.
And there is a.
Shortage of horsepower in the market and.
With the complexity and the Mrs.
As you see more of our stores, adding more.
Mismatches and mismatched components.
When you look at the <unk>.
The amount of horsepower that's in a maintenance cycle.
Given point, 20% to 25% usually.
When you start mismatches parts and having different.
Types of fluid and different types of iron.
You start seeing.
More frequent failures and more stress on that supply chain. So.
As we look at the market going forward I think that this does not he's actually tightened further but what we're really proud of is the customers that we have known about the reliability that we bring and can see that we bring and dead that reliability and consistency.
He is.
As a value proposition.
That.
It's easy to take up so.
But we think our peer classes is going to continue to struggle with where the supply chain and many.
Many price improvement improvements with these competitors.
Likely we'll be going to a more and more located R&M and supply chain.
Great. Thank you and when we think about.
U S well services.
They recently announced <unk>.
They've clearly been hurt by a sort of a lack of a lack of overhead absorption as they roll out new assets.
They ran the last quarter EBITDA per fleet like $5 $5 million on an annualized basis, how long do you think it takes.
Based on what you know about the contracts that they have in place to get their assets up to your level of profitability.
Yes.
Really rather not comment.
Or.
Or speculate on where their contracts are or anything like that.
We really look at is what we're capable of with the same assets.
Yeah.
And then going back and looking at what we've been able to accomplish with the fts integration and quickly being able to get in to see material commercial results.
As well as operational.
Our operational results and so we're really looking at this.
Rather than how do we get from where they are.
Really looking at it from the perspective of what can we do with it.
And we.
Yeah.
Typically these things would take.
Not 12 months.
We take a conservative approach with what feels like to us a conservative approach of around six months, but that's also what we put out for <unk> and we were able to realize that within the within a very short order.
And able to get their profitability so.
Given it some bookends I would say an outside date would be six months and.
And our own internal expectations for ourselves would be.
In a very similar time line to what we did with DSI.
Great and if I could throw one other quick one I don't know if you can comment on this or not.
You give us a sense for.
Flow tax revenue per fleet per year.
Yeah.
I want to I don't want okay on an indication there.
But we do like is that the.
The contracts that we have with them as well.
Or is going according to plan.
They continue to scale operations and.
And not just with us, but also with third with true.
Customers on there and so we're really excited to see that business continue to to scale.
And.
Really look forward to the early early part of 2023 to get this to fully contracted volumes that.
We've.
Mutually negotiated.
And of course as that.
Does it get to scale, we are really excited to see what that does with with their financials and bringing this.
Okay.
We're also outside of that agreement.
We are very excited about the.
The pre agreement that we have in place that gives us confidence.
The quality of the gas that we're that we're pumping with.
And being able to monitor beta use in near real time allows us to protect our equipment.
And provide reliable.
Service for not just the dual fuel systems, but.
For the turbines, providing the power Gen on location that runs on the gas so making sure that we have good high quality gas on location is a very important thing. We're also excited about what that means for for Flotek and the J P. <unk>.
Being able to monitor beta used for gas has far reaching.
Consequences as far reaching.
Impacts across the entire oil and gas.
And especially for the for the midstream side for these operators as they look to make sure that for every dollar.
Okay.
So down the line.
Great no. Thank you for all the color.
Okay.
Our next question comes from Don Crist with Johnson Rice. Please proceed with your question.
Good morning, gentlemen, how are you doing this morning.
Well good good.
I wanted to.
A couple of people have asked about sand, but given the.
The significant impact.
Potential financials next year it could be you know.
10, or 15% of your total EBITDA just wanted to ask.
About number one volumes do you think you can you can get up to that Colin.
Five or so million tons per year.
And number two whats your thoughts are around pricing.
I know it spiked in the first quarter of this year to upwards of 80 to $100 a ton, but didn't know what kind of long term price that you were kind of expecting going forward.
Yes, I mean, there was there was a point early in the year, where it was 80 to $100 a ton at the mine gate.
It hasn't.
I think occasionally youll see it get there depending on.
Whether it's.
Pat or not.
But.
But for the most part we've got contracted volumes that are much lower than that.
Really would prefer not to go into specifically where.
For obvious reasons, but.
Jay is that that this is the one on utilization we definitely believe we can get our utilization where it needs to be.
Providing a minimum of seven 7% to $7 5 million tonnes.
