Q3 2022 ProPetro Holding Corp Earnings Call
Good day.
Welcome to the probe ketchup wherein Corp, third quarter 2022 conference call.
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Thank you and good morning, we appreciate your participation in today's call with me today is Chief Executive Officer, Sam Sledge, Chief Financial Officer, David Shortly Marie <unk>, President and Chief Operating Officer, Adam Boone, Yes yesterday afternoon, We released our earnings results for the third quarter of 2022. Please note that any comments, we make on today's call.
Guarding projections or our expectations for future events are forward looking statements covered by the private Securities Litigation Reform Act forward looking statements are subject to several risks and uncertainties many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise.
Listeners to review our earnings release and risk factors discussed in our filings with the SEC.
Also during today's call, we will reference certain non-GAAP financial measures reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question and answer session with that I would like to turn the call over to Sam.
Thanks, Matt and good morning, everyone first and foremost I'd like to express. Thanks for the continued hard work and high level of execution from our perpetual team.
We are excited to report that in the third quarter of 2022, we continued our track record of operational excellence, along with strong strategic execution and financial performance.
I'll, let David speak more to this in a moment, but at a high level, we're very pleased to produce sequential topline and bottom line increases in the quarter.
Some of our key highlights include the.
The highest adjusted EBITDA margin in the history of our hydraulic fracturing business with the exclusion of the Covid related anomaly in the second quarter of 2020.
Next we had nearly 80% incremental adjusted EBITDA margins for the total company on flat effective fleet utilization, reflecting our disciplined returns based strategy.
Additionally, our cementing business had their highest revenue quarter ever while achieving 100% sequential adjusted EBITDA growth.
Also.
This was the third consecutive quarter of positive operating income for the company excluding impairments.
And finally, we completed the acquisition of Silvertip completion services, a leading Permian basin wireline and pumped out company.
There's a lot to talk about today and we're excited to share more on our strategy and recent actions mentioned above.
We remain committed to executing on our disciplined and focused strategy and it shows.
In the third quarter, we took meaningful steps.
In our efforts to advance our strategy of pursuing accretive growth opportunities that expand our margins and increase free cash flow generation to create a stronger more resilient and more diversified company.
Chief among those transactions is the one we announced yesterday our acquisition of Silvertip completion services.
Also based in Midland, Texas, Silvertip is a leading Permian basin provider wireline perforating and pumped down services.
When coupled with our number one customer rated hydraulic fracturing and cementing businesses in the Permian. We now have a leading completions focused oilfield services company and we're excited to have closed this value enhancing transaction and add this to our potent portfolio of services for our customers.
However, before we speak in depth about silvertip and the other important transactions that we've executed during the quarter.
I want to take a step back and reflect on the macro environment in which we are operating and how we are looking at it from our vantage point.
Just as it was when we spoke last quarter. The crude oil market continues to be structurally under supplied which is a trend we foresee continuing.
For the next few years, so as long as global investment in new production continues to lag.
Moreover, the overhang of a potential global recession has resulted in limited visibility into future near term fuel demand levels.
Given this limited visibility and e&ps, maintaining a disciplined capital spending posture when it comes to growth.
We are anticipating steady to flat activity through the end of this year and into the first part of 2023.
Additionally for the E&ps that are currently operating equipment attrition.
Christian continued delays in supply chain deliveries and a tight labor market are further contributing to stagnated activity.
Given these factors we are seeing a number of e&ps elect to dedicate their resources and efforts towards high grading their service providers with a clear delineation in the pressure pumping sector between those that are high grading to natural gas burning equipment like electric and tier four DGB and those that are not.
This bifurcation as being even further exaggerated among those that are performing safely and efficiently at the well site and those that are not.
Yeah.
As we look ahead, while at a slower pace pricing momentum in the top half of this bifurcated market continues to be strong.
The sense of urgency among our upstream partners remains intense.
And opportunities continue to surface to expand margins through increased pricing.
And with a first of its kind contracting window now open for Frac services. We are optimistic that this momentum will continue.
Additionally, we recently executed a new contract with pioneer natural resources to start 2023 with two simulcast <unk> fleets.
We have already reserved the fleets not continuing with pioneer with other blue chip customers in our 2023 order book is full and effectively sold out with current market based pricing effective in January .
Next I'd like to take a moment to highlight our expansion strategy and the actions we are taking to best position pro Petro for the long term.
First we are focused on optimizing optimizing our operations and industrializing our business. The result of which we expect to add resiliency to our ability to create meaningful incremental free cash flow in the future.
