Q1 2023 NexTier Oilfield Solutions Inc. Earnings Call
Good morning, and welcome to the next tier oilfield solutions first quarter 2023 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 introductions I would like to turn the call over to Mike Sabella, Vice President of Investor Relations for <unk>.
<unk>. Please go ahead Sir.
Thank you operator, good morning, and welcome to the next tier oilfield solutions earnings conference call to discuss our first quarter 2023 result.
With me today are Robert Drummond, President and Chief Executive Officer, Kenny piece, you Chief Financial Officer, Matt Gaylord, Chief operating Officer, and Kevin Mcdonald, Chief administrative officer and General Counsel.
Before we get started I would like to direct your attention to the forward looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's website.
Our call. This morning includes statements that speak to the company's expectations outlook or predictions of the future which are considered forward looking statements.
These forward looking statements are subject to risks and uncertainties many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or publicly update any forward looking statements, except as may be required under applicable security.
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.
<unk> and our reconciliation of the most directly comparable GAAP financial measures are included in our earnings release for the first quarter of 2023, which is posted on our website with that I will turn the call over to Robert Drummond, Chief Executive Officer of Nextera.
Thank you, Mike and thanks to everyone for joining the call.
As anticipated the first quarter for next year was very strong we delivered another quarter of improved operational and financial performance demonstrating both the resiliency and consistency of our strategy.
We saw sequential growth in adjusted net income for the 10th consecutive quarter and had another quarter of strong free cash flow.
We continue to prioritize a sustained and strong return on capital and we remain very disciplined while operating our capital allocation strategy.
Despite recent commodity volatility our 2023 outlook is essentially unchanged from the prior update.
Considering our outlook, we continue to believe our share price is significantly undervalued.
We will always invest our capital dollars and the highest return opportunity that we believe will create the most long term value for our shareholders, including through our sizeable shareholder return program.
Burst.
For the first quarter.
We saw strong operating results, even as the quarter was disrupted by winter weather.
Adjusted net income of $156 million improved 7% for the prior quarter and was 17% of revenue.
Our adjusted net income per diluted share was <unk> 66 cents.
Total revenue of $936 million was up 7% sequentially and was 47% higher than the same quarter last year.
The topline growth was a combination of an increase in pumping hours as well as higher sequential pricing.
Adjusted EBITDA of $228 million was 7% higher sequentially and improved for the eighth consecutive quarter.
We saw a full quarter of benefit from the strategic customer repositioning we undertook during the prior quarter, resulting in strong profitability growth.
We also generated strong free cash flow of $776 million, even as we saw a large working capital headwind and the front half loaded capex budget.
We anticipate free cash flow will gather momentum as the year progresses, and we will still expect to generate approximately $500 million in 2023, which is a free cash flow yield of over 20% based on current market capitalization.
During Q1, we repurchased almost 6 million shares for $53 million under our $250 million shareholder return program funded entirely with free cash flow.
And our adjusted annualized return on invested capital, excluding one time tax items was 50% for the quarter.
We continue to generate returns well ahead of our peer group.
Industry utilization remains very high and we expect to remain sold out.
Loyal base and activity is supported by a commodity price that is more than sufficient for our customers to generate strong returns.
Unlike past cycles, our customers are looking through near term commodity noise towards a long term outlook that remains unchanged from our prior update there.
Their consistency throughout this period of oil price volatility demonstrates the discipline that has enabled by positive global oil supply and demand macro.
We expect our sectors demonstrated maturity and discipline to continue and for U S land frac activity to remain strong in 2023 and beyond.
Considering our stable customer base combined with the current oil price outlook, we still do not anticipate we will need to change our pricing strategy.
Okay.
Natural gas basin demand did soften as expected as the quarter progressed with industry activity in the primary yes basins down roughly six fleets.
Since the start of the year.
Yeah.
Consistent with our prior expectations linked to historic responses to natural gas cycles. We believe there are likely another eight fleets that could be released in natural gas basins as the commodity seeks balance.
The fleets that are most vulnerable are those that are underperforming and those that are working in the spot market. We have very little exposure to the spot market in oil or natural gas basins and our operational performance had been very strong.
As such we should remain relatively insulated from the temporary shut or competitive frac fleets, resulting from lower near term natural gas prices.
And next year, we've said, we've yet to see any of our dedicated fleets released by our customers in either oil or natural gas basins.
This speaks volumes about our service quality as well as the quality of our customers and the partnerships we have built together.
The value created by our well site integration strategy has never been more important.
And all of that is to say.
We've been we've seen very little change in our business since our previous update and we continue to be encouraged by our outlook as we see the overall threat market operating at near capacity in 2024.
By and large the recent noise and spot market activity appears to be a function of the expected relocation of some fleet into oil basins from natural gas basins.
Our view is that the supply and demand balance and U S. Frac will allow these relocated fleets to find new spot work with multiple partners.
Over the long term, we still believe global oil production.
Well need to increase materially to meet demand for gas and the call on U S shale to grow production will only grow louder.
On the natural gas side.
LNG capacity additions through 2025 have the potential to create significant demand from incremental frac fleets.
We still see U S shale struggling to meet both of these calls in tandem given constraints around equipment and capital with the availability of Frac equipment likely remaining bottleneck.
We have been very transparent in our view that the supply change will continue to impact working capacity and we do not see the situation fully correcting itself until at least mid 2020 for.
This is true for both maintenance and new build.
We continue to be flexible with our fleet configuration and are committed to converting our fleet to natural gas powered and the most responsible manner overtime.
In terms of bleak configuration, we are always pursuing avenues to deploy our horsepower to the best unit level economics and maximizing the returns on our available horsepower is a priority.
In response to recent market volatility and fluctuations in the spot market. We have already chosen to redistribute one fleet worth of pumps to supplement our best customers in other basins, rather than lower our returns and we see further opportunities to replicate the strategy.