On annual basis, but.
When you look at the.
The pricing on that and I think that.
You wouldn't see.
Pricing across the board.
Got to box myself in.
I'd like to get.
Let me throw in electric.
Got you are even though the Q2 guide next quarter and I don't want you to do that to me.
Well I mean.
Is it between call. It 35 and 50 as it is that good enough range to kind of not box you in.
That's a good range.
Okay.
And then two kind of cleanups for me.
Lance can you tell us what the share count was in the second it wasn't in the press release.
Yeah, so it'll still be about $142 4 million.
The when you get the financials.
Because the IPO happened mid quarter.
Yes, it will be a little nuanced given the up sea structure.
But but that share count at the IPO is F and forward is about 142.4.
Okay, and then just one final one for me.
SG&A was a little bit.
Crazy this this quarter with with the.
Cheers.
So the Wilks brothers obviously.
Going forward do you think it's going to be in the $40 $45 million or do you think it's going to be.
Closer to close in the first quarter.
You're exactly right. If you back out those three items I called out that kind of gets you into the 40 to 45.
And that's really.
Our best estimate at this point the first one.
You had a lot of things going on with the companies coming together and not having been together previously the IPO et cetera.
And then and so I think Q2 is going to be a better measure than Q1 and.
Hum.
$4 million of that was the acquisition acquisition related expenses, obviously with U S well sure will.
Some of those that will elevate in future quarters, as well, but we'll be sure to call those out.
Yes.
On there is related to.
The GAAP requirements that we've put that in.
And the SG&A.
The share count pre and post.
It is exactly the same.
Those shares were.
Private transaction paid for.
No.
The individuals receiving them.
Understood I appreciate the color.
Turn it back.
Our next question is from Tom Curran with Seaport Research. Please proceed with your question.
Good morning.
Just wanted to.
Wanted to pick up more Stephen left off with Flotek.
I know it was a profitability drag in the quarter with an adjusted EBITDA loss of $7 million.
Oh tax release, they emphasize as chemicals ramp to contractual.
Margins should expand.
Our into positive territory on operating leverage and economies of scale.
What are your own expectations for when Flotek should get there. It sounds you have referenced it twice I believe so part of the call. It sounds like it should be around early 2023 Navy and just.
What sort of potential EBITDA contribution do you see there longer term how collaborative as the relationship at this point when it comes to Flotek broader company Revival plan.
Yes.
As we look at that it is early 2023 for forgetting to full contracted volumes. What we're excited about is as they ramp and they get to a higher utilization there'll be able to absorb a lot of the early cost that you saw in Q2.
Our procurement and their their commercial team is working.
Very very constructively to bring these volumes up and to get things in line. We're also as we bring these volumes on we're excited to see that they are able to get the economies of scale and a greater purchasing power to bring their overall cost structure lower.
So not only do they gain on the topline as we scale to full contract.
But those economies of scale will drive their per unit costs lower on every product that they have and continue to expand.
Just a.
Stability associated with our contracted volumes, but also with the third party customer base that they will also benefit from the economies of scale that that these types of volumes dropped.
Makes sense.
When it comes to your conventional and dual spread reactivation situation is there a sense in which.
You could already definitely get the pricing and terms you'd want really.
The return on that incremental deployment.
But are holding back as part of your fleet growth disciplined strategy and if you were to ink a reactivation contract.
Lead time advantages would you expect to have over the industry norm at this point.
So right now we have no intentions of activating any any fleets that are on the side, but what I would like to touch on is through the upgrade program of of upgrading tier two conventional fleets to dual fuel fleets.
It's giving us additional engines.
We have at our disposal to use as swing units.
And these things swing units have been incredible ability to.
Yes.
Really shift and.
Change the way that our R&M program is currently operated so that if you have a hard down engine, we don't have to bring it all the way back to here in Aledo, we're out into Cisco will werewolf.
Engine rebuild or transmission rebuild instead of having the pumping trailers sitting there waiting for the rebuild to be completed.
These excess engines allows us to swing them in the district, where we can get a 48 hour turn.
And having them back out in the field pumping so.
When you look at the R&M expense associated with that our engine rebuild and transmission rebuild or going to pretty much fixed the same number of engines and the same number of transmissions in a given period.
But by having this wing program it doesn't keep.
Actual trailer itself.
Tied up while those repairs are being completed instead those stay in this.
