Q4 2022 Nextier Oilfield Solutions Inc Earnings Call
Good morning, and welcome to the next tier oilfield solutions first quarter 2022 conference call.
As a reminder, today's call is being recorded at this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
For opening remarks, and introduction I would like to turn the call over to Mike Sabella.
<unk> President of Investor Relations for next year. Please go ahead.
Thank you operator, good morning, and welcome to the next tier oilfield solutions earnings conference call to discuss our fourth quarter 2022 results with me today are Robert Drummond, President and Chief Executive Officer, Kenny piece, you Chief Financial Officer, and Kevin Mcdonald, Chief administrative officer and general.
Hassle.
Before we get started I would like to direct your attention to the forward looking statement disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's website.
Our call. This morning includes statements that speak to the company's expectations outlook or predictions of the future which are considered forward looking statements. These forward looking statements are subject to risks and uncertainties many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by these statements.
We undertake no obligation to revise or update publicly any forward looking statements, except as may be required under applicable securities laws.
We refer you to next year's disclosures regarding risk factors and forward looking statements in our annual report on Form 10-K subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission filings.
Additionally, our comments today also include non-GAAP financial measures.
Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our earnings release for the fourth quarter of 2022, which is posted on our website with that I will turn the call over to Robert Drummond, Chief Executive Officer of next year.
Thank you, Mike and thanks to everyone for joining the call today.
2022 was a strong year for next year.
We will not rest on our past successes I do want to take a moment to reflect we started 2022 by asserting our view that the frac market was tight and then frac equipment will become harder to find a view that was far from the consensus at the time.
Indeed, frac quickly emerged as one of the main bottlenecks in the U S shale oil and gas market.
Against this macro backdrop with strong demand and limited supply for our services, our pricing outlook improved considerably as the year progressed.
Importantly, we were able to deliver strong results for our investors, while also delivering best in class service for our customers.
Do all of our hard working employees and their families that made last year possible. Thank you for contributing to the success of our company I could not be prouder of what we accomplished together.
And next year, we are committed to sharing in the success and investing in our people as we strive to make this a destination, but the hard working men and women of our industry, who are looking to build a long and prosperous career.
During 2022, our success extended beyond just the core frac operation to each of our service lines with profitable growth in wireline cement.
Our solutions and last mile logistics.
But despite the progress we made last year, our business still has not returned to pre COVID-19 net pricing and we are still looking to recoup prior investments we made to improve efficiency our.
Our prior investments must be combined with supportive fundamentals if our industry can be expected to drive the next leg of process improvement and fully reflect the value we can create for our customers.
On the macro front, we believe the cycle has only just begun with a set up in 2023 that is as good as what we saw in 2022.
We believe demand for Frac fleets today exceeds supply by 20 to 25 fleets.
With as much as 10% of horsepower demand going unmet, which has allowed us to raise price this year already.
We also have customers that are enquiring about 'twenty 'twenty four work now.
But fully satisfying demand of our customers has its challenges.
Our supply chain remains stretched.
With a backlog for parch that is substantially higher than normal.
We've seen a little progress so foreign correct in situations.
While some argue that current economics will stall attrition. The reality is that supply chain challenges capital discipline and inflation I'm more likely to cause attrition to accelerate and new builds to delay further.
In fact delivery of our own electric fleet has been delayed into Q2.
And next year alone.
We plan to decommission roughly 150000 horsepower over the next 18 months.
Meaning within our capital budget framework of 8% to 9% of revenue our capacity will remain relatively flat this year.
We will continue to allocate capital to the highest return on investment.
And as we show on slide 11 of our updated Investor presentation investing in these older assets no longer meets our hurdle rate. It makes more sense for us to invest in new equipment and to continue to deploy capital into these older obsolete assets.
We do not believe we are alone in this attrition narrative.
Even with the new builds we see a challenge path to increasing industry, frac capacity, which should lengthen the cycle and solidify another round of price increases.
At the same time and as we show on Slide 12.
Bifurcated industry fleet with a steep equipment cost curve is allowing our natural gas fueled assets to earn a premium return.
These differentiated returns supported by the fuel cost arbitrage should last several years as the industry fully transition to next generation equipment.
A process that will likely take over seven years at the current newbuild cadence with more than half of industry capacity still legacy diesel fleets.
The demand side is supported by what we see as an underinvested oil and gas market that needs to increase production to avert a global energy supply crisis.
U S shales role will no doubt be critical imbalances in global commodity markets, but our customers are restricted by their own capital discipline as well as the availability of equipment like Frac.
We do not believe shale as compared to quickly Astra the global call, which should lengthen the demand cycle for our services as the world's searches for more oil and gas.
For next year.
We believe we're on a path to additional profitability in 2023 and beyond.
We entered this year still roughly 10% below pre COVID-19 net pricing for Frac services, and we will look to recapture that throughout the coming year, some of which we've already realized.
We also see opportunities to grow our wealth side integration offerings and invest in high return projects that support our efficiency in our core Frac operations.
Even as the strong macro environment plays out we will continue to lead our industry and disciplined behavior and use our returns to reward our shareholders.
We've established a track record of delivering strong free cash flow high return on investment and capital efficient growth.
We will continue to focus on maximizing returns on capital and returning capital to shareholders.
We believe this would be the winning strategy for our company and our investors.
While our industry fundamentals remained strong we would be remiss to ignore the growing dialogue around weakness in the near term natural gas fundamentals.
Next here, our largest natural gas exposure remains in the Marcellus.
Takeaway capacity has constrained activity in that basin for some time now and activity. There has been relatively steady over the past couple of years compared to other gas basins.
Coupled with the lower breakeven well economics, we expect Marcellus activity to remain relatively steady despite the drop in natural gas prices.
Because of this we think the Haynesville will take the brunt of any activity decline.
