Q3 2022 Nextier Oilfield Solutions Inc Earnings Call
Good morning, everyone and welcome to the next year oilfield solutions third quarter 2022 conference call.
As a reminder, today's call is being recorded.
At this time all participants are in a listen only mode and a brief question and answer session will follow the formal presentation.
For opening remarks, and introductions I'd like to turn the call over to Mike Sabella, Vice President of Investor Relations for next year.
Please go ahead Sir.
Thank you operator, good morning, and welcome to the Nextera Oilfield solutions earnings conference call to discuss our third quarter 2022 results with me today are Robert Drummond, President and Chief Executive Officer, Kenny piece, you Chief Financial Officer, and Kevin Mcdonnell.
<unk>, 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.
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.
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. Subsequent 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 third 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.
Thanks to everyone for joining the call.
The outlook for U S land, well completion activity remains bullish.
We have been saying for some time now that we believe the availability of Frac fleet is one of the primary bottleneck restricting U S land production growth.
And we have increasing conviction that this will remain the case for at least the next 18 months.
Industry dynamics have created a favorable pricing environment for our services throughout this year.
We have secured higher net pricing for 2023 with pricing still 10% to 15% below pre COVID-19 levels, even after accounting for the latest round of negotiations.
We continue to believe that demand for our services without pace supply and we were encouraged by what we saw even before the recent OPEC production cuts, including through the Q3 commodity volatility.
Global oil production will need to increase its society is to conquer the current inflationary epidemic.
In U S shale should play a big role.
But there is growing consensus that U S shale oil production will increase less than 1 million barrels per day by the end of 2023, well below the ice estimated liquids demand growth of more than one and a half million barrels per day over the same period.
Further we think there's risk that U S shale oil production could disappoint to the downside.
Most analysts see industry Frac fleet, new builds in the low to mid Twenty's through the end of 2023.
We agree with that number.
However, when considering where the total active fleet count is headed we do not believe that the impact from the supply chain are fully understood even with the newbuild capacity coming into the market.
With fleet attrition and continued supply chain issues, we think the active fleet count availability will struggle to grow materially from the 270 fleets operating today.
A significant portion of the legacy fleet.
It was not built to withstand the intensity of the modern frac job.
Maintaining this older equipment puts a huge stress on an already overburdened supply chain.
Many believe attrition will be minimal given improved returns.
But we believe attrition could actually be greater than normal considering the current supply chain challenges.
Simply put.
The Frac bottleneck.
Coupled with shale E&ps current business plans that favor capital discipline and cash returns to shareholders over production growth.
Well with strict shales ability to fully deliver through next year at least.
And this should set next true up for a very favorable multi year outlook.
Okay.
But while the multi year outlook has arguably never been better for U S land well completion fundamentals.
They are clear recessionary signals in the broader economy.
And this brings obvious fears to song.
The near term older men will succumb to macro pressures.
An industry slowdown is not our base case and given the extreme tightness that currently exist in frac, even in a recession, we would expect relatively favorable U S. Frac supply demand dynamics in 2023.
Further for next year, we believe our strong downside protection would position us to continue to create value for our shareholders.
On the operations front.
The tightness in the Frac market this year.
It has allowed us to enhance our commercial terms.
Such as by requiring minimum pump hours and securing multiple integrated services.
We have used the tightness in the Frac market. This year to create sticky partnerships that should limit downside potential and served well at all at all points in the cycle.
And our industry, leading fleet of natural gas powered equipment carries a premium in the market and should remain active in almost any scenario due to the significant fuel cost advantage that natural gas provides.
Yeah.
On the financial side of our balance sheet is very strong with a clear path to net debt zero in 2023, no term loan maturities until 2025 and strong liquidity of more than $620 million.
This balance sheet strength will afford us opportunities to put capital to work at.
At very high returns, including executing on our plan to return at least $250 million to shareholders between now and the end of 2023.
We will continue to run our company with a long term vision in mind we.
We believe we are well positioned to balance downside risk with upside potential and that we have one of the most favorable risk reward profiles in the industry.
Yeah.
Now to our third quarter results.
It was another record quarter for next year, both in adjusted net income per share and adjusted EBITDA, beating the record that we set last quarter.
Adjusted net income of $130 million improved 31% from the prior quarter record and was 14% of revenue our adjusted net income per diluted share was 52 cents.
Total revenue of $896 million was up 6% sequentially, marking the sixth.
Consecutive quarter of market, beating growth and was more than double our revenue from the same quarter last year.
We achieved another quarter of growth despite dropping one fleet due to a fire during the quarter.
The impact from the fire our results would have been even stronger.
I do want to highlight that our well site integration strategy again gained market share and continues to add value for our investors and our customers.
We did not deploy any additional horsepower in Q3.
We were able to secure replacement pumps from a very limited supply or inventory for the portion of the fleet. We lost two of fire and have deployed those pumps in Q4.
Yeah.
Our adjusted EBITDA of $195 million was up 17% sequentially inclusive of a $10 million gain on sale of assets, mostly from the divestiture coiled tubing.
Importantly, we are delivering on our commitment to generate free cash flow early in the cycle.
Our free cash flow generation accelerated totaling $133 million in Q3.
We still expect to see substantial free cash flow this year and even stronger free cash flow in 2023.