Second we are continuing to transition our assets to next generation equipment in a more capital light manner.
And third we are opportunistically pursuing strategic transactions that increase our competitiveness and accelerate value for our shareholders.
So the first goal of optimizing our operations, we have initiated an internal optimization program for our maintenance and reliability operation.
We expect this initiative will yield opportunities to improve our cost effectiveness and extend the life of our equipment.
Therefore, reducing downtime and optimizing the utilization of our fleets.
Second is our fleet transition.
We are continuing to deploy tier four DGB conversions and look forward to beginning 2023 with six tier four DGB fleets in operation and at least seven in operation by the middle of 2023.
This will give us one of the youngest dual fuel fleets of size in the region.
As we've previously discussed we have executed orders for two electric Frac fleets from a leading manufacturer of electric equipment with expected delivery in the third quarter of 2023.
Additionally, we are in advanced stages of contract negotiations with two large E&P operators to utilize these electric fleets in 2023 and beyond.
Yes.
Demand for electric powered solutions is continuing to gain momentum and we are excited to help our valued customers make their mark in the electrification of the Permian Basin oil field.
We expect to have both of these fleets contracted by the end of 2022 with hopes of additional electric Frac fleet orders in the future.
As mentioned before we believe in the upcoming electrification and industrialization of the Permian Basin.
This technology, coupled with the efficiencies that pro Petro is most known for will support customers and their respective transitions to electrification.
Given our view on the state of the global energy industry and the associated severe under supply of crude oil and natural gas. We are pro Petro are convinced we are in the early stages of a sustained multi year long up cycle and accordingly, our confident and our plan to continue transitioning and electrifying our fleet.
Finally, the third leg of our strategy.
Our pursuit of value enhancing free cash flow and earnings accretive transactions, particularly in more capital light businesses.
This takes us to our recent acquisition of Silvertip.
Also based in Midland, Texas, Silvertip is a provider of wireline perforating and pump down services and together with our existing services profile creates a leading completions focused oilfield service company.
Through its culture of data driven decision, making and established track record of safety Silvertip provides operators with efficient high quality wireline and pump down services.
Simply.
We put we're enthusiastic to have made this acquisition, which adds highly which adds highly complementary.
Dedicated assets with substantial cross selling opportunities to drive growth strong free cash flow and superior value creation. This.
This combination also gives us more exposure to the completions well site and allows pro Petro to offer a more integrated and diverse service to our customers.
Acquiring silvertip represents another important step for Petro as.
As we advance our strategy of pursuing accretive growth opportunities that expand our margins and free cash flow generation.
In doing so we are creating a combined organization that is even better positioned to serve our E&P customers with greater scale efficiency diversification and integration.
Going forward Silvertips co founder and President Mike Wood and his team of professionals will continue to manage silvertip within perpetual and we can't wait to begin sharing best practices, while working alongside each other as we bring our companies together.
And with the silvertip team receiving a large portion of their consideration for this transaction in pro Petro equity, we are fully aligned in our commitment to enhancing shareholder value.
Indeed, both pro Petro and silvertip share a like minded and steadfast focus.
On leading the Permian and completion services execution and we are excited to welcome the silvertip team as we work to deliver best in class services for our customers capture the significant growth opportunities inherent in this transaction and unlock meaningful value for our shareholders of both companies.
We expect this acquisition to increase 2023, adjusted EBITDA by approximately $65 million to $75 million, while converting approximately 80% of that EBITDA into free cash flow.
Given this conversion rate, which is double our current conversion rate. The addition of silvertip will significantly enhance our free cash flow.
And due to these attributes we expect the transaction to be immediately accretive across all metrics.
Moving forward as we look to continue executing on our strategy, we will prudently deploy capital to fund value enhancing growth opportunities along with investments in our Frac fleet conversion.
In parallel we intend to reduce capital spending through enhanced operational efficiencies deploy innovative technologies and continue maintenance and operating process improvements.
With that I'd like to turn the call over to David to discuss our third quarter financial performance capital resources David.
Thanks, Sam and good morning, everyone.
As Sam mentioned earlier, we are excited to have closed on the acquisition of Silvertip yesterday. The transaction consideration consisted of the issuance of $10 1 million shares at probe Petro common stock.
$30 million of cash the payoff of approximately $7 million of assumed debt and certain other transaction costs subject to customary post closing adjustments, which implies a value of $150 million based upon the 15 day volume weighted average price of per Petro stock as of October .
27 2022.
The transaction was accretive on all financial metrics, including adjusted EBITDA multiple free cash flow per share and earnings per share.