History suggests worst case is perhaps a 50% decline in haynesville activity, which would imply as many as 14 frac fleets could be released from that basin.
The scenario that would result in a significant decline in basin production.
But what we want to be Crystal clear, we fully believe the fundamental under supplied and nature of the frac market in the oil basins could easily absorb these fleets.
Even in this scenario when taking into consideration current unmet demand.
Modest demand growth in all basins and the planned Frac fleet additions. We believe total utilization is likely to remain balanced even a small amount of attrition will keep the industry fully sold out through 2023, and we believe attrition is inevitable as evidenced by our own actions.
Yes.
Our macro views has always taken a more conservative view on near term rig count additions due to our understanding their frac fleets are the bottleneck to production growth.
So while we were watching the natural gas fundamentals just like everyone else. We view this potential disruption as a relatively minor threat given our view that the overall U S land market is still under supplied and likely will be throughout 2023.
It is important to note that we only have a small exposure to the haynesville with just two fleets operating in that basin today.
Additionally, we're not hearing any commentary for more natural gas customers about slowing the pace of completions.
Further.
Low gas prices increased the cost advantage of our natural gas fuel fleet, which could solidify demand for those premium assets and raise the value of our power solutions business.
Nevertheless.
Even as we see the cycle continuing we are nimble and can respond quickly to unforeseen changes, we have a sticky customer relationships and we will always prioritize a strong balance sheet with substantial liquidity.
Now to our results.
We saw improved profitability and return sequentially, even in a counter seasonal period.
Net income of $133 million improved 27% from the prior quarter and was 15% of revenue.
Our net income per diluted share was <unk> 52 cents.
Total revenue of $871 million was down 3% sequentially, but was 71% higher than the same quarter last year.
Our adjusted EBITDA was $213 million was up 9% from Q3.
We effectively managed our decremental margins on a sequential basis, and we manage the shift to higher margin work with better returns.
We also continued to generate very strong free cash flow generating $93 million in Q4, even as we funded and Alamo earn out payment.
During Q4, we repurchased 11 5 million shares for $113 million under our $250 million of shareholder return program.
It entirely with free cash flow and cash on hand.
For the full year 2022 we more than doubled our revenue with adjusted EBITDA nearly six times greater.
Most importantly, we achieved this strong growth, while staying very disciplined with our capital allocation and generating $295 million in free cash flow.
Since the very start of the recovery, we saw that when this cycle was going to require a different approach compared to prior cycles. We've.
We've been steadfast in our message that our goal is to balance future growth needs demanded by our customers with returns and free cash flow needs demanded by our investors.
We're happy to see this strategy been repeated by many of our peers across the industry.
Capital discipline has become a common theme in the industry, which should lengthen the duration of the cycle.
We're proud of our success in balancing these two strategies and we have high conviction that this is the best path forward for our company and our investors.
As you as you see on slide 15, we've achieved our growth in a very capital efficient manner.
On slide 16, we show that we achieved our growth over the past year, while deploying significantly less capital relative to our peers.
For 2022 hour, 30% return on invested capital has improved significantly over the past year.
In the fourth quarter, we delivered an annualized rossi of 46%.
Oh I see as one of our highest priorities, we consider whenever we make an investment decision.
Maximizing returns require smart and opportunistic capital allocation.
We invested counter cyclically, which allowed us to create additional value during the early parts of the cycle and we continue to rationalize our asset base, we sold $50 million of noncore assets last year and redirected the funds to areas, where we can create better value for our shareholders.
We believe our return should improve significantly again in 2023 and have the potential to stay high for multiple years.
We expect strong demand will continue.
And on the supply side the market remains under supplied and consolidated.
Additionally, growing capital disciplined in our industry and equipment and parts availability are restricting our ability to add and maintain equipment.
Finally by.
Bifurcation and equipment quality is elevating our returns as the industry undergoes a lengthy conversion to natural gas.
During 2022, we reported earnings per diluted share of $1.26.
Our share price today is just seven times, our 2022 earnings per share and considering we expect EPS growth again in 2023, we believe our forward looking price to earnings ratio is even lower.
We generated $295 million of free cash flow in 2022, and our expectation is that will increase our <unk>.
That we will increase our cash flow to at least $500 million in 2023.
We see free cash flow conversion over 50% this year and we still see a path to grow in our adjusted EBITDA, 40% to 50% relative to 2022.
Ultimately the goal of this strategy is to maximize value creation for our shareholders.
Last quarter, we presented a detailed capital allocation strategy that rests on two foundational pillars we.
We will prioritize our net debt zero capital structure to ensure our business remains nimble through the cycle.
And we will look to invest 8% to 9% of our revenues in Capex annually, which we believe is sufficient for us to maintain service quality and market share in our core business, while slowly transitioning the rest of the fleet to natural gas powered and funding growth.
Our well site integration strategy.
On top of this foundation sits what we believe is a durable free cash flow profile.
We will return at least half of this free cash flow to shareholders through a process that we started in 2022.
Through February the 14th and including the amount we used in Q4.
We repurchased 14 4 million shares for $139 million, bringing the total to nearly 6% of the shares that were outstanding prior to the buyback.
After funding our shareholder return commitment and reaching our capital structure go we believe that we have optionality on roughly $200 million in cash through the end of this year.
We remain interested in M&A, including both for further consolidation of the Frac market as well as other avenues to grow our successful well site integration platform.
Yeah.
We have a very strong M&A track record has been demonstrated by our recent acquisitions of Alamo and C. O G logistics, both of which easily outperformed initial expectations and have become core to our company.
But we will continue to be prudent and we will act on transactions that make sense for our shareholders. If no attractive deals were found we can pivot to use the cash to further strengthen our balance sheet or expand the shareholder return program.
We remain committed to maximizing the value of every dollar of capital in all phases of market cycles.
Guided by our sustainable capital allocation program.