In addition, as we stated in our last earnings call. We still expect to retire at least 150000 horsepower from the start of 2023 through the middle of 'twenty 'twenty four rather than invest in maintenance on low return diesel fuel pumps.
We have already started this process and are deployed capacity today has fallen by 20000 horsepower relative to the start of the year as we remove our highest cost assets.
We believe these responsible actions by us and others indicates sector maturity.
On the transition front, we're always looking for the most capital efficient ways to make progress on our electric fleet and natural gas transition strategy.
Our capex guidance of 8% to 9% of revenue always budgeted for a second equally in addition to the one we had previously announced and to that end. We recently saw an opportunity to purchase around 20000 horsepower of electric pumps as replacement or some recently retired diesel.
Equipment.
This readily available equipment was from the inventory of a known OEM with proven technology that we have been build testing since 2021.
These assets will allow us to earn a strong return while we accelerate the transition of one of our existing customers to Ethernet technology without increasing our overall frac capacity.
We now expect to have two customers utilizing he threat technology by Q3 as we continued to act on our transition plan, while remaining in our capital allocation framework.
For clarity.
One fleet was previously announced but delayed from January due to supply chain delays.
We're now expecting to take delivery of this fleet by the third quarter.
The newly acquired horsepower is replacement for recently retired equipment.
We have a high conviction that our steady capital deployment strategy strategy will be the most efficient path to maximizing long term returns.
Even after the delivery of all these electric newbuild pumps, our horsepower by mid year will be flat with where we started the year.
Considering supply chain and capital constraints, winning this cycle will require service quality differentiation.
Our power and nearing our solutions natural gas fueling business is near nearing its two year commercial anniversary. It remains one of our most valuable assets and we are encouraged by recent third party transaction valuations.
We have a big head start with respect to value capture potential from this offering since inception, our solutions is already displaced over 33 million gallons of diesel.
And create as much as $100 million in fuel cost savings.
Our recent substitution rates have been 25% higher versus fleets using third party C and D providers, increasing the fuel cost savings of our customers and thereby elevating the value of both our power solutions business and our dual fuel frac fleets.
The entire business is managed on our centralized next up digital center, improving visibility to us and our customers.
We have organically scaled power solutions in the Permian basin to over 45 million cubic feet per day of compression capacity.
With a sold out C. N G fleet capacity to few 11 to 12 natural gas powered frac fleets.
This scale will increase by more than 50% by year end.
Our proprietary technology addresses both the equipment reliability issues plaguing others in the industry, while also delivering a patent pending approach that significantly reduces hurdles to using field gas.
Our platform is.
It's far more than just the C and D transportation business.
Our success has been so apparent that we recently started gas deliveries to our first third party frac well site in early Q1.
Large electric Frac fleet, where gas reliability is critical and where demand exceeds most if not all other gas consuming fleets on the market.
The E&P customer had experience with power solutions and several other fuel providers and only trusted this challenging operation to next year.
We will continue to evolve and build on these prior successes and maintain our position as a leader in oilfield natural gas services.
We believe our product offering is best in class and difficult to replicate which should give us a sustained advantage in the coming years and increase our capability to capture a greater portion of the growing fuel cost arbitrage.
So need to next year's conference calls let.
Let me introduce our Chief operating Officer, Matt Dillard.
Matt joined the next to your team in the summer of 2021 and has been critical to making next year of top tier service provider and one that our customers know they can rely on to help maximize their returns Matt.
Matt So you.
Thank you Robert and to those on the call I look forward to increasing our engagement over the coming years.
As Robert mentioned I was lucky to receive a call to join next to just over 18 months ago, and it's been a fantastic and rewarding journey so far I'm.
I'm very excited to join the public dialogue on Frac at a pivotal time for our industry.
Since I joined the company, we have used our well site integration strategy to differentiate ourselves from the more commoditized service providers by looking for ways to elevate the returns for both our customers and next to your investors.
We have been extremely capital efficient through this process.
Operational excellence is key we have designed our strategy to lower the total cost to complete a well lower emissions and raise the efficiency of the completions process all on our next call digital platform.
Value creation for next year and our customers is the core of our integration strategy.
This differs from competing strategies, there's simply bundle non complementary services offer.
Our discounts on transfer of value.
While our pricing strategy remains unchanged, we are constantly looking for ways to help our customers improve their financial returns.
For our customers aligning themselves with the Frac service provider the value service quality.
<unk> and efficiency will absolutely improve the capital returns of the own operation.
Horizontally integrating our dual fuel frac fleets with our natural gas fueling our wireline and our last mile logistics business create significant value.
On average we believe we pumped 20% more hours per fleet relative to jobs, whether customer Hearts third parties for these services.
This lowers the lateral footage completion costs and reduces time to production.
We have done this while also managing industry, leading returns for our shareholders.
And perhaps most importantly, our wildfire integration strategy allows us to further ingrain our safety culture.
Other services around our Frac fleet.
Keeping our employees safe is always the highest priority for next year.
We have delivered industry, leading safety results across all product lines, which matches deeply in our customers' decision making process.
Besides our well site integration strategy, we are constantly looking for ways to use technology to further improve the well completion process we.
We're industry leaders and the evolution of using natural gas as a fuel source for Frac. Our digital sensor has significantly lowered the cost to maintain our fleets and optimize our logistics and our reservoir technologies maximize the capital efficiency of completion designs.
With respect to reservoir technology.
Growing challenges around well productivity are well understood.
We believe our engineering team is one of the best equipped in the oilfield to help address reservoir efficiency challenges, while optimizing completion design.
Our <unk> technology portfolio offer significant improvements over past technology offerings, we have seen considerable uptake in a number of technologies over the last six months, most notably our fiber optic monitoring on a lateral funds services.