Demand remained strong for our services in the U S land Frac market is still sold out in Q4.
We've already negotiated further net pricing improvements for 2023, and what will likely remain sold out market.
It is important to remember that even after the latest round of price negotiations net pricing for our services is still 10% to 15% below where it was pre COVID-19, even with current record high utilization.
Given what we see is a tight supply for frac equipment for the foreseeable future. We continue to see a path to recapture all of the pricing concessions.
Made during the prior downturn.
Even as the cycle gathers momentum, we want to be very clear that capital discipline and a focus on shareholder returns as the top consideration for every decision that we make.
It is clear to us that last cycles playbook did not work and we do not intend to repeat the growth at all cost strategy. The industry has taken in prior cycles.
We will significantly exceed our initial 2022 free cash flow guidelines as our operations outperformed.
This gives us the means to deliver on our $250 million shareholder return program.
This program is 9% of our market cap at the close of the market last night.
We believe that our stock valuation is not reflective of our fundamental outlook and by investing in ourselves, we will look to capture some of the value for our shareholders.
Yeah.
But the shareholder return program is just one part of our broader capital allocation strategy that we believe will maximize value for our shareholders through the cycle.
The strategy is supported by two main pillars.
First is maintaining a strong balance sheet.
A clear path to net debt zero is one of our key financial priorities, which gives us the best ability to be nimble and opportunistic at every point in the cycle.
We intend to finish reaching this goal in 2023, and we will execute on our capital allocation strategy within the cash flow that we generate.
The second pillar is commitment to invest in our business and to remain a top tier U S land completion services company for the long term.
For next year, we are targeting a capex range of 8% to 9% of revenue through the cycle.
An amount sufficient to maintain our existing our existing fleet and fund the transition to natural gas powered and electrical equipment responsibly and overtime.
This budget also allocates capital to well site integration as we look to fully capture this value creation opportunity.
Roughly two thirds of our Capex budget will target the maintenance and transformation of our fleet.
We assume $4 million per fleet and maintenance for Frac plus maintenance for our other service lines.
This bucket also includes investments in natural gas powered fleets, including electric fleets sufficient for us to maintain our market share and transitioned to fully natural gas powered overtime.
We expect to maintain a market leading position in natural gas powered equipment and importantly, we will remain disciplined without organically growing our frac market share.
Roughly.
One third of our budget will be allocated to expanding our wealth side integration platform and to fund high return internal projects.
This bucket includes an investment to fund the next phase of our power solutions business investments to further enhance our successful last mile logistics platform and upgrades, so ancillary frac equipment.
An example of high return ancillary upgrades as our plan to upgrade to next generation blenders that reduce nonproductive time for Frac fleet and lowest cost.
Well better withstanding the intensity of the current Frac environment.
All of these investments.
We see the potential for returns that are significantly accretive to the overall business and.
We target threshold economics at less than two year payback.
These investments will not be adding frac capacity to the market, while still delivering strong returns and growth for our investors.
For 2023.
Our capex budget is $350 million.
Our dedication to invest in our business demonstrates our conviction in our industry.
And the cycle over the long term, while owning our commitment to capital discipline.
These pillars support what we believe is a sustainable free cash flow profile we.
We will use our free cash flow to support the investment thesis for our business in two ways.
The first is through shareholder returns.
Alongside our Q3 earnings we've initiated a $250 million share buyback program totaling 9% of our market cap as of the close of market yesterday, and we plan to return at least $250 million to shareholders through the end of 2023.
We believe that returning at least half of our expected annual free cash flow to investors improves the investment thesis for us and our industry.
We will retain flexibility for the remainder of the free cash flow.
And we see potential high return M&A targets that could create substantial value for our shareholders.
Our track record demonstrates that M&A is a core competency for our company.
But we will remain diligent.
And if we do not find attractive M&A targets.
We could instead choose to further increase our shareholder return program.
We are in a very strong position and.
And we're committed to maximizing the value of every dollar of capital in all phases of market cycles to create a sustainable capital allocation program.
We believe we have the ability to execute on this capital allocation strategy, while also strengthening the business operationally.
And financially.
The past cycle Oss playbook did not work.
And we believe this path better served the company and our shareholders.
While organic frac market share growth is not a priority we do continue to see significant opportunities to grow our footprint and integrated services.
And create additional value for both our investors and customers.
A recent example that demonstrates our ability to execute on accretive opportunities for our shareholders is our <unk> <unk>.
<unk> asset acquisition, where we expanded our last mile logistics capabilities at an attractive price.
This investment should have a payback of less than one and a half years and is precisely the type of transaction that we will target as we build out our well site integration strategy.
Okay.
Since we closed the acquisition.
We executed on our integration planning.
We have rebranded our last mile logistics business as next mile and gained significant traction.
We have already increased our base of activity by 50% since the time of acquisition.
We have line of sight to full utilization of these assets by early next year.
So far.
The system capabilities.
Outperformed our expectations.
Our proprietary sand haul traders have a higher average payload compared to a typical system.
Which could result in over 5000 fewer truck loads of proper per Frac fleet per year.
For perspective, this could mean over 350000 fewer truck miles driven and more than 70000 fewer gallons of diesel consumed per year for every system that we deploy.