We believe the significant use of cash to repurchase shares should demonstrate our dedication to our strategy as well as our conviction in the long term outlook for our business and the belief that our equity is significantly undervalued.
The prior cycle, Oss playbook, which was got it almost solely by EBITDA growth.
And rely on indefinitely capitalizing one year returns in new build economics, while ignoring industry supply and demand fundamentals did not work.
We believe our balanced strategy better served the company and our shareholders and we will continue this chart. This new course.
We have strong conviction that capital discipline and a focus on sustained returns and capital efficient growth will be the winning formula in this cycle.
We are bullish that the cycle is in its early stage.
We are prepared to deliver strong value creation and return capital to our shareholders the entire time.
I'll now pass the call over to Kenny to discuss our fourth quarter results in more detail.
Thanks Robert.
Fourth quarter revenue totaled $871 million compared to $896 million in the third quarter.
Revenue decreased 3% sequentially, which was in line with our God.
We had strong execution and pricing continued to strengthen during the quarter, which was offset by seasonal downtime as well as lower product sales.
We continue to operate very efficiently with near company record pumping hours per fleet on average even with the seasonal disruptions.
Revenue decline in our completions segment, while the well construction and intervention services segment revenue improved on strong demand and solid operational performance.
Total fourth quarter, adjusted EBITDA was $213 million, an improvement from $195 million last quarter.
We increased profitability despite lower revenue.
Based upon several factors.
First we saw a shift in work to higher efficiency higher margin jobs during the quarter.
The slower revenue more profitable work as a function of aligning ourselves with like minded customers that focus on efficiency integration and value creation.
This realignment is also serving us well in 2023.
Second well holiday downtime was a factor in our results we managed costs to help minimize the impact on our profitability.
And third the investments, we're making to improve our efficiency and cost structure of work.
These investments such as expanding the functions of our next 12 digital center.
Grading ancillary equipment around our Frac fleet and improvement in last mile efficiency go straight to the bottom line are critical in the quarter on quarter improvement.
In our completion services segment fourth quarter revenue totaled $830 million compared to $858 million in the third quarter.
Sequential decrease of approximately 3%.
Completion services segment gross profit improved to $227 million, even on lower revenue as we upgraded the quality of work and <unk>.
Secondly manage costs.
In our well construction and intervention services segment fourth quarter revenue totaled $41 million.
Increase of 7% compared to $38 million in the third quarter.
Gross profit totaled $10 million, an increase from $8 million in the third quarter as our cement operations showed a strong improvement.
Fourth quarter, selling general and administrative expense totaled $37 million flat compared to the third quarter and excluding management net adjustments of $7 million adjusted SG&A expense totaled $30 million.
EBITDA for the fourth quarter was $200 million.
When excluding management adjustments of $13 million adjusted EBITDA for the fourth quarter was $213 million.
Management adjustments include $7 million in stock comp with other items totaling a net of $6 million.
Non recurring in nature.
Approximately $6 million of told them that management adjustments or cash related.
Now on the balance sheet, we exited the fourth quarter with $218 million in cash down from $250 million at the end of the third quarter.
We exited the fourth quarter total available liquidity of approximately $634 million.
Our liquidity was comprised of cash of $218 million and $450 million available on our asset based credit facility.
Which remains undrawn.
Total debt at the end of the fourth quarter was $361 million net of debt discounts and deferred financing costs and excluding finance lease obligations. We have no term loan maturities until 2025.
Net debt at the end of the fourth quarter was approximately $143 million, an increase from $150 million at the end of the third quarter.
This sequential increase in net debt as a function of the use of cash as part of the share purchase program.
Cash flow from operating activities was $144 million for the quarter.
Profitability strengthened while the sequential decline is a function of the Alamo earn out payment during the quarter.
We continue to aggressively manage our working capital and saw solid improvements in our cash collections.
Our cash used in investing activities was $51 million during the fourth quarter Capex totaled $79 million.
Mostly driven by normal maintenance investments in the next phase of our power solutions growth and proactive investments to increase our inventory spare major components, such as engines and transmissions as.
As we look to minimize the impact of the tight supply chain.
We also funded the replacement pumps for the portion of the fleet. We lost so far in Q3, which was entirely offset by insurance proceeds.
This resulted in overall positive free cash flow of 90 $393 million for the fourth quarter.
Now on the outlook customer demand was very strong as we entered 2003.
And this has continued through Q1.
We had a very encouraging start to the new year with very little impact from normal startup issues that can arise after the holiday slowdown.
As is always the case winter weather will have an impact on our Q1.
For the first quarter, we expect total revenue will be up at least 6% sequentially.
Consistent with previous guidance, our 2023 Capex budget remains at $350 million, which include an attrition will result in relatively flat horsepower deployment through the year.
We expect our budget to be first half weighted and expect capex to decline in the back half as we plan to invest early in the year to maximize returns.
We see free cash flow of at least $500 million in 2023.
We are excited about the company we have bill we've made smart capital allocation decisions that have positioned us to outperform our peer groups on returns free.
Free cash flow early in the cycle.
We plan to continue to win through our focus on balancing high return investments and dedication to capital discipline.
As we've pointed out in our updated investor presentation. The oilfield services sector is healthy.
Returns on most of our peer group are exceeding the cost of capital for the first time in many years and the sector is generating meaningful operating margins contrary to prior cycles.
The industry is prioritizing shareholder returns, which should mean a longer are durable return profile for next year, and our peers and thus a more investable industry.
We believe current equity valuations are not indicative of our sustainable earnings profile, we see no indication of a slowdown.
Macro fundamentals is expected to remain strong for multiple years.
I'll now turn it back to Robert for closing remarks.
Thanks Kenny.
As we announced earlier this week, we recently added an independent director.
Lastly, buyer has agreed to join our team and will be unimportant voice for the company as we enter the next phase of our development.