We combine readily available drilling data with real time completion data do adjust completion designs on the fly.
These technologies have massive potential to create value.
Our team of engineers is on the frontline working with our customers to understand the best passports.
We understand the value we are creating through the services and we see significant potential to use our technologies to improve returns for both our investors and our customers.
We have used our strategy to align ourselves with like minded customers that are looking to maximize their own capital efficiency.
Our customers understand the value that we bring to the partnership on a rewarding us with their loyalty.
More than 75% of our fleets are working for long term customers that we have worked for for more than two years.
Relatively minimal spot exposure as a function of top quality service on a like minded customer base that is constantly looking to work with us on process improvement.
We use our operational excellence and technologies to create sticky relationships to fully align the goals of next year and the customer.
These long term relationships should lead to a more stable operating environment for our company at all points in the cycle.
Capital efficiency has never been more important in our sector, helping our customers maximize their returns is a very high priority on the best path to also maximizing our own returns.
The frac industry has undergone a massive shift over the past several years.
Commoditized service offerings from prior cycles are no longer a reality.
We are already seeing bifurcation between the high end and low end competitors.
Less sufficient service providers will struggle to compete and we believe the differentiation will become more obvious in the coming years and with that I'll turn it over to Kenny.
Thanks, Matt first quarter revenue totaled $936 million compared to $871 million in the fourth quarter.
Up 7% sequentially as higher net service pricing more than offset winter weather disruptions.
Execution was strong to start the year with very little downtime that sometimes occurs as the industry restarts from the holidays.
Weather disruptions in early February our operations performed at a very high rate throughout Q1 with March being the best month in company history.
Adjusted net income was $156 million in Q1.
Up 7% from the prior quarter and totaling 17% of revenue.
Our adjusted net income per diluted share was <unk> 66 cents.
Total first quarter adjusted EBITDA was $228 million, an improvement from $213 million last quarter.
Profitability improved even as we saw higher seasonal expenses that are typical in Q1.
Fit ability was up sequentially on several factors first we benefited from a full quarter of a shift in work to higher efficiency higher margin jobs with customers that allowed us to increase our pumping hours with less costly downtime.
Second.
We remain very focused on cost control, our gross profit margin was up 65 basis points compared to Q4.
While our adjusted SG&A as a percentage of revenue improved once again.
We will be very diligent with our cost even as we look to continue to grow the top line.
Third was on pricing.
We saw another round of pricing resets and very favorable customer repositioning to start the new year.
This was a function of the strong macro and high quality dedicated fleet operations.
In our completion services segment first quarter revenue totaled $896 million.
$830 million in the fourth quarter sequential increase of approximately 8%.
Completion services segment gross profit improved to $253 million on higher revenues and higher margins.
In our well construction and intervention services segment first quarter revenue totaled $40 million, a slight decrease compared to $41 million in the fourth quarter.
Gross profit totaled $9 million, a decrease from $10 million in the fourth quarter on less favorable job mix.
First quarter, selling general and administrative expense totaled $40 million compared to $37 million in the fourth quarter <unk>.
Excluding management net adjustments of $10 million adjusted SG&A expense totaled $30 million.
During the first quarter, we recognized a $107 million noncash tax benefit related to the partial release of a valuation allowance on our deferred tax assets.
This release reflects improved market conditions, and our expectation to utilize these deferred tax assets over the next several years.
EBITDA for this first quarter was $218 million.
When excluding management net adjustments of $10 million adjusted EBITDA for the first quarter was $228 million.
Management adjustments include $9 million in Stockholm, with other items totaling a net of $1 million, which are nonrecurring in nature.
Adjusted net income of $156 million includes a management adjustment for the release of the tax benefit of $107 million.
Now on the balance sheet, we exited the first quarter with $219 million in cash up slightly compared to the fourth quarter.
We exited the first quarter with total available liquidity of $631 million.
Our liquidity was comprised of cash of $219 million and $412 million available on our asset based credit facility.
Which remains undrawn.
Total debt at the end of the first quarter was $358 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 first quarter was approximately $139 million down slightly from the end of the fourth quarter.
Our share repurchases were funded entirely with our free cash flow during the quarter.
Cash flow from operating activities was $173 million.
Profitability strengthened once again with cash flow impacted by $45 million in working capital headwinds.
With the first quarter of the year typically requiring heavy working capital needs.
Our cash used in investing activities was $97 million from the first quarter cap.
Capex totaled $99 million, mostly driven by normal maintenance funding.
Funding for the transition of our Frac fleets to natural gas powered as well as investments in our well site integration strategy.
Excluding growth Capex for both power solutions and last mile logistics.
We also made investments in ancillary equipment around our Frac fleet that should improve frac efficiency.
This resulted in free cash flow of $76 million and we anticipate free cash flow will accelerate significantly as we've progressed throughout the year.
In the second quarter, we have already funded the final earn out payment on the Alamo transaction of $40 million.
Which will be a headwind to free cash flow in the period.
This was the final earn out payment associated with that transaction.
We continue to see a strong outlook and the investments we have made have positioned us for success at all points in the cycle.
Our priority for high liquidity and low leverage allows us to be nimble and opportunistic.
We are on a path to zero net debt and we fully intend to reach that goal in 2023.
The timing remains dependent on the cadence of our shareholder return and our strategic M&A programs throughout the remainder of the year.
Positioning the company to be ready to capitalize on opportunistic investment opportunities at all points in the cycle. It's one of the key components of our capital allocation strategy.
Our strong balance sheet is core to its execution.
At the end of Q1, we had roughly $84 million remaining on our commitment to return at least $250 million to shareholders by the end of 2023.
We reiterate our goal to generate approximately $500 million of free cash flow in 2023.
This will leave us with around $200 million in unallocated capital.
And we continue to look for the highest return investment opportunities including potential M&A.