The Silvertip acquisition provides additional corporate scale and another capitalized business within our core area of operations, the Permian basin, helping us create a best in class completions focused industry leading business.
The transaction is very earnings and free cash flow accretive due to its low capital intensity and we look forward to evaluating other opportunities that can accelerate free cash flow and earnings for our shareholders.
As we have always done in our evaluation of potential transactions, we want to reiterate our commitment to acquire existing capacity rather than adding incremental equipment to the marketplace, particularly in this continuing supply chain constraint environment.
We believe this is also consistent with our disciplined fiscal strategy that informs our actions across the company.
We also believe the combination of cash and stock was an appropriate balance of capital resources, enabling us to maintain healthy liquidity and a strong balance sheet, while aligning silvertips management and shareholders.
Now to our financial results.
During the third quarter, we generated $333 million of revenue a 6% increase from the $315 million generated in the second quarter.
The increase is largely attributable to additional net pricing gains favorable job mix strong cementing performance and our team's ability to consistently outperform for our customers without expanding our fleet activity.
Our effective fleet utilization of $14 eight fleets for the third quarter was sequentially flat and in line with our prior guidance of 14 to 15 fleets for the second half of this year.
We believe our disciplined approach of margin over market share continues to pay off.
We achieved healthy bottom line growth for the past two quarters without deploying any additional assets.
This foundation will further propel pro petrol forward as our hydraulic fracturing asset base shifts to a higher mix of natural gas burning and electric equipment by the end of this year and again shifting more so in 2023.
Cost of services, excluding depreciation and amortization for the third quarter was $224 million versus $219 million in the second quarter with the increase driven by higher pass through costs, and inflationary impacts, including labor and material costs.
Third quarter General and administrative expense was $28 million compared to $25 million in the second quarter. Adjusted G&A was 19 million and excludes $9 million relating to nonrecurring and noncash items.
Depreciation was $30 million in the third quarter.
The company posted a net income of $10 million or <unk> <unk> income per diluted share compared to a second quarter net loss of $33 million.
During the quarter, we sold our coiled tubing business to step energy services, resulting in a net loss on the sale of assets of approximately $14 million.
Operating income excluding this loss would have been $27 million, reflecting the third straight quarter of positive operating income.
As part of the coiled tubing transaction, we elected to receive consideration in the form of cash and shares and step, reflecting our confidence in steps ability to grow the coiled tubing business and create value.
As part of steps leadership position in coiled tubing, we believe the assets now have the appropriate scale to effectively compete and achieve their full potential.
We will continue to mark to market this investment each quarter.
Yeah.
As adjusted adjusted EBITDA performance was strong with margins expanding by almost 300 basis points with.
With adjusted EBITDA coming in at $90 million or just over 27% of revenue.
Adjusted EBITDA increased 18% sequentially compared to $76 million for the second quarter and as Sam mentioned earlier incremental adjusted EBITDA margins were nearly 80%.
The sequential increase in strong Incrementals were primarily attributable to additional net pricing gains and continued fleet repositioning while also being partially offset by rising cost inflation and other supply chain issues.
Combining pro Petro in silvertip results for the third quarter revenues would have been 383 million with adjusted EBITDA of $104 million or 27, 2%.
Annualized adjusted EBITDA per fleet increased 18% sequentially from $20 5 million in the second quarter to $24 $3 million this quarter.
We also commented on the last call that EBITDA per fleet is expected to increase 25% to 40% in 2023 from second quarter levels. So we were pleased to begin seeing those increases already this quarter.
As we finish filling out our fleet calendar for next year and reposition fleet with more market based rates, we believe pricing of our fleets will continue to improve particularly as yearend repricing takes place.
The market for efficient high performing hydraulic fracturing fleets remains tight due to ongoing equipment attrition.
As we are seeing evidence of some medium and smaller players struggle to maintain service quality.
Our steady focus on achieving full cycle cash on cash returns across our operating fleet paired with additional operating leverage in the form of a 15 fleet active later in the fourth quarter of this year and the acquisition of Silvertip gives us confidence to guide to full year 2022, adjusted EBITDA expectations.
<unk> of it or at least $310 million more than double that of last year.
During the quarter, we incurred a $115 million of capital expenditures actual cash used in investing activities as shown on the statement of cash flows for capital expenditures in the third quarter was 98 million with negative free cash flow of approximately $26 million.
This figure differs from our incurred capex number due to differences in timing of receipts and disbursements.