Not only is there an opportunity to capture strong returns of this superior technology, what it means less drivers on the road, a safer environment and a step change in lower diesel consumption and emissions.
Bandwidth, our next hub logistics control tower, which optimizes driver locations and routes.
We think we have created a market leading last mile logistics and proppant management platform.
We have a strong conviction that capital discipline will be the winning formula in this cycle.
We invested counter cyclically back in 2021 to put us in this position to take advantage of the 2023 opportunities while spending less capex than our peers.
This plan is working even better than we expected.
And we will be apparent in our 2023 free cash flow generation, where we will benefit from improved pricing increased pumping hours per fleet, well site integration and schedule efficiency associated with new customer partners.
We believe that this cycle is only just getting started and that we are positioned to benefit with less capex investment than most competitors.
Low on us to reward our shareholders.
I will now pass the call over to Kenny to discuss our third quarter results in more detail.
Thanks, Robert third quarter revenue totaled $896 million.
Compared to $843 million in the second quarter.
Sequential revenue increased 6%.
Both continued during the quarter, even as we deployed less average horsepower. After we dropped one deployed fleet due to a fire.
Revenue improved in our completions segment, while the well construction and intervention services segment revenue saw the impact from the sale of our coiled tubing assets.
Total third quarter, adjusted EBITDA was $195 million, including a $10 million gain on the sale of assets, mostly associated with the gain on the sale of coiled tubing.
This adjusted EBITDA result, improved from $166 million in Q2 as a result of the following factors.
First during the quarter, we benefited from additional net pricing.
Second Q3 strengthen from an efficiency perspective with fewer weather commercial disruptions relative to Q2, even as we dealt with supply chain bottlenecks in the summer heat.
Third we had another strong quarter penetrating well site integration services.
A full quarter run rate from our last power solutions rollout.
Our last mile logistics business continues to grow.
We're having success growing our wireline franchise.
Lastly, as an offset to the aforementioned sequential gains we had a fire in one of our summer frac fleets, which damaged a portion of the fleet.
This impact in addition to the carrying cost of reactivation of the fleet has gone back to work in Q4.
Impacted results by approximately five $6 million in the quarter.
We were pleased with the team's ability to redeploy the fleet.
And collision repair refurbishment in sourcing the replacement horsepower in a very tight supplied market.
The redeployed horsepower will be reimbursed by insurance proceeds in Q4.
Okay.
In our completion services segment third quarter revenue totaled $858 million compared.
Compared to $801 million in the second quarter sequential increase of approximately 7%.
Completion services segment, adjusted gross profit totaled $206 million.
Compared to $185 million in the second quarter.
In our well construction and intervention services segment.
Third quarter revenue totaled $38 million.
A decrease of 9% compared to $42 million in the second quarter.
Adjusted gross profit totaled $8 million.
The modest decrease in revenue and profitability was entirely due to the sale of our coiled tubing assets as.
As our cement business saw improvement relative to Q2.
Third quarter, selling general and administrative expense totaled $37 million.
Compared to $36 million in the second quarter.
Excluding management adjustments of $8 million adjust.
Adjusted SG&A expense totaled $29 million, which was unchanged as a percentage of revenue from the prior quarter.
EBITDA for the third quarter was $170 million.
When excluding management net adjustments of $25 million adjusted EBITDA for the third quarter was $195 million.
Management adjustments include $7 million in stock comp with other items totaling a net of $18 million, which are nonrecurring in nature.
Approximately $18 million of total net management adjustments for cash related.
Included in the management adjustments as of $28 million accrual related to the earn out associated with last year's acquisition of Alamo.
This accrual is a function of the continued success of the Alamo acquisition.
The entire next year franchise has far outpaced our initial 2022 financial expectations.
Alamo has contributed ratably to the success as the market environment has improved.
Reflecting on what we underwrote the Alamo deal on in Q3 of 2021, even when considering the earn out consideration.
The deal multiple is now even more attractive and we are very pleased with the outcome of the acquisition and the performance of the combined team.
Now on the balance sheet.
We exited the third quarter with $250 million in cash up from $158 million at the end of the second quarter.
We exited the third quarter with total available liquidity of approximately $622 million.
An improvement from $492 million in the prior quarter.
Our liquidity was comprised of cash of $250 million and $372 million available on our asset based credit facility, which remains undrawn.
Total debt at the end of the third quarter was $365 million net.
Net of debt discounts and deferred finance costs, and excluding finance lease obligations.
We have no near term maturities on our terminal.
Net debt at the end of the third quarter was approximately $115 million a decrease from $210 million at the end of the second quarter.
Cash flow from operating activities was $164 million for the quarter, which as expected was a strong increase from Q2.
We saw improved profitability and we continue to aggressively manage our working capital.
Even as we continue to see topline growth.
Our cash used in investing activities was $31 million during the third quarter, excluding the $27 million in cash used in acquisitions, mostly from the purchase of <unk> last mile logistics business <unk>.
Capex totaled $59 million, mostly driven by maintenance Capex tier four dual fuel upgrades and investments in our rapidly expanding power solutions business.
None of our Capex added frac capacity to the market.
We collected $27 million in proceeds from asset sales most of which was from the sale of our coiled tubing assets.
This resulted in overall positive free cash flow of $133 million for the third quarter, which accelerated from the first half as we have previously got it.