We currently have a non binding letter of intent in place that would utilize about half of this expected 2023 unallocated capital value.
Dependent upon final agreement the consideration may include cash and equity with the equity component potentially comprised about half of the body.
This transaction if successfully closed will expand our well site integration service offering and we expect that it would significantly improve our capital efficiency.
It would be accretive to our earnings per share even beyond other uses of capital such as expanding our shareholder return program.
This transaction could close within the next 90 days.
It is possible we could also execute additional loss for other transactions that would add complementary services over the next 90 days.
All of these potential deals that we see at this time would fit within our $200 million of unallocated capital for strategic M&A, and we expect to execute on our stock buyback program throughout this process.
We have a very strong M&A track record and we view this to be a core strength of our management team.
We have already passed on several transactions that we did not see as accretive for our investors.
And if no attractive deals are found we can pivot to use the cash to further strengthen our balance sheet or expand the shareholder return program.
Now on the outlook.
We continue to see solid profitability and March set us up at a good run rate as we entered the second quarter.
Further the second quarter should not have the same weather disruptions that we saw in Q1.
For the second quarter, we expect moderate sequential revenue growth with adjusted EBITDA expected to improve once again.
We reiterate our capex budget at 8% to 9% of revenue for the year.
We still 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.
Outside of the investments, we're making to transition our horsepower to natural gas powered over one third of our Capex is targeting high return projects outside of pure horsepower investments.
These investments are core to our results and we continue to see growing returns and free cash flow as they elevate the efficiency of our Frac operations.
We see a very strong free cash flow build through 2023.
It gives us optionality.
Our capital allocation framework.
Considering what we know today, we do not expect to see a degradation in our operating results in the second half of the year relative to the first half with fundamentals, implying consistent and resilient financial performance.
As we have demonstrated our focus is on maximizing value for our customers our investors and our employees I will now turn it back to Robert for closing remarks.
Thank you, Matt and Kenny.
The oil field services industry and more specifically the U S land pressure pumper have shown great discipline as this current cycle has unfolded.
We expect capital and pricing discipline will be rewarded and only downside if we return to past strategies and next year, we will continue to lead the way.
Now, let me close with a few key takeaways.
We've been saying for some time that this cycle would be different.
This is truly many waist high quality service providers will be rewarded and when our customers are capital constrained the value of service quality grows.
This should lead to a bifurcation in returns amongst the oilfield service providers.
The industry is no longer commoditized as it was in the past our well site integration strategy should give us a sustainable advantage as we help our customers maximize their returns without sacrificing our own.
Second demand for our services remains strong and should for the long term.
Our customers have stay committed to the constructive outlook for global oil demand and absent a more severe macro event that we experienced with the recent banking crisis gear, we do not expect a material change in their behavior.
This is a very this is very much a function of a more mature U S shale oil and gas sector that does not respond as aggressively to commodity volatility as it did in prior cycles.
Finally, we see capital discipline lengthening the period for strong returns oilfield service companies.
<unk> been a factor in shifting the industry focus back to returns and free cash flow.
We have a strong conviction that our capital allocation strategy is a winning formula that will maximize the value for our investors throughout the cycle.
We see a reward for remaining disciplined and no reward for returning to the same playbook the industry followed last cycle.
The best path forward to us is obvious.
With that wed now like to open the line for Q&A. Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys if at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two at this.
Time, we will pause momentarily to assemble our roster.
Our first question comes from Arun <unk>.
M <unk> with J P. Morgan. Please go ahead.
Yeah, good morning, gentlemen.
I was wondering if you if we could start and maybe elaborate on kind of trends that you're seeing within power solutions.
We understand that and maybe you could discuss maybe the competitive balance because one of your peers.
Is now moving into that segment.
I think youre right in the 11 to 12 fleets today, you know that could be up 50% by year end and then maybe just help us think about the earnings power of this segment as we move through and into next year.
Well. Thank you for the question Arun, Yes, I think that that's a great question focusing on what we think is a very valuable asset to the company.
A couple of years into it now.
When you look at the fuel arbitrage value between diesel and natural gas is out there to be had.
Besides the fact.
Being able to deliver.
Your own compressed natural gas to your fleet.
The integration between the Frac fleet and the.
Power solutions part of the business creates a lot of value in the sense that you get higher.
Displacement for natural gas to diesel.
Well, we have been measured in our growth despite huge demand for the product outside of our own fleets, because we wanted first to supply our own.
The benefits are.
In the P&L of the <unk>.
Power solutions business has to compete.
One it's individual P&L profitability for capital within the company, but when you take into the account the benefit it adds to the Frac profitability, it's really really a home run and that's the reason we continue to fund it to the level that we have.
I will ask you to comment a little bit about that in a second but for US we believe that.
Our first adventure that I mentioned in the prepared remarks.
And to the market outside of our own fleets is indicative that the customers are seeing the value of that and we foresee in the future within our capital allocation structure, which is largely funding things like this to continue to fund growth in in in this service.
We mentioned that we do have some patent pending technology at the well site with the customers liked about our offering is that it can preferentially use their field gas through that technology at the well site.
And if and when optimal for both of US you know, we can use the C and D flow through it. So I think that's something that differentiates us from everything else that's out there that our customers really like so we see the demand discontinuing.
Yeah. Good morning, everyone. So to answer your question on the value of those trades. The company I think I think I'll just start off with this you know we do not report the business separately for several reasons.
But I will say this week, we've been funding power solutions now since 2021.
And in 2023 for example, we have nearly $50 million of Capex that we're funding for that business as we continue to grow it it's part of that high return Capex budgets.
Second part of that and you know the way we look at power solutions business. We've always underwritten it was kind of a two to three year payback and with the success of the platform.
As Robert mentioned, the higher diesel substitution.