Based on projected activity levels and purchases of additional tier four DGB pumps, our outlook for full year 2022 cash capex is expected to be approximately $325 million or the midpoint of our prior range.
And our incurred capex will be slightly above the top end of our prior range of $350 million. These differences due to timing.
Given the robust industry fundamentals and our desire to transition our fleet to more natural gas burning and electric offerings, which command higher relative pricing, we are confident in our capital allocation strategy.
Accordingly, with the backdrop of our 2022 equipment reinvestment cycle.
Capital expenditures in 2023 are expected to come in lower than this year setting us up for strong free cash flow next year without any future anticipated debt service requirements.
As a separate timber 32022 total cash was $43 million and the company remains debt free.
Total liquidity at the end of the third quarter was $155 million, including cash and $111 million of available capacity under the company's asset based credit facility.
Pro forma for the silvertip acquisition and inclusive of their accounts receivables in our borrowing base total liquidity is now over $200 million.
Despite our reinvestment cycle this year, our cash position and total liquidity have remained strong which in turn it sets a strong foundation for us to execute on our strategy moving forward and with that I'll turn the call back to you soon.
Thanks, David.
I'd like to I'd like to again mention how proud we are here pro Petro to be a vital part of an energy value chain in the Permian basin.
It happens to be one of the most secure and reliable energy sources in the world.
We believe that the oil and natural gas produced in this region and across the United States will be fundamental to producing products and powering all other industries here at home and across the globe for decades to come.
We along with our peers customers and others across the oil and gas value chain will continue to innovate and improve while.
While providing the most reliable and secure energy for the foreseeable future.
Inside of these broader circumstances, we are laser focused on executing our strategy that we've outlined here today opt.
Optimizing fleet transitioning and executing on value enhancing transactions and partnerships.
To do that we will look to enhance operational efficiencies and maintenance capabilities.
So that we can prudently deploy capital while at the same time reduce our overall spend.
We will continue to work to identify and capitalize on value enhancing growth opportunities, particularly those in the completion services space.
Additionally, we will continue to take steps to tradition, our fleet and as we do so we anticipate the need to order additional electric fleets in the coming months.
Of note. It is always important for us to acknowledge that the equipment discussed today will be deployed under our ongoing margin over market share strategy.
And we will likely not add any net capacity to the overall market.
Moving into 2023, we will continue to make certain that we are striving to achieve proper cash on cash returns.
For our entire deployed portfolio of assets across all service lines.
Before we turn it over to Q&A I want to again, thank the entire pro Petro team for another quarter of reducing reducing risk and creating value for our customers through safe.
Liable and predictable operational performance.
The results, we put forth today and the exciting transactions, we have consummated would not be possible without their hard work and dedication to our mission our safety record and each other.
Our team's ability to execute at such a sustained high level gives our management and our board the confidence to move forward with our strategy, including the acquisition of Silvertip.
Lastly, I want to again welcome the entire silvertip team to the Petro family.
We believe we have the most potent collection of services in the Permian Basin, and we will work hard to continue to enhance our ability to serve our customers.
With that I'd like to open up the line for questions operator.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
Speakerphone, please pick up your handset before pressing the keys withdraw your question. Please.
Tom will partner.
Roster.
It looks like our first call is going to come from Steven Chin Gorringe.
Go ahead.
Good morning, everybody.
Alright, let's see you then.
So a question I know you don't want to go into a lot of detail on a specific customer, but when we think about the potential for price uplift.
On the pioneer assets relative to what maybe its high utilization because you were had a pretty consistent schedule. How should we think about those two factors and what it could mean for underlying profitability of the assets.
Sure Stephen this is Sam.
Throughout this year there has been a portion of our fleet some of which are with pioneer.
Who have had locked in pricing.
For the entire year.
That said most of our portfolio has experienced steady pricing increases.
Throughout the year. So there is a portion of the incremental.
A pretty significant portion actually of the incremental margins that came through this quarter that are due large part.
To that to that pricing progression.
And as we stated in our prepared remarks, we do expect to see that to continue into 2023, albeit probably yet.
At a little lesser speed.
Yes, Stephen this is David I think one other thing just to add is we have a very sophisticated pricing model that evaluates customer productivity across our customer base and so differences in productivity at the well site are incorporated into the specific pricing and we believe that current market rates will be.
Well improved from January one levels of last year of this year.
Great.
And then just my other question was around the market and you talked about the market and how your capacity adds are probably not net additions.
Here from all the public operators, who kind of echo that sentiment, where do you see in the market as far as privates.
I'll try to evolution I'm, just trying to get a sense for providing insights into the overall market supply outside of what.