Not only outlook.
We continue to see very strong customer demand through year end and into 2023.
Our frac calendars booked in Q4.
That being said Q4 seasonality, including unpredictable holiday slowdowns.
Create an uncertain quarterly outlook.
For the fourth quarter, we expect total revenue will be down slightly at 2% to 4% sequentially.
We expect another strong quarter of profitability and free cash flow to exit the year.
Year to date at Q3 capital expenditures have totaled $146 million.
Included $59 million in Q3.
During Q4, we anticipate a capex budget of $75 million to $85 million.
With the budget in Q4 capital spend and expected continued strong profitability, we reiterate our commitment to surpass free cash flow of at least $225 million in 2022.
As we alluded to on the last call. The additional budget includes capex to finance strategic orders to bolster frac maintenance major components inventory required to ensure clean is operating at full capability, we cannot risk increased downtime and we use our size and balance sheet to ensure we are as efficient as possible next.
Here.
Q4, Capex also includes $18 million to replace the portion of the fleet that we lost in the fire during Q3.
Which will be offset from a cash perspective in Q4 by insurance proceeds.
And finally this budget also includes capex associated with the completion of the next phase of our power solutions build out to accelerate capacity for early Q1 deployment that is already sold into the market.
For 2023, our estimated Capex budget has been set at $350 million and we believe we can sustain our capex of between eight and 9% of annual revenue through the cycle.
For 2023, this capex will be split roughly two thirds to sustain and transform our frac fleet and maintain market share.
Roughly one third will target growth of our well site integration services as well as to fund high return internal projects that would not add horsepower to the market.
We target less than a two year payback for these investments.
For 2023 based on current estimates, we expect to see free cash flow step higher year over year, and we expect to deliver an estimated $500 million of free cash flow.
We expect to return at least half of that free cash flow to shareholders, starting with the execution of our stock buyback program.
The decisions, we made during the prior down cycle, including countercyclical investments to convert our fleet to natural gas.
As well as the timely acquisition of Alamo position.
Positioned us to capitalize on what turned out to be a very strong 2022.
As the cycle continues through 2023, we will continue to win through a laser focus on capital discipline, while strengthening the company and rewarding our shareholders.
I'll now turn it back to Robert for closing remarks.
Thanks Kenny.
I want to close with a few key takeaways first we're confident in our outlook and.
And I spent the last year or so focused on building the company that would be attractive to investors customers and employees alike.
We've managed to industry, leading growth over this period on the way to establishing what we believe is a company that can generate leading free cash flow that will win through the full cycle.
Customer demand remains strong.
Icing traction remains favorable.
And our already robust free cash flow was improving.
We've done this while remaining conservative with our balance sheet and our support cost to be nimble and able to address high return opportunities that exist around our Frac fleet.
This business model also provides protection from unexpected interruptions that can occur to activity cycles. We believe we're in a great position to advance our strategy no matter the direction the market takes with a strong risk reward profile.
Second we're committed to capital discipline, and returning a sizeable portion of our free cash flow to our shareholders as.
As we stated previously our capital allocation strategy is guided by the following four principles.
One we expect to reach net debt zero in 2023 to protect against uncertainties.
Two we will invest in our core fleet and his transition to natural gas and electric power.
Number three we will systematically return cash to our shareholders and four we will retain some balance sheet flexibility to address high return opportunities that exist around our well completion operations.
Hope that we've shown you today that we are prepared to deliver on this capital allocation plan and are positioned to deliver on our first $250 million cash return program through the end of 2023, while also reaching our financial priority of net debt zero.
We believe delivering on this capital allocation framework will help investors regain trust in our industry and take advantage of this investment opportunity.
And finally, and perhaps most importantly.
We believe great damage might be done to society, we continue to ignore how critical oil and gas is so many people around the world.
Energy expansion.
Not energy transition needs to be to go.
<unk> inflation will require higher oil and gas production over the long term.
We are decades away from displacing fossil fuels as a primary energy source and we need to behave as such.
U S shale is a prime candidate to help fill those global commodity needs.
With that we'd now like to open up the lines for Q&A.
Okay.
Ladies and gentlemen at this time well begin the question and answer session.
To ask a question you May press Star and then one using a touchtone telephone.
You are using a speaker phone would you ask that you. Please pick up the handset prior to pressing numbers to ensure the best sound quality.
To withdraw your question you May press star into.
Once again that is star and then one to join the question queue, we will pause momentarily to assemble the roster.
And our first question today comes from.
Arun <unk> from Jpmorgan. Please go ahead with your question.
Yeah good morning.
I was wondering if we could you could help us kind of walk through.
Kind of an implied EBITDA outlook for 2023, you know you've outlined $500 million of free cash flow I'm assuming.
Assuming 350 million of Capex, so that the $8 50, I think we have a little bit of cash tax in our model, but it seems like you're walking the street up to nine to 950 million EBITA was wonder if you could maybe give us some comments on that.
And I have a couple of follow ups.
Yeah. Good morning, Eric This is Kevin So look we have a lot of avenues of growth.
We talked about integration our operations is performing very well, but it is challenged with the supply chain environment. Those so there is still some upside there we got wireline we have power solutions that we're funding. So we do see a walk up in our profitability on a per fleet basis and overall adjusted EBITDA next year and I think thats.