And the recent gas and diesel price dislocation, we're seeing strong financial performance from the group and very accretive margins to the enterprise. So we're really happy with.
With these investments we've made over the past few years and we are funding basically as quickly as we can get as we can get our hands on the on the kit.
Great. That's helpful and maybe my follow up is for Robert Robert You know one of the themes in earning season is this bifurcation in the frac market between call. It premium service providers such as such as next.
You know one of the big Investor debates. Robert is are some of the North American service company is over earning in a relative to a more normalized view of the world.
We're seeing some you know day rates come down on land rigs and gas basins same thing in O C. T G I.
You know what's your assessment you know EBITDA per fleet today for most premium operators in that mid twenties range.
You know how do you think about the resiliency of those types of margins in an environment, where we could have 14 fleets idle in the near term and you highlight a very very strong returns on capital.
Okay. Good question look there's a lot of things in there I would just say are we over earning I mean, its hard for me to even to.
Understand I guess, because we still have 17% on.
On the EPS earnings.
And we in the process not only us but the sector.
Funding a transition from diesel as a fuel to natural gas as a fuel and in that process, creating you know 10, or maybe even $15 million annually per fleet of value for us and our customer Who's funding you know our our our services.
So so so I don't think I think it's important for everybody to realize it.
We need earnings levels that allow us to continue to do that funding, which we think and we've been running this kind of the math on it how long how long does it take to convert the fleet, which I think everybody is on a path to try to do to be 100% natural gas powered our fueled in the future net debts of six seven.
On a year kind of path there requires solid returns for us to be able to do that and.
Maintain our capital allocation of cash returned to our shareholder base. So I think our customers appreciate and I think that you know the margins now that we're kind of getting to in the earnings.
Our balancing out nicely with where they where they're at I think.
And I think it's a win win if we can continue to do it and continue to invest in and to bring the fleet to a lower emissions more value creating scenario.
So regarding the part about.
You know supply and demand in a few fleets loosen the market.
I kind of want to go into that a bit.
And talk about the macro I think.
From what we guided.
During the last earnings call.
Until now we still talking about.
Our near term narrative related to recession.
In the U S natural gas.
Commodity price.
Versus the structural global oversupply that this is a long term outlook.
And I think we.
We have seen.
Gas prices evolved as we had predicted.
And the corresponding reduction.
And guess bleeds.
But additional to that the banking crisis scared occurred.
And led to some short term oil price volatility that now has since recovered.
But even through all of that.
The horizontal drilling rig count since January it only dropped by 14.
Which is only 2%.
And the DUC count.
Is it kind of remained flat.
Yeah.
So the bottom line is.
The end of Q1 or at the end of Q4.
We made a case that the market was actually under supplied.
About 20 Frac fleets.
And since then with the commodity.
Bounce back and forth.
We think that the market as we ended Q1 and a balanced state.
So.
You know from here out how do you keep that imbalance.
You have basically the need to account for.
Every new fleet add.
With one out through attrition.
And we've been kind of boisterous about saying that we expected to see about 10% of the fleets the trip.
During this year.
Which is about 23 frac fleets on the current kind of.
280, which balances very closely with kind of the new build ads that we see coming into the market. So I.
I think that demonstrates a very balanced market coming off of.
2022, which was perhaps the most under balanced market that I've ever seen in Frac in my career so.
All I would say there is that's very supportive for our margins to stay the same.
As we as we kind of move into the back half of the year.
Even in an environment, where the spot market is very volatile associated with those movement of gas fleet.
Fleet from the gas basins to oil.
So I guess you saw him all of it but saying, we're just going to trust the macro assessment and we're not going to get caught up in in that shovel, that's going on a little while in the ER and the spot market.
Alright, thanks, Thank you very much.
Our next question comes from Derek part Heizer with Barclays. Please go ahead.
Hey, good morning, guys.
I wanted to go back to your comments about around redistributing that one fleet worth of pumps.
So can you help can you walk us through that fleet progression.
Market fleet, assuming it was a tier two diesel customer comes to you asking for pricing concessions youre not ready to do that you move the fleet to your other current active fleets to beef up those fleets. I mean is this the forced attrition that we're starting to see unfold in the marketplace. Your peer made a similar comment.
And importantly are you getting paid for these pumps that go to your different customers. I think just if you can unpack that and give us some more color as to the progression of that fleet and why you chose to redistribute that would also sounded like Youre also taking stuff out of the market. I think this is a this is an important piece of this new discipline, new playbook, that's R&R unfolds here.
Yeah. Thanks Derrick.
I would just say I'm going to ask Matt to answer a little bit of that question, but.
It's more or less that the spot market when theres, a big shuffle going on like we've been talking about gas to oil it can be very volatile in for a little while as things get repositioned, we just decided not to play in that arena. It was a fleet, we got a very low participation in the spot market in general.
We just put one of the two or three that we had in spot market out to reallocate in a manner that was more.
Effective to our profitability, Matt that put a little color on Italy. Okay. So so thanks, Robert as Robert mentioned, we have limited exposure to spot market already but we didn't make that decisions take that fleet out of operations. When it began to fall below our efficiency and return expectations.
I think just just to add some more flavor here you know at the same time the demands that we will put on a horsepower and our people joined the fleet shortages in 2022, we're probably at levels that were just somewhat unsustainable long term.
So with these two factors in mind, we shut down that fleet in East, Texas, We disbursed. This additional horsepower to fleets with our key core clients and we were able to maintain the same level of revenue and profitability for the Standalone fleet with normally make so if you look at this we really see this as a win win for both ourselves and our customers.
Got it.
Very helpful.
Maybe just going back to it sounded like you signed an LOI.
Just on the well site integration any any more color you can provide on that this is similar.
Similar well site integration expansion that we saw at <unk> logistics do you make the other year just any more color around what type of opportunity. This could be in and the type of value proposition that you would be providing to your customers.
