Q2 2023 NexTier Oilfield Solutions Inc Earnings Call
And welcome to the next tier oilfield solutions second quarter 2023 conference call.
As a reminder, today's call is being recorded.
At this time, all participants are in listen only mode.
Great 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.
<unk> President of Investor Relations for next year.
Please go ahead Sir.
Thank you operator, good morning, and welcome to the Nextera Oilfield solutions earnings conference call to discuss our second quarter 2023 results.
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 and 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 second quarter of 2023, which is posted on our website with that I'll 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.
The second core was another strong quarter for next year.
Assistant with our guidance revenue was moderately higher sequentially, resulting in improved EBITDA and operating profit and we delivered another quarter of strong free cash flow and a high return on capital.
Our fleet activity levels remain resilient, even as the broader completions market temporary slowed demonstrating the value of our well site integration strategy to both next year and our customers.
The performance is a testament to the strength of the team. We've built at next year and I could not be prouder of the way we continued to deliver through a challenging environment, our commercial strategy aligned us with like minded customers to strive for excellence and appreciate the value that we create.
And our operations team delivered another efficient quarter. This combination will serve us well at all points in the cycle.
From our customer's perspective next year control the critical path to maximizing their returns.
Their trust in our team to deliver has helped us retain customers even as those same customers have slowed spending with several key customers choosing a next to your fleet over the other service providers.
In the second half, we believe we enjoy a strong competitive position relative to the peer group.
The previously announced merger with Patterson UTI will allow us to apply our strategy across a larger asset base, including utilizing our power solutions to accelerate the transition to a more fuel efficient and emissions friendly fleet, while also enhancing our digital capabilities.
In growing our wealth side, the integration of addressable market.
For the fourth consecutive quarter, we generated an annualized return on invested capital of more than 35% and free cash flow was very strong again.
Adjusted net income was $158 million for the quarter and our adjusted diluted earnings per share of 68 cents was up three 3% from last quarter.
Total revenue of $945 million was up 1% sequentially and was 12% higher than the same quarter last year we.
We delivered the highest top line in the company's history. We once again saw growth on another modest increase in pricing relative to the first quarter, even as our active fleet count exited Q2 lower than where it started.
Adjusted EBITDA of $234 million was 3% higher sequentially.
And up 41% from the second quarter of last year.
We saw strong incremental margins and improved our adjusted EBITDA for the ninth consecutive quarter.
And we again operated in a very capital efficient manner, we generated strong free cash flow of $128 million, despite making the final alamo earn out payment during the quarter, which negatively impacted free cash flow by $37 million.
Our Capex budget was also weighted toward the first half and we anticipate free cash flow will remain strong in Q3.
During Q2, we repurchased more than 2 million shares of stock for around $18 million.
In the first half we purchased more than 8 million shares for roughly $71 million.
We have $66 million remaining on our commitment to return $250 million to shareholders by the end of 2023.
Given the pending merger with Patterson, we have suspended our share repurchase program. Although the combined company remains committed to targeting a return of 50% of free cash flow to investors consistent with the next here capital allocation strategy.
Shifting to the macro.
Overall U S land completion activity slowed as Q2 progressed following the decline in the U S rig count they started late last year.
And natural gas basins activity has so far played out as expected.
The Marcellus has proven to be relatively resilient.
While the Haynesville has taken the brunt of the activity decline.
Natural gas basin activity is already down almost 20 fleets from the peak and we think natural gas activity is now approaching the trough.
Already the Henry hub natural gas forward strip has started to reflect the reality that activity will need to move higher from here to ultimately feel the growing global call on U S natural gas.
The Haynesville has already seen a large increase in drilled but uncompleted wells, which we believe indicates producers are preparing to add completion activity by next year.
In oil basins completion demand has softened, albeit only modestly so far while in the near term theres been more noise than we previously expected in the oil basins.
Our views over the long term remain largely unchanged.
Despite near term economic uncertainty all signs point to higher global oil demand over the coming years and accordingly, we believe U S land all activity will need to move higher than current levels as production will need to increase.
We see the availability of Frac fleets. Once again is the bottleneck U S oil and natural gas production growth by as soon as 2024.
In the near term, we think the U S land rig count will likely bottomed this summer with industry frac activity potentially down further from current levels with a trough likely come in later this year.
Importantly, we anticipate trough utilization will be significantly higher than the industry has traditionally experienced a strong indication that the longer term uptrend for the industry is still intact.
As we've said previously our customers are looking through commodity volatility more than they have in the past had positive for next year. This should help reduce the historical volatility in our sector.
This scenario in 'twenty, 'twenty, two where frac fleets were in short supply.
Fresh on our customers' minds.
Many are hesitant to give up high performing crews given the positive early view for 2024, frac supply and demand.