Leslie is the CEO of the energy, we're fortunate technology Council, the largest energy technology and services Association in the World. She bring brings with her a wealth of oil and gas knowledge and expertise and we're so delighted to have her voice in our boardroom.
Now, let me close with a few takeaways.
First we're very excited for 2023.
And industry fundamentals are strong as they were last year and the tightness now is far better understood.
Given the sold out nature of the Frac market customers are actively looking to align themselves with the most reliable partners as they look to maximize their own capital efficiency.
Several of our customers are already starting conversations now for 2020 for work.
Our operational excellence puts us high on that list, we have repositioned our footprint commercially and geographically to align with strong partners, which should mean higher profits in 2023.
Second our well site integration strategy is a differentiator they rely heavily on value creation and synergies for next year, our integrated offering either lowers the total cost of operated completions well site.
Our raises efficiency.
And in most cases both.
This value creation allows us to earn strong returns while also offering the customer a superior product if.
If we do not see a path to process improvement.
We do not see the need to invest our capital dollars and the service.
Finally.
We still see some investors and analysts discussing the investment strategy for our fifth in the same context as prior more growth oriented cycles.
The industry has changed.
Durable returns earnings per share and free cash flow are increasing in importance. It must be considered alongside EBITDA growth we.
We see this is the best strategy to attract the next generation of investors back to oilfield services.
And next year, we're doing our part to lead the industry into this next phase with that wed now like to open the lines for Q&A.
Thank you and we will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
If youre using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then two at this time, we will pause for a moment some of our roster.
Our first question today is going to come from Scott Gruber of Citigroup. Please go ahead.
Yes, good morning, great execution this quarter.
Thank you Scott Thanks, Scott Good morning.
I think I'm going to start on your comments regarding the unmet demand in the oily basins are obviously as you mentioned the market's concerned about gas directed activity migrating out into the oily basins.
So just some color on how you did mentioned that you are in the bag.
Agnes due to that.
Met oil demand are you looking at DUC counts.
Is it based on customer conversations the blend of the two and just some color on how you arrived at the 20 to 25.
So I would be glad to walk you through that you know you go back to Q3, we were saying then that frac demand growth was higher than Frac supply growth and that you know frac supply was already at that point the bottleneck for U S production growth and a little bit contrary to the pack at that particular time that the current.
Rig count was increasing the DUC count you know even back then.
You combine that with the fact that the Frac supply chain is distressed and then attrition for the Frac fleet is very real.
And that's the kind of the backdrop for for it but certainly any kind of projection.
You put on you know macro Brac a supply demand has to be built around what is the macro for oil and gas and for oil you know I think the near term narratives around.
Assertion and inflation impact China, Russia.
The U S land natural gas price and also maybe the S. P. R replacement balanced against the structural long term under supply scenario. So we.
We're not going to try to predict the oil price, but when we look at what our.
Customers are budgeting and we look at our view of the long term kind of runway for oil it's very supportive.
So then you kind of taken drop that into.
You know frac supply and demand we exited last year, you know what about 272 fleets operating we thought and market their need at about 20 to 25 more.
Fleet.
And that you know it was the beginning it's taken a look at what you would project it to look like at the end of 'twenty three.
So there's been a lot of discussion about drilling rig additions in 'twenty three that number is continuously came down over the last few months and we've been very conservative about that because we always knew that.
Frac was more or less the bottleneck.
So we just take a slight increase in drilling rig count and the old buttons for next year generates.
You know demand for about 10 more frac fleets.
And then we'd take a look at that at the Haynesville side of this scenario.
And there's been a lot of discussion and we mentioned in our prepared remarks. It now we see that is going to be some activity decline, we believe even though the customers are not saying it yet we believe it was going to be some decline in the haynesville more than any other gas basin.
So we went back and looked historically last two down cycles back in <unk>.
2016, and 2020 gas price around two Bucks, we saw a 50% reduction in the frac fleets in the Haynesville.
That's about 14, it's not dramatic to the macro.
But you know you got a few additional rigs on the demand side and a few less gas rigs.
Take a look at the supply side, we've spent a lot of effort.
Stay on top of what we believe is about 29, new builds and reactivation that coming into the market.
You know in a in.
And 23 throughout the year, a significant number of those hit in Q1 as it was projected.
But theres a lot of pressure pushing those to the right as well and I mentioned in our prepared remarks and in fact, our electric fleets getting pushed into Q2.
But if you just put any kind of conservative attrition number on that side the supply side.
You know as little as 5%, which is that we think it's much more than that but just say 5%.
Is that projects into a balanced market as you exit 2023.
So we like the way that's shipped shapes up and you know some of that stems around if you believe DUC count's been increasing or not and you know the EIA recently kind of came out with their last three numbers for November December and January and you know they were up 14, 35, and 42 Ducks you know per month.
Our own numbers are a little bit higher than that and we believe that even in February and we don't see the DUC count in the U S. On a macro increase by between 40 and 50.
So I'm glad you asked that question I really wanted to be able to address what we've been hearing you know kind of in the press a little bit about our second half pressure you know, we just don't see it that way and and that's the reason that's a as detailed you know Scott is that could probably get to.
No I appreciate all that detail and I do want a turnkey.
The power solutions business, which is appear set to offer a lot of value that the clients.
Correct.
Current market with this widening gas diesel spread.
What are you hearing.
You know from your clients.
On incremental demand for your power solutions offering and is it something that you're you're contemplating increasing spending on this year you know shifting some of the budget more of that where you just kind of latest conversations on your.
No your expansion in that business and in customer appetite for more.
Yeah, I'll start with the back and then thanks for asking the power solution has been something we've been very proud of we built our business to fuel ourself and help us get the maximum displacement of diesel with C. N G for our own frac fleets in the beginning.
And as far as how much growth, we'll have I think they exited 22 versus exited the 23 would be more than double.