Public for doing it.
Yes, Stephen I think I think the most important thing to focus on focus on is as you and and really we look at the entire frac market.
Upwards of maybe over 80% of the market's capacity is in.
Seven to eight.
Pressure pumping names.
I would say all of those seven to eight companies have fairly sophisticated operations maintenance programs to supply chains that are going to allow them and I would include us in this group to sustain their activity in a healthy manner going into next year.
There is a significant portion of the remaining 20%.
That might be a bit disadvantaged in and circumstances in the market like we're seeing today.
From a cost standpoint from a supply chain standpoint.
Just in the ability to persist.
In this in this environment.
So while you may see some what are perceived as net adds from some of the bigger players.
I'd say that most of those adds are keeping up with with overall attrition throughout the market.
Great. Thank you for the details.
Our next question come from Derrick <unk> Barclays. Please go ahead.
Hey, good morning, just wanted to dig in on a silver kit deal at a bar just talk about the synergies or the cross selling with the wireline integration you mentioned that 65 to 75 million of EBITDA you expect for next year.
Inclusive of the expected uplift that youll get by integrating the wireline fleets or is that more of a standalone figure I just wanted to get more of a sense of the profitability uplift on an EBITDA per fleet perspective, now that you are vertically integrated with wireline and Frac.
Sure Derek this is Sam great question.
The $65 million to $75 million and adjusted EBITDA that we mentioned attributable to Silvertip is in addition to the legacy business.
As you see it and model it today so.
That just goes on top of.
Any estimates that you have.
For Us next year.
One of the things that we we are excited about inside of this silvertip deal.
<unk> is a pretty significant customer overlap.
So theres quite a few frac locations that we're on today, where silvertip is out there with us.
And we're excited to kind of push into maybe industrializing some of those locations.
With better processes practices, and possibly even trimming down.
The need for for labor on some of those locations by by kind of sharing the load and providing more of a more of a packaged service to our customers.
Yes.
Derek.
This is Dave just to just to add to that this is not a synergy story, we're acquiring this business because of the goodwill and reputation of silvertip and we have not modeled any synergy share. So this is this is on a standalone basis, we've already seen collaboration between our business development groups that has been very.
Positive and we think that some upside but.
No synergies model.
Yes.
Okay understood I mean would you expect some synergies the float there just considering you should get more utilization uplift integrating wireline and Frac you. Obviously had some cost redundancies that you can you could minus out of the system.
Really looking for a sense of the uplift that you could see from that.
Yes, I think the short answer to that is yes.
Okay. Okay.
Just wanted to switch over to the attrition topic again, I think investors are struggling with how thats really going to look like as far as from those top six or seven guys that you mentioned can you walk us through that if you have some more of these tier four DGB is coming into the into the fleet and then particularly that the fracs coming in it sounds like you'll you'll be making addition.
Orders, how does that slow down the line of your fleet that may be your most underperforming tier two how does that how does attrition look like for <unk>, where it's not a complete net addition, where we actually will see tangible evidence of fleet replacement with some of the newer fleets that maybe coming in.
Yes. This is.
This is Sam.
This is Sam again. This is I think they are very very important topic for for people to understand around our sector.
A few different things come to mind.
Side of that question.
One of which is just how different we are operating as pressure from <unk> today as we were in years past. If you rewind to say 2019, and you compare the average Frac site two in 2019 to a frac site today. It is not uncommon for there to be.
<unk> is a 50% more equipment on each individual location.
And it is not uncommon for that equipment to be pumping say, 30% to 40% more hours per day.
So I think we're really early innings of Av.
The market in general understanding the broader effects.
This new attrition.
New attrition speed of attrition is going to have.
On the entire market that said as we look at that in our fleet specifically.
Most everything Youre seeing us do from especially from a tier four DGB perspective is converting existing capacity.
The long term goal as we discuss internally here is to migrate investment away from equipment that burns diesel and towards more equipment more equipment that burns natural gas.
For us those things are things like dual fuel DGB and and our electric offering.
So we're balancing.
<unk>.
Real time market opportunities with with the speed at which we want to execute on that on that conversion program keyword conversion.
Got it okay very helpful I'll turn it back.
Our next question comes from Scott Gruber Citigroup. Please go ahead.
Yes, good morning.
Wanted to touch on Capex for next year, you guys mentioned that it's going to directionally be down but wanted to ask about a few of the moving pieces.
So to E. Frac fleet on order can you just remind us when the spending for those.
And between this year and next year.