Yeah look I think that.
You're on the right track.
I would just add a few comments, we're committed to our capital allocation strategy in anything we're looking at.
From an accretive M&A perspective has got to compete with our own buying back your own stock.
We believe and we have been really massive.
That said the operation really going strong from a efficiency perspective, but these opportunities to tack on a little technology and some integrate around our integrations team can take that to another level and that's the logic for.
The deals and we've been extremely patient.
And throughout this process to get to the point, where there was an opportunity to do that and find M&A deals that could compete with buying back our stock at a depressed level.
Yeah.
I'll just add.
We do have a nonbinding LOI that we that we set in our in our call. We wanted to announce the fact just to make it public and as we stated in our prepared remarks, we plan to continue to execute on our shareholder return program.
And I would just say at these levels probably aggressively.
Got it great I appreciate the color guys.
Thanks.
Next question comes from Jim.
Rollyson with Raymond James Please go ahead.
Good morning, guys.
Good morning, Jim.
Robert just going back to one of the comments you made on the kind of opportunistic purchase of some of the electric pumps that you were going to filter into an existing fleet.
You know your prior to this you are kind of strategy has been you've been working on the gas conversion stuff for a couple of years now obviously, you've talked about incrementally adding E fleets.
As the market and in Europe .
Dictates one of your competitors is kind of doing a similar thing with adding pumps kind of building up the fleet as its working curious how you view this as a go forward opportunity to maybe replace some of the legacy pumps with a with electric pumps to kind of build up your fleet side of things.
From from active fleets.
Thanks, Jim I appreciate the question.
<unk> kind of been saying within our capital allocation strategy over time, we're going to move our fleet to entire entirety to natural gas and a big component of that will be you know natural gas powered electric fleet.
And being able to.
Opportunistically fund this opportunity to accelerate that to take care of some strong customer demand was something that fit in it we have been measured about kind.
Kind of talking about that previously, but I think you can expect to see that from us over time and I want to be careful to note very carefully balanced.
Some stuff going out and some coming in.
Matt why don't you add a little more color.
Thanks, Robert So you know.
I think Robert talks about the opportunity that we had presented to us in Q1 to obtain some additional electric horsepower and I think you mentioned, Jim we've had electric horsepower dispersed within our diesel fleets for over two years now so we can see the value that provides.
One thing I'd like to say in addition to this is we already made a decision last year to actually invest in electrifying, a blenders and ancillary equipment. These are at the heart of our diesel crews. So we made a very easy decision to deploy this additional electric horsepower that became available alongside our existing E pumps married with the new electric blenders, having construction, but the general.
The second Emerald crew fairly quickly.
So by doing this we were able to deploy the second animal fleet within our existing fleet transition capex, but at the same time, we're lowering our maintenance capex by retiring.
Further some of the tier two pumps, which have a higher cost to operate.
Yeah.
It makes perfect sense and then just one follow up maybe for Kenny Kenny you mentioned continuing to bring you know net leverage hopefully below zero by the end of the year is that strictly just gonna be piling cash on the balance sheet or do you think you will actually start paying off some of that term loan over and above.
Amortization rate.
Yeah, Jim Thanks for the question.
At this point I would say, it's it's just strengthening the balance sheet cash, but obviously, we're watching where the debt's trading and if we see an opportunistic avenues to pay down some debt, we would but I would probably say we're leaning towards cash right now.
Great. Thank you guys good quarter.
Thank you Sir.
Our next question comes from Stephen <unk> with Stifel. Please go ahead.
Thanks, Good morning, everybody.
Or.
Two things should be one.
We've heard a lot from you and your peers about.
Price conversations or discussions and just curious when you're talking to your customers.
Right now.
How much of the pricing discussion is around sort of the integrated well site opportunities.
And how do you think about it sort of holistically from year over year sort of profitability per per well site as opposed to sort of on a per pump basis I'm just trying to get a sense for how we think about how that sort of filters down into profitability per asset.
Look it's a good question.
When you look at profitability by unit or by fleet about well side no matter, how you're looking at it in Frac.
Balance between pricing contract terms, you know operating efficiency and integration and we look at all of those and I think our customers appreciate that and there's trade offs.
Less integration more price.
Higher efficiency less price to get to the numbers that makes our return thresholds.
In <unk>, we've been very successful getting I would consider say a high single digit pricing increases.
In Q1.
And I expect to see a little more pricing increasing in Q2, and when I talk pricing increase I'm talking about all four of those components.
So it is a.
It is a holistic manner and wish to look at it and I think our customers more and more are open minded about the integration aspect because theyre looking at their bottom line and our returns.
So anything that we can bring to the picture with bigger integration and addresses that is a good story as the support behind our M&A program.
And behind.
Our support of <unk>.
And wet sand in the market and how wet sand is able to kind of drive down.
Customers overall cost, particularly when that when that mine location can be very close.
Two where the operations are.
So yes I think these are these discussions include all of those things in.
You know with the spot market volatility that was brought up earlier.
<unk>.
We were talking about price with our customers and I would say we've been guiding into the back half of the year that you know.
We're still dealing with a lot of inflation and if we can get continue to get price to offset inflation that we think we will then that's probably will be what happens mostly in the back half.
Yeah.
Great.
Thank you and then just one quick one for Ken is there.
Could you give us any framework for how to think about 2020 for capex as a percentage of EBITDA and I know you've talked a little bit about this in the past, but anything you can update us on there.
Sure look we've said very clearly.
Our capital allocation program that it's through the cycle and what I mean by that is we're going to commit to 8% to 9% of revenue.
Through time, So 2024, you can anticipate the same thing.
Okay. Thank you.
Thank you.
Our next question comes from Scott Gruber with Citi Group. Please go ahead.