We believe the call on U S land oil and natural gas production in 2024 and beyond means industry demand could return to levels. We saw earlier this year.
Considering newbuild frac equipment has likely been insufficient to fully replace fleet attrition.
We can see a scenario where demand for our services could once again exceed supply by next year.
Against this positive long term macro backdrop and consistent with what we've previously said if demand softens in the near term, we would choose to stack or redistribute horsepower rather than work at pricing that result, and sub threshold returns.
During Q2, we idled two frac fleets and redistributed the horsepower to our remaining fleets with.
With opportunities to optimize horsepower levels across all fleets given the high intensity required by the modern frac job.
We could idle up to three additional fleets in Q3.
We continue to run our business on returns and through cycle free cash flow and not market share or short term EBITDA targets.
Our balance sheet is healthy with strong free cash flow expected again in Q3, and we will not accelerate the depreciation of our quality assets just to keep working in the near term.
Instead, we will use any downtime as an opportunity to invest to fully maintain our fleet.
And prepare for what we see as a strong recovery in 2024.
Our customers are expressing our appreciation for our efforts to strengthen the U S land oilfield services industry, which will help U S land maintained its position as a low cost global producer.
Our customers are choosing to remain with next year due to the value created by the fuel cost arbitrage from our integrated natural gas powered model, which is enhanced by our power solutions C. N G fueling business.
Our partnership matters and given the strong set up into 2024.
Many customers see no reason to make a change today that could disrupt our extremely safe and efficient operations and a recovery.
This is not to say that we do not expect to see an impact from the industry slowdown, but however, we have so far been more resilient than the industry average and we expect that will remain the case.
Just over a month ago, we announced that we had agreed to merge with Patterson UTI. Another leader in the U S land oil field services market.
Combination allows both companies to expand our product offerings and drive value for our customers with Patterson's Premier U S land drilling franchise complementing the combined companies' Premier U S land completion services product portfolio.
We believe the merger of these two great companies has the potential for significant value creation for our shareholders with enhanced scale and $200 million in expected synergies within 18 months after the merger closes.
Applying our successful well side the integration strategy across a larger asset base should lift the performance of the entire enterprise.
Standalone each company was already operating a disciplined capital allocation strategy and the increased scale of the combined company should allow us to tap into larger universe of potential investors that we believe will appreciate our shared focus on free cash flow and shareholder returns.
Yeah.
And the data analytics capabilities of both companies should not be underestimated.
Over time, we are confident that we can monetize the combined drilling and completion data to drive further value creation.
The new company will be a leader across the U S onshore market positioning us to more effectively allocate capital and accelerate shareholder returns. While also investing in next generation technologies that should create a sustained competitive advantage through the cycle.
Since we announced the merger Patterson has also announced another acquisition that is highly complementary to their drilling business Patterson.
Patterson's acquisition of Altera drill bits follows a very similar playbook to our integration strategy and our view Altera offers mission critical products and processes around the core asset in this case the drilling rig that can be leveraged with a fully integrated package to improve the process and create.
Value for both the service provider and the customer.
In addition, all terrorists international exposure also offers another potential path for next to your shareholders to benefit from an expanded geographic footprint.
We believe the Altera acquisition will further strengthen the combined company and next to your shareholders will greatly benefit from this transaction.
Okay.
On our prior conference call, we introduced next year's Chief operating Officer, Matt Gallard.
Matt has played a crucial role in the success of next here since he's joined the company and he will continue in his role as a leader of the combined completion franchise post merger.
So with that I'm going to turn the call over to Matt.
Thank you Robert.
Upon the anticipated closure of the merger of equals transaction with Patterson I'm honored to have the opportunity to lead the combined next year and universal completions teams.
I'm thrilled to help unlock the potential that lies ahead.
As we have done it next year and as Universal has done on departure. So we will continue to strive for operational excellence and the most capital efficient way possible.
When the next cycle will require maximizing asset efficiency and we believe the combination of these two great companies will give us a strong advantage and allow us to help keep U S shale oil and gas producers in a strong position on the global cost curve.
Well I know, our investors and customers understand our wildfire integration strategy.
<unk> aims to lower the total cost to complete a well reduce emissions and raise the efficiency and safety of the completions process all combined on on X hub digital platform.
It has allowed us to earn superior results.
Our customers a superior product and how it's been important in our differentiated financial and operational performance this cycle.
We continue to prove integrating our natural gas powered frac fleets without natural gas fuelling service, our wireline and our last mile logistics business and enhance margins for us and for our clients. The data supports this and we consistently see more pump hours per fleet relative to jobs, where the customer Hearts third parties can be.
Services on those hours come at a very high return.
The combination of the next two fleet with a universal fleet will increase the addressable market for integrated services and there is a huge opportunity to apply the strategy across a larger footprint much of which can be done with very little incremental capital.