You mentioned potentially ordering additional fleet over time.
So.
Would any of that hit any of that can lead to kind of built into the budget next year kind of thinking about that.
Frac spend component of 'twenty, three if you could dimension that for us.
Sure Scott I'm glad you asked that question. This is something that we think is just a very favorable aspect of our transitioning to the electric equipment, we actually have.
A very favorable lease agreement and essentially we're able to make this transition without any material capital investment, we're going to be matching our revenues with our cost in that regard and still maintaining some healthy margin.
We will be there will be some customer supplied equipment I would consider it about 10, 15%.
20% of the total cost of the fleet deployment and that spending will probably be occurring in the first half of next year.
So again very very minimal capital investment and we've incorporated that into the general guidance that we're giving you now we will.
Hopefully be able to provide some more.
Specific guidance as we finish out our 2023 planning.
On the next call.
The <unk> suites will be leased not one.
That is correct, we we were able to.
Negotiate a very favorable lease transaction that effectively enables us to have a very capital light entry into the E fleet space. This is something that we think is pretty exclusive and very favorable to us and our capital efficiency going forward.
Got it.
What do you guys think about maintenance.
For next year.
On the on the legacy fleet.
And how much does the fluid end component running for you guys on a per fleet basis.
So I think just generally speaking as we continue to invest in.
Equipment that doesn't have the same.
Refurbishment requirements and I'm talking about the electric equipment that over time that will decrease our maintenance capex, but I think right now given what Sam mentioned regarding the intensity of how equipment is used on location.
It's essentially going to be similar to what we've experienced recently.
And although we are.
A very significant optimization program to help to expand and Linkedin.
The equipment life.
I would I would model what we've utilized in the past, which is approximately $3 million.
And just the I mean youre going to have.
But setting DGB fleets by the middle of next year.
Fairly new equipment.
Is that a mitigate in terms of the maintenance expense and funding those pumps.
So new.
I think sir.
Yes.
Sam mentioned and we have a slide in our investor deck showing that the.
The age of our assets and how the significant investments we've made over the last couple of years and are finishing up this year and continuing into next year somewhat.
Gives us a young fleet that being said there is still significant utilization of equipment with the pumping times that we've seen continue to increase and the size of the fleets on location as Sam mentioned as well. So I think overall as we continue to renew our.
Our fleet that we should see some mitigating that spend but.
But don't want to understate the intensity of what goes on.
Location, I think our big our big.
Pursuit here is to replace.
Diesel and even tier four DGB engines with electric motors overtime, but.
But that's going to take some time.
Got you got you just overall kind of the legacy suites are you still thinking kind of then.
Like high single digits, maybe like $9 million.
Consider the fluid askmen.
Yes, that's right I think I think.
Given inflation that that could be biased higher but if that eases somewhat in 2023, then maybe maybe we're able to keep it in that range.
Okay.
All the color. Thank you.
Our next question is going to come from Erinn Jairam of J P. Morgan Chase. Please go ahead.
Yes, David I was wondering if you could maybe help us think about how the accounting around the leases and maybe a follow up to Scott's question.
On the <unk> Fracs will work and how do we think about it.
Margins, including kind of the lease obligations. So just trying to think about some of the moving pieces for the model.
Sure and we're continuing to evaluate the specific characterization of those leases, but we believe that.
They will be embedded in our cost of services and that I think youll have some.
Some slight degradation.
With that cost, but the way we've priced the fleets, we're still generating very high quality.
EBITDA per fleet in the 30, plus range and and that's how we're looking at it so I think overall.
The total company it may be slight degradation, but.
But I think given the repricing that we're expecting in 2023 and the cadence of the industry.
Overall, we're still sticking with our guidance for next year as far as EBITDA per fleet.
This is Sam I'll, just add on to what David said, our overall goal with this structure.
Was.
Was to smooth out from a free cash flow perspective, what has traditionally been a pretty jagged and lumpy.
Sector from an investing standpoint.
We're absolute.
Risk and capital gets gets passed around in big chunks.
So when you hear us mentioned.
Working to industrialize our business.
This this type of economic model, we think fits that kind of.
Longer flatter.
Type of line, rather than the investing volatility that our that our sector has been so accustomed to in the past.
Yeah, and Arun one more note on that.
When we take delivery of the assets in the late second quarter early third quarter of next year, we will gross up our balance sheet for those minimum lease obligations and then we will.
Essentially accrete those through cost of services as as we use the equipment.
And then and then we will have purchase options on the back end of those leases.
Should we choose to acquire them.