It gave us the confidence to go ahead and guide that $500 million of free cash flow.
Okay got it so.
The ballpark I was talking about nine to 950 seems reasonable based on those assumptions.
Yes, okay.
Fair enough.
The next you know kind of question I wanted to see is is just on your.
Available horsepower kind of next year, we're trying to for our model kind of fine tune.
How much of the how.
How much incremental horsepower do you expect to have next year, obviously some of the.
Additional horsepower could be replacement. So just trying to understand is you know help us think about how many more fleets would you expect to be operating in 'twenty three based on that that Capex estimate.
Good morning, everyone. Thank you for the question look I would just say that what we've got is so far as it will have you know a new electric fleet. The start activity in January of next year.
And there's been a lot of there is and has been a lot of flux in our fleet as we transitioned around to a new customer base going into next year and how we balancing.
Some of that with traditional zipper frac and how that fleet is allocated so our fleet count is under a lot of flux without putting new horse too much new horsepower in the system.
You know the Capex budget that we outlined has you know as Kenny pointed out two thirds of it allocated to sustaining and transitioning the fleet.
And what that means really is that the maintenance capex aspect of it is pretty straightforward based on historically the way.
We've talked about it and we guided 4 million in the in the context of this of this prepared prepared remarks.
The other dynamic is around transitioning to natural gas power over time, and I mean over a long time, we got started earlier with the transition to tier four dual fuel and has been serving us well, but when you look at it long term is going to be more and more electric as a percent of total we guided the one I mentioned already in.
And I think that in this two thirds of our $350 million Capex.
Link to.
Sustaining and transitioning the fleet there'll be at least one more in in that mix.
And then deciding about whether or not that is a growth asset or replacement in this transition that asked that has to do with what goes on in the macro our intention is not to grow our organic market share and frac two.
To sustain to our commitment that way.
But we do want to have a fleet 10 years from now that's probably a 100% natural gas in some shape or form mostly electric.
So as we add a fleet if the market and the macro is not growing we will get we will retire the bottom end of our operating base, which is the highest maintenance capex required to keep it running at currently.
Hi high intensity Frac jobs that we did a day so I'm glad I got to put that whole message out there is that while there is some of our capex allocated to new fleets like electric that is as equally likely to be a replacement as it is to be anything to do with growth because as we've got it before.
We intend to stay in that 12% to 13% kind of organic market share range.
With our fleet long answer I apologize, but I was kind of want to get that message out.
Robert Thanks for the capital return framework get to see it from the office industry talk soon thanks.
Thank you Sir thank you.
Our next question comes from Steven <unk> from Stifel. Please go ahead with your question.
Thanks, and good morning, gentlemen.
Good morning.
Two things for me if you don't mind. One is you talk a little bit I think on the call about getting back towards prior peak pricing on the pressure pumping side can you give us a sense for where we stand.
Versus prior peaks.
Yeah look I would just say a prayer.
Prior peak you Gotta go back a lot of years, you know 14, probably 2014 being that year, we've been more focused on calling back what we yielded since COVID-19. We mentioned in the prepared remarks that we still got 10 of 15% to go on net pricing to get to get back to where we were even pre COVID-19.
Don't think the industry really needed to have to go all the way back to 2014, we've gotten so much more efficient as a frac operation that profitability is we were able to achieve excellent profitability I can already see with pricing that is much less than it was before so from our customer's perspective, I think that's a good message.
But.
The 15% recapture.
From where we are as we sit here now is something that we're aiming to get done.
And that I hope that gives you some perspective, you know the the real driver and there's been a lot of the printed material regarded what does the Frac fleet look like.
And how many new fleets are being added and we spend a lot of time on that and have continued to do that.
Regarding reactivation as well as new builds and when you project out all the way through next year I mean, I think pretty much everybody has kind of got the same numbers roughly.
But nobody has really taken into account the attrition aspect of it and I can tell you right now that it's difficult to maintain the fleet with the current supply chain challenges related to spare parts around.
The core conventional all parts really of the of the Frac.
<unk>.
So all I'm, saying is that the pricing outlook for 2023 is very very good because supply and demand.
Is still out of balance and this is more demand and their supply and demand is growing faster than supply.
I want to make sure I've got point to reference that deck that we released last night.
We're in the back of that deck it talks a little bit about our view of the macro.
And as it relates to that.
Yeah.
Thanks, and then the other thing and we talked a little bit about this recently I know when you when you talk about the integration and the $7 million of potential cash savings or cash improvement per fleet, where does that stand on sort of fleets that are deployed I know, they're in various stages of integration.
Where do you stand on that whole process getting it implemented across our fleet.
In the early stages of that still are we towards the middle how should we think about that and the impact it has going forward.
Yeah, it's in the first half of it for sure I mean, we still are building up our supply capabilities on the power solutions side for example.
And a comment I made in the prepared remarks around last mile logistics now we've deployed double what we had deployed on the <unk> acquisition and the only you know what does that meant 45 days 60 days or something like that.
So that is moving the needle.
And you know the wireline integration process.
With with Alamo acquisition is moving in the right direction as well. So we made significant progress I'd say during Q3, and we intend to be able to continue to do that particularly as power solutions got a pretty good surge of a capacity hitting the market early in Q1, So we liked that progress.