And most importantly, the wildfire integration strategy also allows us to control more of a safety process and protecting the hard working men and women on our completion, while sides is one of my horse priorities.
As an example, we have been dealing with extreme temperatures. This summer in these conditions. It is important to us and our employees that we can ensure the pod is as safe as possible.
Very proud of the way that our team is protected each other through these difficult conditions.
On the Frac supply side headwinds continued to limit of efficiency as has been the case over the last 18 months the maintenance cycle remains a challenge and the number of pumps and the maintenance process today is still near the cycle high.
While some major components, such as engines and transmissions are becoming easier to source. Other issues are rising that are interrupting our maintenance lines.
The extreme summer heat is very hard on our equipment and recently, we have seen a spike in heat related equipment issues.
Well the nature of the issues is minor they are frequently I'm require us to take pumps out of service for repairs, which lowers our pumping efficiency.
Along those same lines protecting our employees from extreme heat as the highest priority and we require all employees to move slower when the temperatures get to these extremes.
In the northeast the Canadian wildfires impacted air quality on several occasions, forcing us to temporarily suspend operations. When we felt it was unsafe for our employees to be outside.
These anecdotes should serve as a reminder, the frac efficiency is a function of money changing factors some of which are outside our control successfully navigating and anticipate any challenges and differentiate us from our competitors.
In addition to maximizing asset efficiency, we see technology as another path to differentiation.
Our power solutions natural gas fueling business has been a huge success and has improved the marketability of our natural gas powered fleets.
We are consistently displacing more diesel I'm, helping lower the total cost to operate when our dual fuel fleets are paired with our power solutions offering.
We expect our power solutions product line.
Even more value and lower emissions, if applied across a larger natural gas powered frankly.
We also continue to make advances in rolling out our next generation Frac fleets.
I have two fleets in the field with deployed electric horsepower.
We intend to continue converting our fleet to 100% natural gas powered responsibly over time.
The measured pace of our capital deployment has been the winning strategy. So far as technology is changing very rapidly.
This has helped us maximize free cash flow and returns during the upgrade process.
Up next here, we have built what we believe is one of the most capital efficient businesses in U S land with a focus on employee safety.
Excellent and financial returns.
So these priorities should be a winning strategy with.
With inclusion of Universal and the no.
And experience, we expect to receive from that team. We believe we are set up to add significant value for our shareholders over the next several years and beyond with that I will turn it over to Kenny.
Thank you, Matt second quarter revenue totaled $945 million compared to $936 million in the first quarter up 1% sequentially.
<unk> modestly modestly higher net service pricing on average and an increase in sales from our well site integration services.
Meanwhile, execution was strong despite the heat waves that we saw in June .
This was somewhat offset by lower fleet count sequentially as frac activity exited the second quarter lower than where it started.
Adjusted net income was $158 million for Q2 up 1% from the prior quarter.
<unk> totaled 17% of revenue.
Our adjusted net income per diluted share was <unk> 68.
Total second quarter, adjusted EBITDA was $234 million, an improvement from $228 million last quarter.
Our adjusted EBITDA improved for the ninth consecutive quarter, even as activity slowed modestly as the quarter progressed.
The ability was up sequentially on several factors.
First we saw a slight increase in net pricing relative to Q1, driven by service pricing and higher well site integration revenue.
Second we continue to see efficiency improvements relative to the prior quarter, our decision to lower our fleet count and reinforced the remaining fleets had a positive impact on average pumping hours per fleet, which in turn improved fleet level profitability.
The final factor was cost.
<unk> been very diligent with cost controls throughout the year and we will continue to look for ways to optimize our cost structure.
In short we delivered a strong adjusted EBITDA incrementals of more than 65% sequentially.
Function of our winning commercial strategy and operational performance.
In our completion services segment second quarter revenue totaled $906 million compared to $896 million in the first quarter sequential increase of approximately 1%.
Completion services segment gross profit improved to $260 million on the increase in revenue as.
As well as a modest increase in margins.
In our well construction and intervention services segment second quarter revenue totaled $40 million essentially flat compared to the first quarter.
Gross profit totaled $9 million down slightly on less favorable job mix.
Second quarter, selling general and administrative expenses totaled $40 million flat with the first quarter.
Excluding management net adjustments of $9 million adjusted SG&A expenses totaled $31 million.
EBITDA for the second quarter was $221 million when.
When excluding management net adjustments of $13 million adjusted EBITDA for the second quarter was $234 million.
Management adjustments include $8 million in Stockholm, with other items totaling a net of $5 million, which are nonrecurring in nature.
Management adjustments include $5 million in acquisition integration and expansion cost mostly associated with the merger with Patterson.
Now on the balance sheet.