And it's a very robust business that we've been able to keep sold out ahead of delivery and we're making a notch up in Q1 on deployed fleets substantial notch up and then again in the back half of the year. So we're continuing the investment into that high return business.
That business is very valuable to us not only in the sense of the P&L associated with the CMG fueling business, but also.
The efficiencies it adds to the overall frac franchise, where.
Where we have power solutions combined in an integrated model and location of our Frac fleets dual fuel diesel frac pump combination fleet displace natural gas at a much higher rate than the average in the market has been told to us by our customers.
So yeah, it's a it helps us capture the fuel arbitrage to a greater extent, adding returns to our Frac fleet as well as its own P&L. So it's been a thing that we're going to continue to go and we even would say openly that you know we'd like to keep looking at.
Around that kind of model two to continue to grow that business with a robust cash flow we have.
I appreciate that color Robert I'll turn it back thank you.
Thank you.
Our next question today will come from Stephen <unk> with Stifel. Please go ahead.
Hi, Thanks, good morning, everybody.
Good morning.
Two things should be one I guess follow up on Scott's question. When you guys laid out at your analyst day that $7 million of cash savings per fleet.
It's five of EBITDA two of cash flow, where do you stand on that initiative how much of that.
It's flowing through this pretty healthy annualized EBITDA per fleet number right now and how much is how much should we think about maybe being additive over the next 12 months.
You know, we can only move as fast with that comprehensively as we can grow the capacity of power solutions.
But we got plenty of capacity in wireline and plenty of capacity in our last mile logistics. So each one of the components of the integration of our own a different run rate I'd say.
Well, we continue to move.
Move it up slightly I was saying last quarter. You know we were probably in the third in doing something like that if some some some fleets where 100%.
And some where you know 10% or something.
And that's something that as we moved from 2022 made any decisions about who we were going to partner with in 2023 that we took into consideration.
We moved as many you know over 25% of our all of our customer base changed between December and January .
And in tune with that sometimes you take a step forward with integration and sometimes you just take a step backward.
But in the cases, where we actually took a step backward from an integration standpoint.
We took a position that gave us better returns overall and then we can turn around and build on the integrations are as we get deeper into the year because we've found once we get a toehold typically it doesn't take very long to begin to demonstrate the value of the integrated model and we're able to build upon it so I'd still say very very early.
Days, but we expect to make a lot of progress on that in 2023. In fact, we're in the process of a slight organizational tweaks to enable the management in the field to be able to better align and drive that process I'm excited about the upside potential of it.
Great. Thank you and then my follow up is probably two parts, but one is when you think about the first quarter.
Can you just give us your expected fleet count and based on your revenue growth.
Feels like there should be 15 or 20 million of.
Incremental EBITDA growth at reasonable.
Reasonable incrementals that in the ballpark of what you're thinking.
Yeah, Let me, let me just kind of tell you kind of what how things.
Kind of flow a bit more and more we're getting.
It's harder for Us I'd say, there's talk about fleet allocations, when we're really thinking about more horsepower allocations, you're going to see a lot I think of our some some drift in our fleet count.
Up and down.
Going forward I'd say forever as we configure our fleet optimally.
<unk> fleet, the fleet geography to geography client to client, even though our horsepower I expect to maintain flat.
So you know that that's one thing I'd say and then I would also say as it goes as we went into Q1.
I don't I don't think I could say that ive ever been more pleased with the start we've had to a quarter you know I talked about the turnover, we had a customer base that it began in December it created a situation. We had the best month, we've ever had in January and that's usually not easy to pull off.
So it.
February got a little bit of freezing weather days has it hurt us in the Permian, but but we're off to a great start there so.
And even with the weather impacts are built in early February we do see that top line growth of at least 6% that we said and I want to be clear, we're expecting to grow profitability.
And at quarter on quarter.
Whenever you look at that revenue growth is going to be some positive impact from pricing.
Operational performance in calendar improvements and this is going to be partially offset by weather. We think that February actually cost us probably about 25 to 30 million on the topline.
But still again on that 6%.
Although that being said, we expect profitability to continue to increase at a good pace quarter on quarter and and even with that February impact. We're excited about the continued to improve them and to the point about the fleet count and just say we originally had said we'd have a fleet starting in Q1 that elect the electric fleet, but I would say that how it moved out into Q2.
Okay, great. Thank you both.
Thank you.
Our next question will come from Luke Lemoine of Piper Sandler. Please go ahead.
Hey, good morning, Robert Kenny Mike.
Hey, Luke.
Robert I guess with the pace of your buyback it almost seems like youre not going to lever each stock for anyone else to purchase.
You just chewed through over half your authorization within four months.
I guess, if we look at your free cash flow for this year and the pace of your buyback. It seems like this authorization to be finished in the next several months.
And maybe a possible authorization increase.
We realized an increase authorizations.
<unk> is a board decision, but it'd be helpful. If you could maybe just comment on the pace of buyback.
Along with maybe your possible willingness to return well over 50% of free cash flow to investors in here. If you continue to see the stock undervalued.
Yeah, Louise I would start by thank you for the question start by saying that Ah stay into the 50% return of free cash flow is solidly in the plan.
I would look at it like the commitment for the $250 million of return for 2023.
Look at it this way we got started earlier the sale price on the stock was just too attractive when we went aggressively for.
I think that when we look at re up in it I think that it'll be in the context of that 50% of free cash flow and perhaps looking at it from maybe getting an early start on 2024.
The.
But no one announcement now about any change to it other than that were you know.
On the same path that we got to do what we're gonna be on.
But I wouldn't be surprised to see that evolve as we get into next quarter.
I'd just add keep in mind, we're balancing all the elements of our capital allocation program, we're going to have capex that will be somewhat front end loaded as we invest early.