And our customers know that they're getting more of a taste of it I mean this is more of a pool than it used to be.
Great. Thank you for the detail.
Yes, Sir.
Our next question comes from Derek <unk> from Barclays. Please go ahead with your question.
Hey, good morning, guys I just wanted to expand more on your fourth morning on your on your fourth quarter Guide. So you pointed to in the release you pointed to budget exhaustion weather and holiday slowdowns, but just maybe on the first point of budget exhaustion. Some of your peers dismissed that notion just if you could expand are you seeing that or do you think customers are still too early to drop a fleet.
Not be able to get it back just some more thoughts around that budget exhaustion point.
I appreciate it we tried to leave that out in my prepared remarks, because we don't really see it that much either but we do still have a huge component of concern not huge but the typical holiday shut down no matter, if it's got it or not by the customer a lot of time that happens I think an extension of a day on Thanksgiving day on Christmas and like that.
Not a giant concern, but as it relates to budget exhaustion and I'd say this is that the customers understand that the supply and demand dynamic right now better than they did a few months ago and better much better than they did last year at the same time.
So we probably have two opportunities for every one opportunity where we might have if a customer says I'm willing to.
The shut of fleet down for a couple of weeks. We can go put it to work two or three different classes, but we cant come back until we finish whatever commitment we made to where we win so that's a big deterrent and I think it's the same story among all of our competitive base in that respect so budget budget exhaustion might exist.
For a customer or two out there, but I would say there are probably going to try to adapt to trying to keep those fleets go and it just makes sense for everybody and what we like about that and the reason we thought a lot about it and try not to put that in our prepared remarks too much is because when you have.
The restart of learning curve after a shutdown that slows the ramp up in Q1, and if you don't have that then Europe learning curve already as you go into the next year. So we like where we stand from that respect to getting a good running start in Q1.
Got it okay. That's helpful.
And then just moving back over to the shareholder returns you've committed to the $250 million half of your free cash flow.
Thinking about returning the other half if you don't find the right M&A deal or anything else to bolster the balance sheet, what form could we see that and would be additional buybacks would it be.
Sheeting, a fixed dividend or possibly a supplemental dividend like we saw at one of your peer just maybe more color on that and what signals you need to see from the market to start talking about dividends, whether that's fixed or more like a special or supplement.
I appreciate that question look we have been ears open now for nine months, because we kind of knew where the free cash flow was going I've I've been listening to our stakeholders of all types and we thought about it long and hard before we put in the share buyback plan that we announced yesterday.
<unk>.
But theres still a contingent of our shareholders that are interested in dividend.
And you know we take a serious about making our commitments, we don't want to put one in place and take it down anytime in the future.
But I think that we wanted to be clear about keeping some flexibility around that obviously you know we.
Feel like we've been stating a lot and demonstrating a lot I think that the stock's kind of undervalued versus historical metrics.
And our free cash flow capabilities and buying back shares a pretty easy decision in my view is it still just right now, but as we get out in time, a little bit more further down the road and we intend to kind of continue to do this 50% of free cash flow return dividends I think is very much on the table as far as.
Fixed versus variable the advice.
The interest of our shareholders pretty much more focused on fixed more than variable as it relates to hell with the split.
Let us continue to get smarter about that as we decide in the coming year or so.
Got it great. Thanks, Robert turn it back.
Thank you Sir.
Our next question comes from Scott Gruber from Citigroup. Please go ahead with your question.
Yes, good morning, I actually wanted to circle back on Steven's question about the <unk>.
$7 million.
Additive EBITDA potential.
You guys mentioned kind of being in the first half.
Of that.
Additionally.
As you stand today.
Yes, if you look at the Capex budget, one third kind of dedicated to kind of further expansion of those product lines and services.
Where do you think you would stand on that.
That path too.
Capturing $7 million of added to EBITDA at the end of next year. After this capex was spent.
Well look I'll take that just want to clarify that the 5 million is EBITDA 2 million is on Capex. So the $7 million is basically from a cash standpoint.
Just I wanted to call out the fact that if you look at our revenue growth over the last six quarters a lot of that expansion has come from from this integration right.
And also to point out that $7 million that we committed is actually the impact of frac and not necessarily the individual product and service service line profitability right. So my point to your question on the additional investment in the integration as we called out the $120 million or so that we invest in high return projects that is going to not only.
Strengthen the integration.
The ability on a standalone basis, but it's also going to strengthen that from a product perspective, I think like Robert said, we're probably about halfway there now and I see us, making a big step up towards that $7 billion by the end of by the end of 2023.
Look I would also add Scott that it'll never be 100%, because there's always flux in it and we probably would never have 100% capacity for power solutions for example.
And maybe even the last mile logistics, but I think the needles definitely moving to the right and but it does it does it ever get across the entire.
30, plus fleets.
That's probably not in the cards.
Got you got you and I appreciate the color there and a reminder, on the <unk>.
But between EBITDA and Capex.
Kenny just a couple.
More modeling questions.
They had the fire.
When does that back up and running.
And then from a cash tax perspective, how do we think about cash taxes.
In 2023.
Sure.
The fire on.
On the portion of the fleet the horsepower is actually back into service here as we speak.