And just real quick David is the leasing arrangement with the manufacturing of the equipment or is it let's say a third party financing company.
It is with the manufacturer.
Okay, great great.
And then as we think about.
<unk> the acquisition under our model.
Can you give us can you give me a little bit of help on thinking about.
DD&A.
G&A in any maintenance capex for that for that business.
Yes, I can give you some.
Some general ideas I think that from a quarterly.
Depreciation perspective, and next year, we're probably going to be $32 million to $33 million per quarter. We will continue to refine that as we as we incorporate that business into our model.
As far as Capex going forward, we've provided some information in our <unk>.
Investor Relations deck that reflects.
Yes.
Kind of less and less than $10 million of maintenance Capex next year for the business.
Great. Thanks, a lot.
Our next question comes from Luke Lemoine with Piper Sandler. Please go ahead.
Hey, good morning, and congratulations on silvertip.
Sam you talked about ordering I believe you talked about the ordering more additional fleets in the coming months.
Can we probably think about this as a couple more and then I guess at this point with <unk> 2004 deliveries.
And do you see a need to order additional tier four DGB fleets or do you think all replacement fleets going forward are probably electric.
That's a that's a great question.
I think yes, it's fair to look at Additionally fleet orders.
In the ballpark of a couple.
We've said this multiple times past and really its been our strategy here at perpetual for a long time in terms of committing to.
Orders for new equipment is that we'd like to see demand.
Specific demand of perpetual.
Outstrip, our ability to supply before we pull the trigger on on certain things like this.
Especially electric fleets.
So demand is still very strong as we as we've mentioned multiple times and in.
In the scripted remarks and and to.
To tie back to I mentioned I made earlier in Q&A.
Finding down investment in diesel burning equipment in winding up investment in natural gas bring equipment is a key part of our.
Fleet conversion strategy, if not a cornerstone.
Of it so.
From a tier four DGB standpoint.
I think we're in pretty good position, where we are now.
<unk>.
We'll probably wait to see a couple of more specific opportunities materialize before we change the speed.
Of that conversion program. So when you look at it at a fleet next year that if we are running the same number of fleets. We are today, we would have.
Nine out of 15.
Of our fleets.
Less than two years old and natural gas burning so we think thats that's.
A very significant competitive advantage.
Yeah.
Got it and then if you did order more equally it's in the coming months within the 24 delivery.
Late 'twenty three at this point.
It would be cutting it close and not sure. If we have a direct comment on that yet, but it would be.
It would be that would be very close.
Okay got it alright, thanks, a bunch.
Our next question comes from John Daniel Daniel Energy Partners. Please go ahead.
Hey, guys I've got a few this morning, thanks for including me I'm going to follow.
Lutz lead here stick with electric can.
Can you.
Remind me you may have said this on the last call and that just simply forgotten gain all but who's going to own the power on the electric rates when you get them.
Yes, Jon this is Sam its going to be kind of cut.
Customer by customer basis, each of these first two fleets the prospective customers.
We have them earmarked for.
We will probably be supplying power through a third party on one of them and on the other day, they will likely be sourcing power themselves directly.
We will look to remain nimble nimble on that front moving forward okay.
Housekeeping a couple more here I know.
<unk> been sort of asked multiple different ways on the E fleets whether there.
On how they.
They are not expected to be additions I.
I guess my question is obviously, you know who the two customers are in you probably won't say, which is fine but when they look at these eat fleets are they looking to replace an existing fleet are they looking for these to be incremental and if theyre looking to replace and fleet isn't one of yours that makes sense.
As it sits today it could be one of each.
So.
And we're trying to measure up against.
We want to.
What what activity level, we want to hold throughout the year.
Next year as well, but it could be a little bit of both.
Okay couple more and I apologize for being up.
Our hog here.
You mentioned on the investments and dual fuel and electric clearly that's a big push on your Frac side as you look at the integration of silver 10, what are the demands there for dual fuel our electric wireline there've been a few companies out there.
Dabbling in it.
I'm just curious like what's the what are the demands from customers with respect to that and if they say hey, we want all of these to be electric what's the capital cost for you guys if that happens.
Sure.
Great question.
I think the demand or focuses is probably much lower than it is on something like frac equipment.
Just given the fuel consumption intensity.
Right you don't have wireline units consuming.
It really only a fraction of 1% of the fuel that something like a frac fleet consumes that said.
Given our transition into more natural gas burning in electrified offerings.
That becomes a pretty significant.
Kind of play to run into.
This conversion in this electrification of the oilfield so.