We exited the second quarter with $310 million in cash and.
Total liquidity was $721 million, which include the cash as well as $411 million available on our Undrawn asset based loan.
Total debt at the end of the second quarter was $355 million.
Net of debt discounts and deferred financing costs and excluding finance lease obligations.
We have no term loan maturities until 2025.
Yeah.
Net debt at the end of the second quarter was approximately $44 million down more than $95 million from the prior quarter.
Cash flow from operating activities was $226 million.
Profitability was very strong once again with cash flow negatively impacted by $37 million associated with the final Alamo earn out payment.
This earn out should serve as a reminder of the value that the acquisition created for Nextera shareholders.
We once again, we're very prudent in managing our working capital.
Our cash used in investing activities was $98 million during the second quarter.
Capex totaled $102 million.
Mostly driven by normal maintenance.
Funding for the transition of our Frac fleets to natural gas powered as.
As well as investments in our well site integration strategy, including growth Capex for both power solutions and last mile logistics.
We continue to make investments in high return non horsepower growth projects that are critical to the efficiency of our Frac fleet.
This resulted in free cash flow of $128 million, which would've been even greater without the $37 million associated with the Alamo Arnaud.
Given the pending merger with Patterson, we will not provide detailed financial guidance.
One activity, we could see our deployed fleet count fall by as many as three fleets by the end of the third quarter and we also expect to see increased white space with our average pumping hours per fleet also expected to decline slightly.
For Q3, we anticipate capex of roughly $85 million, which is down from Q2.
We expect to reduce Capex further in Q4.
Free cash flow should be strong again, and we expect that we will exceed our target of zero net debt by the end of Q3.
In conclusion, the second quarter was simply more of the same for next year and we cannot be happier with the way. The company has performed so far this year in the U S. Land offered services market that has seen demand softened as the year has progressed.
Since the recovery started back in 2021.
We have been one of the most consistent companies in the oilfield.
The entire time, our message has been the same.
Build a foundation with a strong commercial strategy.
Operator, as efficiently and effectively as possible for our customers and remain good stewards of capital for our shareholders.
This strategy has served our company and our investors well.
What makes the pending merger with Patterson, so exciting is that their management team shares the same principles.
And the opportunity to replicate the complementary strategies across a larger asset base and capital structure should meet even greater value creation for all stakeholders.
In my role as Chief integration Officer of the combined company.
It'll be my focus to ensure that the best practices from each company to survive.
I cannot be more excited to take on this new responsibilities other roles in the combined company's future.
I'll now turn it back to Robert for closing remarks.
Thank you, Matt and kidney.
Now, let me close with a few key takeaways.
And next year, we're proving that our well site integration strategy is a winning strategy across all points in the cycle.
We have generated above average returns during the period of Frac under supply over the past 18 months.
And already during the recent temporary slowdown we are seeing steadier activity levels than the industry average.
We believe we should continue to fare relatively well as activity levels bottom.
Second we expect to use any downtime on our equipment to upgrade and invest as we prepare for our expectation of a demand recovery.
These investments include the continued transition of our fleet to next generation natural gas power.
We do not plan to accelerated depreciation of our equipment to whole work in the near term and we will operate our business with a focus on through cycle return on invested capital just as we always have.
Finally, our long term macro view is unchanged.
Both oil and natural gas activity will likely need to increase over the next 18 months to meet growing global demand.
Considering they have been insufficient frac capacity additions to replace attrition.
We still see a scenario where demand for our services exceeds supply again.
Soon as next year.
We plan to keep our fleet fully maintained to be ready for the recovery.
During my time as CEO , we've completed several transformative deals that have positively reshape the company and the industry.
Bringing keen and C N J together in 2019 to form next year was hugely successful and was a big step for both industry consolidation and cost efficiency.
The animal acquisition in 2021 was well timed and allowed us to accelerate our transition to natural gas powered equipment and was the pinnacle of our successful counter cyclical investment strategy.
We believe the merger with Patterson is the next step to value creation for our shareholders our industry and our employees I'm excited to help lead the new company and the Vice chair role, while we will continue to pursue what is made next year in Patterson successful over the past several years.
I've learned a significant amount from all of the next year stakeholders, including our employees our executive team our board members and our investors I've enjoyed my time as CEO and I will always appreciate being given such a unique opportunity and with that we'd now like to open the lines for Q&A.
We will now begin the question and answer session.
Ask a question you May press Star then one on your telephone keypad.
If you are 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 to some of our roster.
Yes.
Our first question today will come from Luke Lemoine of Piper Sandler. Please go ahead.
Hey, good morning.
Oh well.
Hey, good morning, Thanks for the fleet outlook through the end of <unk> just wanted to see if you guys could maybe.
Outline how you see <unk> activity shaping up.