On the buyback we have a very aggressive start you'll probably see some of that activity subsided, some but what I would say is that you know at these at these pricing levels, we're going to continue to be opportunistic.
Okay.
Okay got it thanks a bunch.
Thanks Luke.
Yeah.
Our next question will come from Derek part Haynesville of Barclays. Please go ahead.
Hey, Good morning, guys I wanted to go back to the attrition conversation just maybe expand on the different components that you are seeing I mean, theres definitely many forums to what attrition as you've been seeing your deployed fleet count come down a few over the last couple of quarters, you're talking about 12, 29 fleets coming into the market. He meant.
150 horsepower be decommissioned.
Maybe just talk about are you will you be replacing that 150.
The extending maintenance lead times are acting accordingly, just maybe the different pieces that you could talk about why the 29 coming in shifting spook are scaring here any investors because you'd expect something coming out through all the different forms that we're seeing.
Yeah. Thank you for the question.
You know, we tried to anticipate that more and more after hearing the dialogue in the market you know the investor deck, we put out last night I would refer people I thought this was the best view of what I've seen before on that page number 11, where it shows the rebuild cost.
Versus newbuild cost and how the salvage value for the old diesel fleet declines it each time that you rebuild it and thereby you reach a point where the return on investment of our Newbuild is better than our return on investment for our refer.
And I think there are a large portion of that diesel fleet is out there in the market not just ours, but the others are in that kind of category.
So you you go to the point that and you've got 29 announced kind of we believe that it kind of fall in 'twenty three.
Our new E fleets drag drive then rebuilds in the in the market.
That's about as much as it could be.
And then you go and you think about the attrition side supported by what I. Just said is that even if only you know three.
3% of the fleet attrit.
That's saying that the Frac fleet last 30 years in a Frac fleet this last that long.
I think.
When we talk about our horsepower being flat.
We've talked about I have an electric fleet coming in.
And the fact that we're going to remove and retire 150000 horsepower over the next 18 months all of that kind of leads to us, saying that we're going to keep the same amount of supply in the market through 'twenty, three and we're going to manage it and it's not that we're doing and being stupid and cutting up equipment, that's because there's a better return.
To do so.
Replacing it with new build in our case electric.
So that's that's the logic that I think applies across the whole fleet and honestly I honestly believe that did.
That's not even a choice.
<unk> changed the way it is right now were struggling to keep up with the parts needed.
The acute continue to do maintenance Capex. So I think that's also systemic across the entire sector.
Alright, I appreciate the comments and just just quickly to follow up that 150, you plan to replace all of that would that be with all electric pumps or do you expect to acquire.
Or just any more tier four DGB pumps on that 150.
That's mostly going to be electric, but I would say opportunistic opportunity to pick up. These these tier four dual fuel.
Fleets that we do the decision we made to make that investment more and more I think about it the more I like it.
It's got a great return profile and its maybe better than electric in the long run is the fact that we've been kind of going slow on deploying electric has been in our favor I think theres things about the market and how that's powered that it's getting better all the time and I feel like the return on the tier four deal.
It's going to be good for a long time, so we might sprinkle a little bit of that in there with it.
And in fact are there.
We'll have roughly about two fleets of tier four that we need to convert to tier four DGB that just slipped from last year due to supply chain and our Capex budget, we already have two more fleets coming out but the main thing is you really got to be gas power to take advantage of that fuel arbitrage, which is a big number.
Right. Okay. That's helpful. And then for my follow up just wanted to go back to M&A, you talked and stick on the consolidated on the Frac side, what would that look like for you guys. I mean, I think a lot of these privates have been taken out theres not too many out there with with real next generation palms, it's more of the tier two diesel stuff that's been taken up off the auction blocks, we've seen one of your larger peers take out.
One or two of those well it is consolidation on the Frac side look for you. What are you looking for is it just taken those pumps out of the market do they have maybe vertical integration aspects or facilities that that are attractive to you or just some more color on that would be helpful. As far as M&A targets.
Yeah, I guess do you recognize this is a slight change in what we've been saying and it's meant to be because of the big the big factors that I just mentioned a bit.
I think the smaller your company is the more challenging it is to tap into an already difficult supply chain. So some of the deals that perhaps could be available can have such a good return profile that you can't ignore if it came down to a small company that was on.
Table to keep the fleet in the condition in which they wanted to because of lack of access to ports.
So if it was a very quick payback consolidating traditional equipment.
How arguably would have been rolling that out six months ago. The other might be considered today and the second thing I would say any company that is in the line of.
The transition from diesel to gas that would help and in our comp combined manner would be a logical M&A in the Frac arena directly.
Got it very helpful. I appreciate it guys I'll turn it back.
Thanks Derek.
Our next question today is from Curt <unk> with benchmark. Please go ahead.
Hey, good morning.
Good morning, Kurt.
Okay, great great color today really appreciate it so I'm curious first and foremost you talked about.
Why chain and lead times being extended you kind of referenced that.
On the third quarter conference call as well so what what are the particular parts or pieces of equipment, where youre seeing those those lead times.
And are you seeing them extend relative to what they were in the third quarter or are you don't have those lead times kind of stabilized at this point.
So it is hard for me to be overly specific without maybe hurt much self and I don't want to do that so I would just say is that relative to.
Q3 that it's about the same.
And I would've hoped it would've been a little bit better.
And I would say that I think about it being the big components are mostly <unk>.
And I would also say that there are spots, where we've made some progress but there are spots, where we are where we haven't.
Talking about the big way all of Us in my view.
And I think that there is signs of our of our ability to make Mike makes a difference, but some of that is it within your own control and some of it.
You have to be in a partnership with one of your vendors. So.
So we spent a lot of time now trying to make sure the interface between us and our vendors is as good as it could be just like we do.
The interface between us and our own customers and I'll just add that you know we've been investing in Capex and inventory just to kind of take control our own destiny in that space to make sure that we can that we can supply the fleet probably carry more inventory and Capex then we would have in the past.