Yes, good morning.
Morning.
So question here on on how market pricing could evolve.
When the markets are super tight pricing spreads tend to compress across different types.
It's certainly different operational efficiencies.
Et cetera.
But obviously it could start to see some some spread emerge here, particularly between nextgen pumps and legacy pumps.
Nextgen pumps, obviously burning gas is quite quite a significant amount of fuel savings.
I'm just wondering.
You look at the wide diesel gas spread today and you look at the fuel savings here.
Tier four dual fuel versus you know running running a diesel fleet.
What magnitude of pricing spread would will be supported by the the wide diesel gas spread today.
We looked at the <unk>.
Spread between price for any gas powered unit versus diesel power is supported by that.
The amount of.
Displacement that occurs and that's you know that's a math equation about how wide is that arbitrage and the customers understand it very well and so the way so we price it to get as much of that is you can in your fleet and.
And and and and and they offset it with the arbitrage.
I think that that is.
Rod spread today in that.
With diesel prices, where they are and gas spring extremely low price in the marketplace.
And we do a lot to try to facilitate keeping that arbitrage wide because it supports the whole pricing structure for for that bifurcation and.
And I think that bifurcation will continue to be a huge benefit and the demand for those fleets is constant.
Anytime you have one you can just plug it you can just about deploy it.
I think that it's not going to change, perhaps maybe it even gets better.
As we all get smarter about how to increase the displacement on these units.
How you operate them make a big difference.
Another thing I think that supports bus occasion.
Yeah definitely.
Yeah.
Go ahead.
That was going to say does that address it okay.
Yeah.
Back of the envelope math I'm getting to a fairly sizeable number.
You know $2 gas and for dollar diesel, but I I can run through it with you all offline.
And just a quick follow up it sounds like you guys took.
The advantage of a good opportunity to buy the E frac pumps when they they came to market from the OEM.
But just curious why are they available was it was an order canceled by somebody else or would be.
Building some pumps on spec.
How did those come into the market.
I think in this case it was built on spec in.
The thing that change I think it was the contractual terms changed a little bit.
About maybe how you could access those pumps, maybe not in a holistic system versus just individual pumps that made it a little more readily available.
And that.
That was it I think theres not a lot of it but there is no inventory like that in the market today that I know of.
But except for that.
I didn't give you a follow up thank you.
I'll turn it back to you with the question you asked me about what I'm sorry go ahead.
No I was just wondering whether there's additional opportunities like this or whether there was.
It was a one off it sounds like a one off.
We think so.
Gotcha.
Okay, well I appreciate all the color. Thank you.
Thank you Scott.
Our next question comes from Waqar Syed with ATB capital markets. Please go ahead.
Hi, Thanks for taking my question.
Just wanted to understand a little bit more than that.
You know what you mean by the but moderating your guidance for Q2.
Given that your revenues in Q1 were up about.
47% year over year. So the moderate growth are moderating growth would could mean a number of different things. So do you mean by low to mid single digit type, that's a big increase quarter over quarter or I think as they get more than that could you maybe.
Right the bookends there.
Hey, Waqar. Good morning, let me just reiterate what we said things are very important are our outlook is essentially unchanged from our last update.
We continue to see topline growth and we've called out 40% to 50% of adjusted EBITDA growth in 2023.
In Q1, we demonstrated that we are on that trajectory.
And what I would just say in Q2 is that we ended the quarter with momentum we had a solid Q1 exit.
We will have less weather disruptions in Q1, and we continue to see gains as we continue to push integration.
Which by the way we are currently investing in heavily.
And this will lead what we said is moderate Q2 top line growth and that's all we're really prepared to say at this point.
We also expect that this will lead to continued growth in our operating profits.
Improved free cash flow.
Yes.
Maybe if you could help us with the incremental kind of margins that you expect on this moderate revenue growth in Q2.
I've said, all we're going to say at this time.
Alright, Thank you very much.
That's all I have thanks, Sir.
Okay.
Our next question comes from Kurt how lead with benchmark. Please go ahead.
Hey, guys. Thanks for Slotting me I really appreciate it.
Thank you Kurt.
Yeah for sure so Robert on.
I kind of want to focus in on this transition dynamic that's underway and in the U S. Frac fleet right.
And a lot of ways. It kind of reminds me of what transpired in the U S land drilling market I don't know 10, or 15 years ago, when the market Atlanta rate dynamics shifted from mechanical rigs to AC rigs and there was a huge step change in drilling efficiency and <unk>.
Federer et cetera, right. So it seems to me like the Frac market is definitely on that path.
So I guess my question really is do you do you see.
What could you would you agree with with kind of this analogy and then if you. If you did would you effectively suggest maybe that the electric frac fleets will become effectively the AC.
Evelyn of the of the Frac market.
Or do you think that that dual fuel.
Assets will still be the predominant asset in the marketplace you indicated a six to eight year transition period.
Can you know, let's let's get out of the noise, let's get out of this stuff near term and maybe kind of would really like to get your thoughts on how you see it evolving.
Well look I think that's a good point rigs versus the transition to natural gas for for Frac fleets in both cases that investment is buying a return that's very apparent.
Rigs were buying.
Drilling efficiency.
And our investment in these frac fleets is buying you know a return on a bifurcate on the.
The difference between oil and natural gas.
Diesel and natural gas price.
I think that's a logic that's easy investment to make because the return is supported so much bye.
But that arbitrage.
But when you look at where we're headed.
I'd like to be careful to distinguish it I think we're headed towards all natural gas fueling, but I'm not so quick to say that it's going to be all electric because when you think about what's happening.
Natural gas power generators are.
Turbine power generators that uses natural gas as well to provide electricity to provide power to a pump.
And that's not exactly perfectly efficient and I would argue that when you look at demand both from our perspective and the customer frankly.