And then do you think <unk> will jumpstart 24, and then third part if you could just step a bit further and expand on your outlook for 'twenty. Four would you describe it is looking more like <unk> 23.
And maybe what level and type of conversations you're having with customers right now.
Thanks for the question Luca.
I think that what we're seeing in Q3 and in my view is the customers managing their budgets.
They they they're balancing production targets with their balance sheet.
And their commitments to cash returns.
Versus their outlook for what they think about oil and gas price and.
And I think it's a bit of a unique scenario, we were sitting here with oil at $79 and see in the drilling rig count being down a little bit.
So when you think about that playing into 2024.
I believe that there's like two potential scenarios.
One is that we have a traditional Q4 holiday impact that some people call budget exhaustion.
No that kind of scenario, where you see Q4 down a little bit from Q3.
But there's another scenario in my view and the more likely one in my view for this year and that is that the customer base prepares to get a running start into 2024.
You know theres, a number of reasons, but perhaps for that one is that they are in good shape at this point this year with their production targets.
In in 'twenty, four we start to get a little more takeaway capacity in the gas markets.
And more even in 'twenty five and in that.
And you know the old outlook seems stronger and stronger on the oil price. So I feel like that that's the most likely scenarios that you start to see people getting ready for 'twenty for you know in Q4 and in fact, you know, Matt and I have been taking.
Discussions with similar customers all right about those kind of plans for ramping up in 2024.
And I guess, you would probably get a variable answer depending on which company you talk to but you know we do try to Atlanta with like minded customers that have a long term view you know about the market. So I think that we may be influenced by that a bit but I, but I believe that that probably describes a macro pretty well.
Okay got it that's perfect. Thanks Robert.
Thank you Luke.
Our next question today will come from Arun Jairam of J P. Morgan. Please go ahead.
Yeah, Yeah. Good morning, gentlemen, I wanted to first start off with the you know the planned integration activities with the team at Patterson.
Wanted to see if you could talk about your plans to integrate.
The Universal team within next what are your early observations on fleet quality and any upgrade work that needs to be done and then maybe Kenny you can give us an update on the synergy capture from the deal I think you've outlined up to.
The $200 million over an 18 month period.
Well thanks for the question around one thing I'd say is that we we are on the track that we said we'd be on related to do that integration.
And.
The concentration of talent has been very impressive from from where I see it.
Kenny would you make some comments about about where you are with beginning of the Atlanta. Good morning, Arun. So so obviously you know what the altera deal and the background, where we're kind of just getting started on our integration planning process. So I don't have a lot to report there, but what I can tell you is as Robert mentioned is that it is very exciting.
We're focused are our focus right now is going to be not disrupting the current very high performing drilling and completion businesses and we're developing our day one plans on your point on the synergies look nothing really to report at this point, we put the $200 million out there everything we've seen so far that's obviously still intact. So there'll be more news on that.
In the coming quarters.
Matt.
Hey, good morning, Arun I think just just on the integration side, but like any started it's pretty early and we're obviously operating independently, but I. Just think you know from what I saw on the fleet and equipment side.
It was pretty happy with the progress that we've made you know upgrading our fleet to DGB natural gas and with the deployment of the easily to around 70% of the fleet are now able to operate on fuel efficient natural gas.
These fleets have been extremely easy to keep busy as we've seen some some movements in Q Q3 or Q2.
I think its partisans publicly stated and they've also made a large conversion over recent years to a good percentage of natural gas capable fleets. So once it closes complete one of the things. We really look forward to is the synergies that we can see with a plan a power solutions go to further reduce diesel consumption. So I think that's something that will be work in progress, but we're looking forward to as the deal closes.
Great. My follow up is maybe for you Robert you know last quarter, you mentioned that given caught the bifurcation.
And the equipment between premium equipment and call. It more legacy equipment that you didn't see the need to adjust your pricing strategy at that time.
Fast forwarding called 90, 90 days or so you guys have talked.
<unk> talked about a couple of fleets in the quarter, where you integrated the horsepower with the existing units and you could lose.
A couple of three more fleets.
In terms of demand and so I wanted to get your thoughts on your updated views on the pricing strategy and next and how do you think pricing will trend as we get into you know quote unquote.
The 'twenty 'twenty four kind of buying season as things are reset based on 2024 budgets et cetera.
Got it around and look up reflecting back on Q1, you know, we we said that.
You know we were going to be looking at fleet configuration enhancements and driving trying to drive record level of efficiencies out of that fleet.
<unk> ended up making a stronger focusing on integration.
It would get pricing you know up a little bit Q to Q Q2 versus Q1 and that free cash flow behind not I'm glad to say that.
From an accuracy accuracy standpoint, those things happened.
And we continue to look at.
The commercial aspects that includes pricing.