Through our diligence to silvertip in conversations about how we can work together going forward that has definitely been a part of them.
Especially on the on the on the E Fleet side, Yes. John This is David it's not a significant expense to convert those to be able to support electric.
Capability.
My final one and that is a very big picture, but Sam.
Just your thoughts on the Permian Basin Frac market in 'twenty three.
As you talked about customers are starting to go through the budget process do you see.
Big incremental gains and Permian Frac crew count or stable just opine if you will.
I think it will be relatively stable John .
Theres obviously.
A good number of dual fuel conversions and new E fleets coming into the system and we're fairly confident that attrition is outstripping all of those add.
On the bottom end of the market. So we think it will remain tight and virtually sold out throughout the entire year next year.
Great. Thank you for allowing me in.
Thanks.
As a reminder, if you have a question. Please press Star then one.
A question that is going to come from Don Crist of Johnson Rice. Please go ahead.
Good morning, gentlemen, just one on silvertip from me can you say what the utilization of the 2023 wireline units are today are they fully utilized.
Just shy of 20.
Right now.
Okay. So there is some upside there.
Our increased EBITDA, if those three go to work.
And Brett.
On the last call David I believe you talked about free cash flow being somewhere in the name of 150% of your EBITDA for 2023 with the Silvertip acquisition when the estimated free cash flow of $55 to $60 is that additive and was that closer to 60.
5% or 70% now after this acquisition.
Thinking about that right.
Dan we're going to be continuing to incorporate the financial numbers and evaluating our budgets for next year, So I want to be very.
Thoughtful about that and let you know that will provide further guidance I think we've provided some.
The information in our <unk>.
Investor Relations deck that you can take a look at but.
Definitely accretive to free cash flow for sure on an absolute basis, and I think it would certainly help blend our conversion upwards. So.
Let us spend some more time, finishing out our planning for next year, we'll give you a bit more guidance on the next call.
Okay, Yeah, I wasn't trying to nail you down on a specific number I just wanted to know that it was accretive okay. I appreciate all the color. Thank you.
You bet.
As a final reminder, if you have a question. Please press Star then one.
Our next question will come from.
<unk> of <unk> capital. Please go ahead.
Hi, Thanks for taking my question.
Sam.
As you look at the silhouettes.
I understand there is a supply chain challenges to see difficult to lead to the gains a company like that but what are you to buy on these assets.
Somehow, let's say theoretically what would the cost be.
The kind of the replacement cost of all of the assets because there's always a lot more than just like 23 wireline Clarkson.
<unk> is also all the other claims and other equipment that comes with it and so what the replacement costs be in your view.
Okay.
Yeah, Waqar I think we'd rather not comment on what the replacement cost.
Perceive maybe some of that's a little bit of.
Competitive information that said.
You are correct inside of what is a very tight.
Environment labor supply chain equipment, all the above coupled.
Coupled with the fact that this is a business that pro Petro has not historically been in.
We think that this is definitely the right way for us to enter.
Another service line Thats Thats complementary to Frac.
So I think what's most compelling for US is one the team at silvertip brings along with the expertise reputation execution they bring from a performance standpoint.
And the free cash flow profile of their business.
Those two things lead the way for us and we're pretty we're pretty excited to push into 2023 with that offering.
Okay. This is David just to add one little comment we have no desire to create additional equipment capacity in the marketplace.
Our strategy around pursuing high quality operations, and acquiring that free cash flow and earnings capability.
<unk> is the right strategy here and we've done that we've got a lot of confidence in Mike Wood and his team.
And we think Thats the right way to go.
Okay.
And then Sam.
Multiple different easily designs out there.
What design are you buying the manufactured with manufacturers.
Yeah, we're not we're not we're not publicly disclosing the name of the manufacturer, but we can tell you that this is a very tried and true solution.
That exists and has been in operation for years and years across the globe.
Sure.
Mainly we will have conventional pumping systems on the back of these trailers. So.
A fairly significant portion of this equipment will be something that our team our legacy team here at perpetual was already very familiar with so you can you can look to us to hit the ground running operationally with this electric offerings.
Sure.
Alright, Thank you very much.
Thanks Waqar.
This concludes our question answer session.
I would now like to turn the call back over to you.
Pardon me.
Sam Sledge CEO . Please go ahead.
Thank you and thanks again to everyone for joining us on today's call as I mentioned before and I would love to mention again, we are very proud here pro Petro to play a part in the innovative energy industry, where oil and gas remain critical to everyday life across the globe.
We hope to talk to you soon and we hope you join us for our next call.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
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