We did have to go to multiple vendors to source that and we're very proud of the team for being able to put that together in a tight market in terms of supply.
On cash taxes are based.
Based on our projections with some of our Nols are going to be subject to the 80% limitation on taxable income, but what we're seeing today is an early estimate is about 4% to 5% of cash taxes next year. So we will be utilizing a significant.
The amount of our Nols next year and even into into the following year.
Okay, great appreciate the color. Thank you.
Thank you.
Our next question comes from Robert <unk> from Bank of America. Please go ahead with your question.
Hi, Robert and Kenny and good morning.
Wanted to monitor on now.
Hi, Good morning, I wanted to touch on I think you said, 8% to 9% of revenues.
Through cycle.
Capex right I just wanted to understand how did you get to that number why is it why is that the right number and what do you get with Rick spending that much in capex.
Yeah. So look let me just start with answering the question by kind of.
Given your guiding principles around what we how we think about capex.
Say three or four things one is that we need to maintain our fleet needs to be at least as good as it is at the end of the period as it was at the beginning meaning I Gotta put maintenance capex in there in.
The second thing around it is that we look at the macro of U S land.
From a drilling.
And completion perspective, and we don't see a massive amount of growth it'll be a slow leak upwards in the out years, we think.
So we're not going to try to organically grow our frac market share not going to invest a lot of capex to do that we just want to manage it so that we stay in the same organic.
Status quo area.
And but we are going to transition the fleet.
Natural gas powered over time, and that's most likely electric mostly.
And that's going to be.
Our steady investment in the business that.
You know a trips the low end conventional fleets as pure diesel and replace it with electric over a long period of time. So you got a map that out for like 10 years.
And that helps US retired a fleet makes the fleet stronger over time and it makes the operating costs for the fleet go down over time.
And then right now we're inundated with opportunities of internal projects that have great return profiles.
Less than two years.
Around the integration theme that we've talked about in our strategy a lot power solutions. As an example, we gave an example in the prepared remarks around blenders.
Iron ore projects, there's a whole bunch of things out there that we can get a great return on but with limiting that to about a third of our cafes.
But if we're going to get to a sustainable.
Cash return program for our investors, we got to have a framework around our capex and that the process, we've been going through for the last three or four months and I would say when you get to eight 9% of revenue you're looking at it from an old oil at this guy this manager historically.
Compared to our.
Wireline no open hole wireline franchise or something else, 89% of our revenue for Frac business is better than the market uptake and you can go.
Research on that and see if you believe it or not but I'll do.
So I think that we can flex it downward in the total number.
As the market has cycles that are down that are slower, but if we keep investing at that rate. The fleet will be much more healthy and much more low cost in the long run so.
That's the logic.
Is to stay in that range and if you look at in that prepared material. We put out we kind of looked at what the consensus is of the peer group and eight 9% lower than the consensus of.
Our sector.
So that's the thing that context is very helpful. It does make sense.
Are you going to keep investing in your fleet, though to make a kennedy.
And then transition has obviously got a valid point and then one more quick follow up or Robert on the attrition.
Logic, obviously, there's a lot of debate on that how much accretion would be how much can we see it in a in an up cycle. How should we think about that Randy I think you said in your prepared remark that attrition would be higher than normal below normal which makes sense given the intensity of work that we are doing great but.
From an overall industry standpoint, and from a next year's standpoint, it sounds like we should not expect attrition on next year's leap because you have taken care of.
Right is that.
Yeah.
Well look I would say you know I don't I don't know if it is it depends on them on the macro of supply and demand I would just say this word whether we like it or not.
The supply chain for supply and spare parts like in Q3. This quarter. We just came out I have never seen it that tight before and the amount of money and effort. It takes to get the parts you need to try to keep your fleet maintained to the standards that laid out in the previous comment is not it's not it's not.
Possible right now so you have attrition going on whether you wanted or not so when you look at that and you go where am I going to make sure. These parts go it's going to be in the best part of your fleet and it's not going to be in the older part of the old as part of the conventional diesel fleets.
That happens.
During this phase we're in for the next at least 18 months I think no matter what is what do you like what you want to do and that's why I think the fleet count in the U S. Still only like 270 are operating right now if it's that was different it might be a little bit higher because you see.
The pace of which.
The increases occurred is slower than than we even thought so point is is that.
Think that attrition number is very variable.
To your point and to your work and I would just say that I think has come in and if you see us adding additional fleets beyond.
We're not going to see us, adding fleets beyond the market share guide that I gave if we do it will be as we take out the let the fleets are treated at the bottom end.
Hope that answered business on those kind of all right.
No its not yes, its not black and white right I know somebody.
Thanks, a lot thanks, Robert I'll, let turn it back thank you.
Thank you.
Our next question comes from Dan <unk> from Morgan Stanley . Please go ahead with your question.
Hey, Thanks, good morning.
Good morning, Dan.
So I just wanted to ask.
If there's anything you can do to help us think through what youre seeing in terms of the kind of pricing our earnings tell time between.
Tiers of fleet quality any trends that youre seeing.
Between kind of diesel Pete's dual fuel all that.
Rick crack just anything you can do that help us think through how.
How that's trending would be great. Thanks.
Thanks for the question look we rank our fleet monthly from that perspective.
Top to bottom.