On a profitability per metric profitability per fleet are more likely for us profitability for hydraulic horsepower deployed.
And what that means really is besides the net pricing aspects the contract terms and the scheduling you know do you have a likelihood of white space. The operating efficiency for the combined operations between us and our customer base you know how many pumping hours do we get per month for example, how.
How much is integration uptake been there and then also the.
The cost structure that we deal within the commodities, how do we put all of that into a commercial aspect to optimize it for both us and our customers.
And we've got a history of working with the same customer for a long time and that's because we can demonstrate flexibility with them and we have all of those different knobs to turn in order to do it.
So when we we said that we weren't going to be focusing on price because you know we weren't going to do that we haven't had to do that and.
And we've operated in a market that allowed that to be the case because of the relationship. We have you know what.
There are long term customers.
But when you when you when I go back to my comments earlier about some of our customers and some of the E&ps in general managing.
Their budgets in the middle of the year and stood at the end of the year.
Think that put some fleets one on the market that would ordinarily be a dedicated fleet.
So when that happens you get into a very volatile scenario and maybe theres a number of fleets chasing you know a bunch of smaller opportunities that are one off wells or one off pads.
And that's a different environment. So we proactively made some decisions like that to take those fleets out I mean, Matt you won't comment on that a little bit I know, we got a lot of catch up that we needed to do on our fleet maintenance was.
Yeah, I think so we talked a little bit about short term softness in Q3, but I think if you remember I think we will talk about this before we probably work the fleet.
Hard in Q1, and Q2 and one of the reasons, we took to redeploy a horsepower.
It was to deploy those extra couple of pumps on fleets and to increase our efficiency.
It also increases our gas substitution right. So again, just by working those fleets a little bit less hard we're able to offer more fuel savings and I think as we go forwards into a into Q3 again that there's some upgrades that we wanted to do to the fleet and the prior quarters and we weren't able to pull in from operations. So actually to have a little bit of a breather in Q3 and.
Continue to upgrade and improve the fleet is actually a good thing for us.
When you when you asked about the trend as we start to go into next year.
The way we look at it is we've spent a lot of time trying to understand the macro supply and a man and Frac and you know as we made comments in our prepared remarks, a bit that we see 2024 could be another case, where you know frac is a bottleneck again in other words theres more demand than there are there are fleets, particularly.
Any upper tier of the equipment base. It uses that uses natural gas. So we see huge strong demand their steel.
And I would argue that that's a very supportive environment and in 2024 for that obviously.
Everytime prefaced on you know what oil price does I mean, I think we've got probably more visibility on natural gas prices over the next couple of years and we do than we do oil, but I think you.
You know everybody's got to review, but I'm not here to try to predict that it's just that we see it set up pretty good for a for 2024.
Great. Thanks for the fulsome answers.
Thank you Sir.
Our next question will come from Derek part of our of Barclays. Please go ahead.
Hey, good morning, guys I, just wanted to keep going on our ruins comment around around pricing I think the bear case out there and what investors are worried about is that we're going to get this wholesale reset on pricing going into RFP season.
So maybe can you help us dismiss those concerns I mean is it something to be said that your fleet mix. It was much more improved to start 2024 compared to 2023, just maybe some things to help investors.
That'd be too concerned about a wholesale pricing reset as we enter next year.
Yeah, I mean, I think that the cycles themselves.
I'll become an shallower I mean, it means that you know you don't have to be worried about necessarily a real long periods of time I think that as Matt described having an opportunity to catch your breath, a little bit and get your maintenance cycle really revamped up is somewhat what's.
Inning, that's taking capacity off the market right now I think in the spot market people, sometimes want to make a judgment about what's going on in the overall market based upon what's happening in a situation where people are just trying to decide do I keep a fleet go on for a little while it really a sub market pricing.
<unk> versus doing what we do in some of our other competitors, who said that they were doing.
So I mean, I would just say that that is one factor and another factor is the fact that the fleets evolved a lot you know now when you're talking about using a fleet that uses diesel versus one that's using natural gas theres a big difference in the total cost profile for that fleet for the operator and he has the ability.
To continue working with it.
Providers, who can bring that fuel arbitrage to the to the table.
And then the other part of it is when you have a workflows that are really really run and really well for you and.
And you have a number of services integrated around it and it's clicking and you measure that by pumping hours per fleet, we mentioned it a little bit our comments in the prepared remarks, we had unbelievable Q2.
And people don't want to mess with it too much and I will just say that that's supported by the fuel arbitrage for that for gas powered.
Is a is a lot of reasons why and I think that yeah. There's always the way people, sometimes make short term decisions that you know where it might be best for them and that in certain circumstances, but I think in large part we agree with some of our previous competitors' comments about how the how the market.
<unk>.