Tier four dual fuel systems operating properly supported by the likes of power solutions.
Is it very competitive stance.
And maybe even some sort of hybrid in between.
Somebody mentioned that some of our competitors our main argument to that earlier doing some of that so we think that makes a lot of sense, but in any case, the math on staying capital within our capital allocation program that all of US have now in the sector, it's going to take a number of years to get there.
And I think that technology will probably evolve a bit during that period seven eight years in the endpoint might not look exactly like we think.
From the perspective of what exact kind of equipment is being deployed but certainly I believe using the lower cost fuel system cleaner fuel system makes sense on so many different levels.
That's great that's great context, and color and if I might.
My follow up here is you know you've been very clear and very consistent and others about capital discipline.
I think discipline in a very clear that you know, there's a differentiation between what's going on in spot markets versus dedicated fleets.
Right.
I can't help but kind of think about prior cycle periods and there's always this.
The friction between E&P and service company then.
Every E&P, so you'll see an opportunity they'll always try to kind of lean on our service guys to kind of give a give up on price. Even if it has been kind of attract contractual or dedicated kind of arrangement.
Just kind of curious as to beyond just a typical friction has there been anything else that's game and kind of Bubbling up to the surface, where there are some incremental.
No discussion going on where the E&ps are trying to extract some price concessions anything anything that's more than typical Robert.
No I don't think so I mean, they always going to want a lower price, we always want higher I think that's something that's natural.
What market disruption very predictable in a lot of fleets coming loose that we're moving from gas to oil, but we believe we got a trust the macro and make your business.
Often decisions based upon supply and demand.
And utilization.
It jumped up a little bit during the runes question.
And didn't really do a good job of explaining but at the end of the day I think that right now we're sitting at like 98% utilization.
That's less than last year, when we were you know.
Undersupplies substantially and there are.
You know a number of fleets coming to him, but nobody's really given attrition the full look that it needs to then.
Oh Man I talk about all the time, we run into fleet harder than it's ever been run I mean, all of US and that provides a lot of pressure on maintenance and where the supply chain. The way. It is I don't think that it's a near the concern that's being played out I don't blame the e&ps for negotiating price a little bit through the market, but in the end of the.
Day, I think that all of us are taking a little bit more longer term view in a capital constrained market.
Better than we ever have before and that's a new playbook.
Oh I thought some really appreciate it thank you.
Thank you.
The next question comes from John Daniel with Daniel Energy Partners. Please go ahead.
Hey, gentlemen, thanks for keeping the call going.
But you guys have been very clear about the AR and the push for natural gas powered fleets and the differentiation, which comes from just simplistically new versus old.
Knowing this is it fair to assume that.
Kind of going forward you guys are likely to pass on opportunities to buy the smaller frac companies, who tend to be tier two.
<unk> players.
Well look we've said before that in the M&A arena of pure Frac horsepower scale.
Scale matters and there's some cases, where we might have a company that has a diesel fleet or a partial diesel fleet.
That scale to really make a difference and the payback on that could be relatively swift power.
<unk> slipped to the point that it was better than buying our own stock, but I can see a case like that.
Preferably or any kind of in the maintenance arena with what we wanted to move down that curve towards a quicker conversion to natural gas, but oh I hate to say, we'd ruled it all the way out, but I think you're reading the tea leaves pretty accurately there.
Never say never I get that but that's okay. The customers adopting your electric fleets.
Do you sense, they will go 100% electric and if so I mean, how do you I know you talked about six or seven years yourself with industry like transmission, but once that company customer decides to go how quickly do they.
Speed the conversion if that makes any sense.
Yeah, Doug I would just refer back to that question before in saying that the transition is going to take a long time I've heard a few customers say they want to do that but when you look at the time it takes and the amount of Capex. It takes for this fleet to get converted that's a multiyear deal and you take a if you take and added all those up that everybody.
Wanted it'd probably.
It's not going to be it won't be done in that the second thing I'd say is that by the time you get out there a little ways and you say look you know this is tier four dual fuel.
Arrange most displaces 75, 8% sometimes of the gas and emission profile and everything else associated with that you go you know maybe these hybrid fleets are better so I'm not going to be surprised.
That happen and I've seen a few customers already kind of.
Coming to that conclusion, which we thought would ultimately happen.
Sexy apparently about a pure electric fleet I don't know if it last forever.
Fair enough.
Last one for me and.
And this is Mike.
Mistaken you guys still playing in so many market can you give us an update on just trends in that business outlook.
Any big picture thoughts would be appreciated.
Yeah look I'll, just say that obviously is tied to drilling rig count a lot in general in Canada.
We've had our particular pieces of business we have.
We shrunk our footprint to be where we wanted to be a while back focusing on getting our efficiency in our in our loading in our returns where they needed to be and we've done that Kenny can you tell us about the results a little bit and we like that business. It's a it's one that is generating free cash.
Hello, we like it and.
I just think though it's married a bit to what happens in rig count and by the way I would argue the earlier when I was soaked up.
That drilling rig count and oil dropped a little bit and the oil price now is back up and I wouldn't be surprised in the back half of the year.
Oil rigs kind of recovering back to where they were in the first quarter.
Off a little bit beyond that even and I know that a few drilling contractors, who have a similar view to that.
Right.
Okay.
That's all I got thanks for including the gas.
I appreciate it.
Ladies and gentlemen, we have reached the end of the question and answer session I would like to turn the call back to Mr. Robert.
Drummond for any closing remarks.
Yeah. Thank you very much for participating in today's call and for your interest in our company and I am extremely proud of our team's execution to recent commodity volatility and we're going to continue to show our customers the value of our next year partnership and we will continue to look for ways to help our customers maximize their returns. While also also maximizing our own. Thank you.
Again.
The conference.
<unk> has concluded thank you for attending today's presentation you may now disconnect.