And a lot of ourselves with the vendors and helping them do whatever their goal as always we are trying to help them.
If it's better visibility on planning or if it's front end payments like Kenny is talking about.
Oh, Okay got it so my follow up would be.
You mentioned that and you have strong conviction in your ability to kind of recapture the lost pricing that occurred during the Covid period right. So I really just kind of curious on your perspective right. We have a situation that could evolve I assure you mentioned, where you could see 50% of frac activity decline in the Haynesville not saying.
We're predicting that you're saying that that's what happened last cycle right.
And you got the let's say those 14 fleets go into trying to find a home in and you know the Permian or another oil base and that typically creates kind.
Kind of accurate on NASDAQ competition, and kind of puts the negotiating leverage back in the E&P hands right. So.
Just kind of curious you know what.
What what kind of underpins your conviction or hydro conviction changed at all about kind of recapturing that pricing given what's going on in the natural gas markets right now.
So that goes back to the supply and demand balance and Frac either you believe it or you don't and you think about this time last year, how the dialogue was what we were saying versus what was being said by you know many of the e&ps that they didn't realize yet the supply demand balance was what it was.
<unk>.
So all I'd say is that whenever there's a move regionally my original migration, what's been going on a lot by the way in the last year I mean, among even among our fleet.
Is that the first step of two you had to have either conviction in it or not and if you don't then there will be some.
Frac company somewhere they will they will feel it but if it's a balanced market there will be another home for any display sleep and that part of it our customers I think to understand that better this year than they did this time than they did they did last year. So all I'd say is our track record of.
Kind of looking at this macro is pretty good we've been skating to where we said it was going to be an knock on wood, you know kind of been riding, but it's we're very cautious about not being wrong about it but.
But I'll also say, it's not necessarily that everybody needs to get a price increase many times you get the same impact of a price increase by improving contractual terms. They were calling back what maybe you can see it in the past you know around minimums in hours that you would succeed how you handle Weiss.
Pace in the calendar has nonproductive time managed.
And I'd also say that the big dynamic that we often don't think about when you're looking at the whole macro is the dynamic.
For natural gas powered fleet.
Natural gas fueled fleet is way different is supported by an arbitrage of as much as $10 million of fleet, where there's $10 million that a customer could pay substantially more.
For our fleet, yet show, a lower cost and I saw on the E&P recently announced that they were going to make a change in 2023 and they were going to see some deflation and thats what theyre talking about I think is where they are going to be paying a frac company more frac them you can get a good return and the customers offsetting it with the law.
His portion of the lower fuel costs.
So it's a win win if there ever was a definitional, one and that's more and more becoming a big part of the fleet you know for us its more than half of our fleet is got natural gas support that way so it might be talking a little bit our book overall, but at the end of the day my comments around the macro sustain that I believe the whole fleet is in that arena.
And moving out of gas and the oil at this particular part of the cycle is going to be fine.
Yeah, and I think what you reemphasize here is that there is a lot more nuance to it in this cycle run them there might have been 456 years ago.
Just discussions that youre, having with E&ps right now.
That's exactly right and the E&ps understand that clearly because they they are the ones having to write a check and they can see the fuel cost Bill is way down in the.
The Frac fleet costs up a little bit, but we still.
Back to that point.
Back to our NIM.
Our net pricing pre Covid I mean, we're not part of the inflation story.
Until we get back to at least at that number. So I feel like you know were not part of the problem here for them.
Alright, that's great color. Thanks, Robert.
Yeah.
Our next question is from Sohrab <unk> of Bank of America. Please go ahead.
Hi, Good morning, Hey, Rob I didn't Kenny.
Just a quick one for me.
It's kind of following up on <unk> question on pricing and I'm trying to understand the full year 2023 guidance I think if I caught it correctly. You said you expect EBITDA to be up 40% to 50% in 2023, which is basically in line with the implied EBITDA based on your free cash flow and Capex number its about 920.
$985 million.
I'm just trying to do EBITDA per fleet, our math that implies about $30 million per fleet on a flat 32 fleet basis versus the fourth quarter right.
That was $26 million in the fourth quarter Kenny.
To help us through the moving pieces on how we get from 'twenty six to put the basically trying to understand what's baked into that from a pricing perspective from an efficiency perspective and from a web site integration perspective.
I'm glad you asked that question that way because at the end of the day I can see how it might be you know confusion to see that a company is not spending very much money in growth capex and being able to demonstrate that kind of year over year increase and when you look at where we are as we exit 2022.
And project that on an annualized basis, it doesn't take very much price.
Our efficiency to get to the kind of numbers you know that you were talking about but.
But I do want to try to emphasize one more time, but.
I wouldn't encourage people not to get overly caught up on the fleet count cause I think you'll see ours move two or three up or down during the year with exactly the same amount of horsepower deployed.
There is a significant number of fleets operating in U S. Land today that are operating with less than the number of pumps that they would like to have from the customer would gladly pay for a couple more.
There are cases, where deploying horsepower into that kind of arena is better then configuring a bunch of them into a new fleet and going out less than and it may be odd deal.
No.
We're gonna be on AR, and our economics, we run on a per horsepower or a per pump basis as opposed to per fleet.
But long answer all at Kinder get into little more of a mathematical details there just think about it being largely price.
And building off the already established run rate.
With the one additional electric fleet hitting the market.
Now in Q2, instead of Q1 and like I, just I'll, just add and just to highlight from our investor deck, It's not just about EBIT profitability or EBITDA profitability on a per fleet basis. We.
We're focused on generating returns of cash flow and that's our goal to the cycle was to generate all three right.
And that's why one of the reasons why we put out that back just to kind of show some other perspectives around financial performance of both sector and in next year.
Yeah, No David I. Appreciate you said that because that EBITDA per fleet metrics, and it's becoming increasingly less relevant because the numerator and the denominator.