The last thing I'll just throw in there Eric is the fact that we have.
Spent hundreds of millions of dollars on upgrading the fleet and that has to have a return and so I think that's what's doing a lot of the pricing discussions.
For the high tier fleets is that we have to we have to generate that return on investment.
All right Yeah that makes a lot of sense, Robert maybe on that cycle being shallower comment just thinking about how the decrementals.
Should look in the back half of the year, how will it differ from this cycle versus past cycles. I mean should we expect that to be more controlled than what we've historically seen just trying to gauge where profitability could bottom out.
By the end of the year before we start off 2024.
No I think that's I think that's a good question Yeah, you know, Matt alluded a little bit to our supply chain, which you know has been struggling up until lately, you know as far as making deliveries in on driving cost into our system.
The weird on a campaign to try to back some of that out and through not just pricing, but through hell held in those.
Services or equipment or utilized within our workflows.
So I think that'll have a lot to do with the ultimate Decrementals I'd point out that the incrementals in our last quarter very well very good.
I think one thing that we've been able to do is be pretty proactive because we are pretty good at assessing the macro and deciding where things are going to be in and start planning and getting ahead of that for example, you know we actually put them merit raise in place for our employee base.
At the beginning of this quarter and our attrition rates are down that's actually a net positive.
For you know for the company and I would say that we have not had to.
Who would have a reduction enforced because Matt was proactive in balancing you know all of our hiring in tune with the expectations of how that would flow through the system.
So all I'd say is you know decrementals are a function of all of those all of those things in.
Because our customers are so efficiency focused and our workflows are so married together now I think we can manage the decrementals very well through this downturn, but I mean can you get any comments what am I going to yeah. I would just add that you know you can't really give any specific margin guidance, there, but what I would like to see.
Is that.
In fact, our margins to be to remain higher than what they were at similar revenue streams in the past.
So everything that Robert said, we have a lot of factors that we have that could limit our decrementals as we go forward.
Great. That's helpful and if I can squeeze just one more I know last call. We met you guys mentioned the LOI.
Just an update on that is that still valid or just given the merger with Patterson and there's just no longer in place.
So the value proposition for that kind of a deal for US is steel is still intact and arguably better with increased scale that we have around you know it was a completion business and in the newco.
So I think that it requires a little bit patient for everybody involved because we you know we do have a lot on the table and we are very diligent about wanting to.
The already announced mergers.
Never Miss a beat.
So I would say is Derek yes, I think I can't speak for the New company I'm just speaking on behalf of all of US right. Now is that we still see value in that kind of deal. So I would say stay tuned.
Perfect Awesome, all right guys I'll turn it back thank you very much.
Thank you.
Our next question today will come from Stephens, Inc. <unk> of Stifel. Please go ahead.
Thanks, and good morning, everybody.
The the.
One of the things I wanted to ask you about just from from your perspective, and I as others as well.
Consolidation of assuming industry has clearly helped industry dynamics such.
As we think about the frac market in Frac pricing.
No theres been no spot market pressure, especially amongst a small operators. What are you seeing what can you point to things that support that the dynamics are better.
And that pricing is holding up better or you're getting anecdotes from conversations I'm, just trying to get sort of a validation that that sort of.
Hearings playing out.
Well, it's hard for me to be able to comment on that right now I would just say that in general.
Yeah.
The supply and demand balance of our of.
The thing is still there and.
I I don't really have any particular data points that could bring up or anything about about that.
Yeah.
No one really maybe I'll say something Robert I think I think one thing is as you know size and scale and we talked about this a little bit in our Investor day.
Having that size and scale and integration together allows us to offer value savings and cost savings to the client and so I think we've had a lot of great discussions recently with the clients.
And how we can improve the total system completion costs.
We will take additional services like sand or chemicals will power solutions.
I think where we will have a win win situation, where we provide savings to the client and you maybe in the past is we don't have to go so deep on the service pricing that we've had to.
And I think our customers appreciate any.
The measures taken that you know, we got a certain amount of fixed cost in the industry and if we spread it out broader across you know the fleet that's good for everybody.
Thank the customers appreciate that aspect of it.
Yeah.
Thanks.
And.
I I appreciate you guys not.
Not wanting to.
Give a whole lot of guidance.
When I when I think about your just giving US Liberty as an example, just because they are probably the biggest other plasma that has already reported.
The.
The.
Consensus seems to be around this.
The second half of 'twenty three and beyond.
20 ish, 25% below the first half.
Do you think that's in the ballpark based on what you see on that I'll talk about that I'm just talking in general.
View based on activity and pricing that you're seeing right now that EBITDA in the second half was.
20% to 25% below the first half.
All I'd say is that you know Q3.
Pretty well kind of baked in a little bit when you look at what's happened with the drilling rig count already.