Longer.
Generally.
So just.
Just kind of looking at prior to the FTC action, we had 17 20 fleets active.
Those other three fleets, we're supporting a.
R&M cycle and so now that we've brought in the pair and transmission repair in house.
Yeah.
We also continue to see expansion of our swing unit program for engines and transmissions that we can do in the district.
As we see that come to us.
Come to scale.
What youll see is we will get those three.
Get those three fleets.
And rather than supporting an R&M cycle.
Scalable to generate revenue out in the field.
Not necessarily called those activations of reactivation.
There are already active.
Just not generating revenue they are supporting it R&M cycle.
So dean.
High value fleets and a very low cost.
Way of getting back out there generating revenue.
For for equipment that is already active it just doesn't generate the same revenue and the.
R&M cycle and the cost of that R&M.
Typically remain the same so those three fleets would come.
At a higher profitability, because we're already paying for the R&M.
Got it and just to clarify.
As it stands today do you have any horsepower and if so how much left there.
It is neither participating in a swing program.
Nor being cannibalized as a source or parts of them, but.
But it's.
Solely idle parked against the fence.
And you're still deciding what to eventually go with it.
Is there any horsepower that would fall into that category.
There is no equipment.
That is in a yard anywhere in this company that we anticipate bringing back.
And just going back to the swing and what I'd like to turn.
Look at on it just as a just an example, just to highlight just how material it is.
If you can get us.
A trailer that hasnt hard down engine or a hard down transmission. If you can get them back out in the field generating revenue and 48 hours as opposed to <unk>.
Close to 20 days or three weeks.
It's kind of like.
Raise cargo into pet row, and get a new set of tires and topping up the fuel in 10 seconds.
Instead of 100 seconds.
And it's.
It's incredible the cumulative effect that.
That type of cycle time has on your overall performance across your entire company and so those are the types of improvements we like to focus on.
Those are the immediate opportunities.
To continue improving the profitability of <unk>.
Looking at the.
The demand side.
We like what we see there but.
Rather than responding to it with adding capacity to the market what we're looking at is.
Debt.
And busted old equipment.
Answer in a yard somewhere and you stay there.
Yeah and Tom.
You're kind of hinting around.
Yes.
Just EBITDA per fleet like with it and how we think about all of our fleets and that's how we talk about EBITDA per fleet, but fleet a fleet isn't.
Not all of a sudden.
<unk>.
Even though we kind of talk like they are.
And they haven't they're.
They're not what they see either and if you think back to 2018, our fleet was closer to 45000 horsepower and today our fleets are around 62000 horsepower.
That we have in the.
Well.
With the with the equipment that we have maintenance.
There were maintenance team.
And in that maintenance rotation, it's closer to that 62000, right now and and now they're coming back.
That Matt is talking about.
We're going to use that to support the fleets that we have out in the field.
And get better utilization.
And when do we when you look at other People's fleets.
They have a similar that's similar for them as well and when do you think about.
Newbuild economics, it's actually a lot higher than what people talk about.
With inflation, but also just the larger.
With these jobs that are more intense you have to have more <unk>.
<unk> powder to support them.
When you look at the.
The strength of your of your supply chain and your R&M cycles.
Being able to really focus on your efficiencies in your utilization the utilization there.
For me it really reach out into a bone yard and activate fleets that.
That you wouldn't have otherwise.
I think I think reviving these.
Zombie fleets is.
It's definitely not something that <unk>.
Trying to do or has to do to providing top quality service that we're known for.
And so.
I think that.
We are we're in the same industry as everybody else, but when the vertical integration of the capabilities that we have I think that.
What you see is.
Our bedroom nation better performance delivered because of.
Quick cycle times that we have.
Not every.
Is positioned to replicate those results.
We have reached the end of the question and answer session I would now like to call back over to management for closing comments.
Well, we definitely appreciate everybody for further questions.
Look forward to the days ahead the quarters.
For 2023, as we continued to expand our overall platform continue to execute on our commitment to our stakeholders of delivering incredible results and continued expansion and and on our acquired retire replace and consolidation within the.
Supply chain.
Commitment to profitable growth and we look forward.
Yes.
In the months ahead of providing further guidance on exactly what we mean by that specifics and excited to look forward.
<unk>.
The opportunity to pay dividends.
And with that.
Want to thank everybody. Thank our stakeholders have a good day. Thanks.
Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.