The covenant, becoming ought to come back and cross company. So I totally appreciate that point just a quick unrelated follow up I think you said somebody's question. It has benefited you.
That you have been slow on the electric fleet front right I wanted to follow up on that and think through.
What are you looking at from a technology standpoint are there other technologies out there that you are testing Trialing and then just on the on the fleet front, how do you think about leasing versus owning.
What do you think is the right answer for you on that front.
Okay.
Well look I think it depends on the terms sports, which one was the best of all the time, we would be looking at how it impacts our returns to make any decision like that technically I would just say it's more about.
The financial <unk>.
Round, how your power and electric fleet Theres numerous different electric options out there, but they're not hugely different when it comes right down to it I think they're all going to be pretty effective in and and balancing our lower fuel consumption or lower fuel cost and a lower operating cost and <unk>.
General overtime, it's just yet.
When I said, we were going slow I've met you know not slow technically.
More slow financially so that we could harvest tier four DGB and I would just argue I don't know when that and it seems like tier four DGB might be a good investment or a long term, but but.
But I think for us that.
Keep balancing that without power evolves, if you get to a point, where there's a grid out there and there's no more customers working in that direction that you can plug in electric fleet in and you don't have to take off the power generation out. There then that's going to be a really good dynamic for our frac financially so west kind of things we're balancing.
Okay. Okay. Okay, perfect and then just a quick clarification Robert Oh, the first fleet that's coming on in the second quarter have you said if that's what you saw this at least.
Yeah. This is Kenny so we've said publicly our first E fleets on a capital lease about $30 million of its finance and about 10 million in the Capex budget.
Look we are we negotiated out about a year ago, we're very pleased with the terms and it is going to allow us to domestic cash flow in and out so but yeah. That's that's that's what our first leases.
Okay. Okay. Okay. Thanks, Kenny Thanks for clarifying Okay, guys ill turn it back thank you.
Good day.
Again. It is star then one to ask a question and our next question is from John Daniel of Daniel Energy Partners. Please go ahead.
Good morning, and thank you for including me.
I gladly.
Yeah, a quick question on them.
Pointed out rightly the supply chain headaches that are out there and it sort of begs the question at what point do you have to start planning your orders for 24.
Well I'm not I'm not.
Asking for a specific capex dollar and I'm, just asking just a strategy from a procurement standpoint.
I think pretty much now man I mean at the end of the day given visibility to your supply chain.
Just like our customers can do it for us it helps everybody plan and organize accordingly.
So I would argue that yes. That's that's that is probably true and I'd say a lot of people did 23 very early.
Did 22, very early and I would say, we probably should have moved up 23, even earlier than we than we did.
But it's going to pay I don't mean, it doesn't matter, if you ordered or not in there right now getting clarity on their ability to catch up and I think theres, probably more down asset now as a percentage of total then there's probably that I've seen in a lot of ever maybe right. So they've got to catch up with that first and then new new Bill So I'm I'm not even thinking.
There's much risk in 'twenty for having a lot of a wave of new builds coming just simply because of that.
It would seem to me and you pointed out the new capacity in but when you think about the lead times companies such as yourself, having the wherewithal to place orders now to be in the front of the queue.
It just seems like the larger companies in theory. It sounds it's not meant to sound anti competitive, but you can tie up the supply chain a bit more than it does limit.
If I'm not mistaken.
The number of new entrants that could actually practically come on and the Mark I don't know if you would care to comment on that but it just seems reasonable to me.
Yeah, I think as soon as reasonable to me as well Jon I'd, just say that I think I've seen it play out a little bit in a market. When you look at maybe some of the M&A deals that had been done with smaller guys who buy.
Basically has seen their fleet count drop over time against their will it might be because the on that unable to access it.
Parts necessary to keep the whole thing running.
I think not extrapolate that into your question I think that's the same answer.
Okay can I squeeze two quick ones in here real quick I don't know if you've got longhorn yeah.
What do you is this is our last questions I mean youre Alaska. So what's gonna go ahead. Thank you. Thank you. Thank you Sam and the incremental demand of 20 to 25 fleets I'd hate to be nuanced, but how much of that is actually truly for dual fuel versus legacy tier two.
Does that makes sense, so it seemed like more of the demand as well.
Well look I would say that we.
Looking at like Yeah, there's some macro okay. The fleet count if it if the customer had a choice it'd be 100% dual fuel or electric.
Whatever can burn natural gas put it that way.
Fair enough and the last one can you just update us on sort of your.
Your thoughts on any differences competitive differences between Delaware and Midland based on what you're seeing sort of leading edge out there.
From a what for more persuasive just from activity from.
Thoughts of competitors, maybe shying away from Delaware Basin type work because of a bit more intensity. If you will on the equipment. Just have you seen any demonstrable change in competitive landscape.
Or would you expect you know.
Oh, I think everybody's looking for who can get the best kind of efficiency.
Efficiency pumping hours per fleet per month on average.
We made a number of changes in our home fleet as we went into 'twenty three and some of that was migrations within the basin looking for customers of like mind that we're focused on you know.
The whole supply chain working in unison.
And absorbing the integrated model and being able to pump in day in day out the difficulty of the Fracs a factor in there for sure and it has to be captured either in price or or or something.
Are you would have this differential performance.
Financially, one frac fleet to another and hard versus easy fracking.
So yeah I suspect there's some of that.
Fair enough well I appreciate you, making time for me.
Thank you I appreciate the color yes, Sir.
This will conclude our question and answer session. At this time I'd like to turn the conference back over to Robert Chavez for any closing remarks.
Thank you very much everyone for participating in today's call and I really do want to thank the entire next to your team for your efforts.
And we remain committed to making next year, a place where youre going to find opportunities for a long and fruitful career. Thank you very much.
Yeah.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.