Right at the top of that ranking the leading edge of the financial performance of our fleet.
As with the most.
Newest tier four dual fuel converted fleets, meaning driven by the natural gas aspect of it.
And that's the reason you see the market transition and as I referred to because that's the best part of the market to be and is supported by the fuel arbitrage.
And the better that fleet operates.
Efficiently was the more diesel you displace making it even more profitable for both the operator and and the service company.
As those fleets are integrated we see you know any.
Graded into well side, meaning where I'm, providing wireline and the last mile logistics in the power solutions that control more of our own destiny as it relates to efficiency.
That is that swing from the top of that stack to the bottom is always pretty broad.
So we're constantly migrating.
The bottom of that fleet to new opportunities to find a better mix of integration and interfaced with efficient customers and as we go into next year Youre going to see our customer base turnover a lot for that reason, so you know big opportunity for <unk>.
<unk> is moving that bottom part of that curve toward the middle or towards the top through the pathway of.
Not only price, but more and equally important maybe as the integration and the and.
And the efficiency aspect.
So it's pretty broad, but largely supported by the those those components of value creation.
That's really helpful. Thanks, Robert and then.
Just given us a lot on M&A I'm looking at the slide in your presentation, where you kind of.
Wait out the opportunities that might be interesting to hear that youre looking at inorganic Frac M&A technology.
It's in market.
And efficiency innovations just wondering if you could help us think through.
How you would kind of rank, which of those you see as the most attractive or where youre seeing the most opportunities and kind of what their hurdles would be that you'd look for are there are there are certain investments that you think are that are higher strategic priorities or is kind of about the payback period economics that is there.
Part of the calculus, just wondering if you can expand on your M&A strategy.
Yeah, Let me I appreciate that question, it's very important when I think we've demonstrated that we're pretty good at acquisitions and integration and we kind of like doing it because it does further our strategy and I think it's a lower risk and certainly doesn't add capacity to the market the same way as organic growth does.
The <unk> acquisition for example was one that when you looked at our integration strategy to just say it was a perfect fit accelerated didn't add capacity to the market accelerated what we're always trying to do.
But besides the four categories that we outlined on that slide you know technology efficiency, new adjacent type markets and inorganic Frac. There is also a business development aspect of our strategic opportunity to integrate.
And that could be around entering a basin are entering a customer arena. That's a it allows you to drive drive top line as well so I would just say.
Opportunities to.
Moving the same direction that we're moving technically around low emission gas powered equipment.
Knowledge that furthers the overall frac franchise and all of the footprint that we've already got established around the completion well side is the core of our investment strategy in small deals like <unk> very easy no no risk.
And versus a big M&A merger between two equals SaaS Brad companies those are two different entirely different things and we but we've done both of those are in the last two and a half years and you know what can you say like one better than the other is just depending on the value opportunity.
Okay.
Thanks, a lot that's really helpful color I'll turn it back.
Thank you Sir.
Once again, if you would like to ask a question. Please press star and one.
Our next question comes from Sean Mitchell from Daniel Energy Partners. Please go ahead with your question.
Good morning, guys.
Oh can you hear me, Okay, Hey, Sean.
Good Thanks for taking my question and fitting me in here just you guys recently closed and <unk> logistics last mile.
Deal as you look at their solution versus those of <unk> peers do you see what do you see as kind of the key competitive advantages of their solution versus other services I know you talked broadly earlier in the call about some of the key advantages, but what are the advantages versus maybe other services and then the second part of the question would be do you plan.
Is it reasonable for us to assume you will try to pair that <unk> solution with all of your fleets.
Well, so I'd say, we got a good relationship with that.
<unk> of our service providers.
We have not an intention to try to supply all of our fleets working with with many vendors that do that do a good job. However, I would say the <unk> acquisition that we highlighted some in the prepared remarks.
Round handling really have volumes is very is very intriguing and the fact that you can carry a bit more prop.
Proppant sand per per trip, how fast you can unload it and the ability of the technology too.
Deploy straight into the blenders, how fast that occurs and we've been extremely pleased with that but it will also stand to be challenged and our capex deployment mix and have to compete with other high value opportunities that we don't get to all we don't get to all of them on my list. All the time, so I would just.
Say is it youre going to see it.
A significant increase of deployment with us, but largely that was the assets. There was idle at the time of the acquisition. So I'd just say in general the way. It handles volume has been the upside of it all and the differentiator and an end of the day, the environmental impact of having less trucks and less consumption of diesel and all.
All of those things fit right in our theme of trying to be you know ESG, leading edge and the Frac and the Frac Arena.
Do you have anything you want to add to that.
No.
I, just I would just echo the sentiment around the additional volume and we put it on one of our fastest fleets in the Permian basin and it was able to handle the volume no issue. So.
We're happy with the technology.
Thank you for that question Sean.
Absolutely I appreciate your by sticking with a little bit longer a paired remarks, a little bit long with this particular.
The session was a bit.
Bit complicated with a new release of our shareholder return program.
And look I want to thank thank you for your interest in our company I want to thank the next to your team for the extra efforts and dedication to this strategy and are taking good care of our customers. We're excited about 2023 and look forward to talking to you next quarter.
And ladies and gentlemen, with that we'll conclude today's presentation and conference call. We thank you for joining you may now disconnect your lines.