And I'd go back to my comments about that to face potential scenario for Q4, one being that traditional holiday relaxation that occurs.
And in many cases versus a running start on 2024.
I'm leaning toward the second when more likely than the first simply because it's not uncommon for customers at this current oil price levels to be balanced with managing their budget in the middle of the year like you've seen with this drilling rig count reduction.
One of those.
The competitor that reported and you mentioned.
It said that there was a lag you know in frac activity of a.
A quarter behind.
Behind drilling rig activity I think that's you know we don't disagree with it at 60 to 90 day kind of lag. So I think we have to watch that and to make that prediction I think would be a coin toss on what happens.
In Q4.
Okay No that's fair I appreciate the color. Thank you gentlemen.
Thank you.
Next question is from Sean Michel off Daniel Energy Partners. Please go ahead.
Hey, guys good morning.
Or just wanted to ask you. The noise you referred to Robert are in the oil basins, you referred to noise.
And then in the kind of oily basins earlier in the call and maybe just take a minute is that more a function of frac fleets moving ended those oil basins from gas basins, because we've recently heard a couple of anecdotes around.
Some of the gas basin Frac fleets are just now moving which seems a little surprising to me, but I guess the lag you guys. Just talked about maybe that's part of that are you seeing more assets move into the oil basins from the gas basins on the frac side today, which might be driving some of the what you're seeing in Q3.
Look I think that.
It's all linked to that comment about the customers managing their budget to I mean, it's in the middle of the year kind of dropping a little bit of activity. Because you are already under production targets. It's also.
It has to do with what you're referring to.
And I'd say that you know maybe people are prospecting.
Their before they actually move let's see if they can find something but I mean at the end of the day.
If you go back to the gain in all of that I'd say it was.
This is a bit under supplied.
Basins so.
So that's a dynamic that is that is this rebalancing and I'd also say that help dynamic about what kind of fleet you're talking about you're talking about one is pure diesel are you talking about some sort of gas powered fleet and the dynamics around those are different than just.
And idled the tier two diesel looking for whatever it could get.
Yeah, I think that's a fair a fair assessment on your core book yet.
And then maybe wanted to follow up on Labor I mean, I guess it sounds like you guys aren't having to lay people off yet but on the labor side are you guys seeing other people kind of let people go and are they coming to you, saying, Hey, I'm looking for work.
Well, you know I better let other people to disclose.
Disclose what they've got going on and we have our view about that but I would say that we do see a little bit of anecdotal evidence when.
Applications show up.
Yeah, I mean, I think it depends on where you are and you know who you have been working for and what status.
Your equipments and everything else like that we have just been trying to stay ahead of it on a plan that plays in balancing.
Hari with what the expectations are because you know.
Wholesale services has got a super hub.
The amount of churn in the business when it comes to.
Field staffing.
Got it thanks, guys I'll turn it back.
Thanks, Phil.
Again. It is star then one to ask a question. Our next question is from Conor Jensen of capital markets. Please go ahead.
Oh, Hey, this is Conor Jensen for Jim Rollyson with Raymond James.
Thanks for taking my call today.
Thank you Tom.
Just a couple of quick questions for me given youre not giving guidance for the third quarter do you expect the merger could close sooner than anticipated or am I reading too far into that.
Well you know for US all in all I'd say is that you know, we havent changed any of our.
Our messaging around around the timing everything from a filing perspective as you know kind of went on tracking.
I would just say standby I think that that's pretty much out of our control that.
At this stage.
Got it and then you mentioned the three fleet you may drop in Q3 any insight on whether those nice skew earlier late in the quarter.
Yes. This is Matt I'll take that one again.
Again, I think we've stopped talking about absolute fleet kind of four wall, because we constantly reconfigure that fleet you know either based on the needs of our client on the paths or to optimize the returns.
I think it's probably helpful to answer your question.
Robert mentioned that we may take out to three fleets in Q3.
But if I add a little color to that I can probably say that we'll start Q3 with two less fleets than we'd run through most of Q2.
But I will say, we're keeping our options open on that third fleet drop as we see it today July pumping activity is very strong.
And I think Robert mentioned, we're seeing some requests already for possible additional activity in Q3 and Q4. So I think we're just going to watch the corda closely before we make that decision on the third fleet.
Great. Thanks for the answers I'll turn it back over.
Thank you Paul.
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 closing remarks.
Thank you Allison.
Look I just want to end by saying next year had a great first half of the year and I'm. So proud of the people, we're very well positioned as we go into this merger, we're going to take a very healthy cash balance have foreign group employees and our fleet is very very efficient equipment into the new company.
Thank <unk> next year employees enough for the high level of performance, especially in the field, where we're dealing with extreme weather conditions.
<unk> is an amazing group. Thank you very much.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect your lines.