Q2 2023 Solaris Oilfield Infrastructure Inc Earnings Call
Good morning, and welcome to the Solaris oilfield infrastructure second quarter 2023 earnings call. All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After todays presentation, there will be an opportunity to ask questions to ask a question you May Press Star then one on your Touchtone phone. Please note. This event is being recorded I would like now to turn the conference over to Yvonne Fletcher Senior Vice President of Finance and Investor Relations. Please go ahead.
Morning, and welcome to the Solaris second quarter 2023 earnings Conference call I'm joined today by our chairman and CEO , Bill <unk>, and our President and CFO Kyle Ramachandran before we begin I'd like to remind you of our standard cautionary remarks regarding the forward looking nature of some of the statements that we will make today.
Such forward looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks.
I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance.
Presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP.
Reconciliations to comparable GAAP measures are available in our earnings release, which is posted on our website at Solaris oilfield Dot com under the news section I'll now turn the call over to our chairman and CEO .
Thank you Don and thank you everyone for joining us. This morning, I'm pleased to share another strong quarter of profitability growth as we continue to see success from our Topco and auto blood technologies.
Quarterly adjusted EBITDA by 7% sequentially and 27% from the second quarter of 2020 to nearly $27 million.
We generated free cash flow of $7 million, and we returned $16 million to shareholders through dividends and share repurchases under our enhanced shareholder return framework.
Industry Frac crews were down sequentially in the second quarter and the impact of soft natural gas prices became evident in completions activity. We saw the impact of lower completion activity in our same system count, but we're able to offset that with earnings contribution from our top film and auto blending systems, which were both up over the last quarter as well as from increased.
<unk> from ancillary trucking services.
Over the last 18 months, we've made strategic investments in new technologies with the goal of enhancing both our earnings power and addressable market potential our goal with these investments is to provide incremental value to our customers and complement our core same storage offering.
As a result, this allows us to expand our footprint and customer list in our lower 48 and drive higher earnings and cash flow per Frac crew. We service our results. This quarter continue to highlight the returns on this strategy.
Prior to developing these new technologies on average we deployed $1 six packs and system to every fracture we covered today with our expanded offering we're deploying 50% more systems, including Taco in Ottawa and units on our covered Frac fleets.
We expect that further new equipment deployments in the third quarter will help drive incremental EBITDA contribution, resulting in growing earnings per Frac fleet, regardless of what happens with industry Frac activity.
<unk> technology has been a major driver of this success today, we have nearly 50 units in the field compared to only a couple of units a year ago.
<unk> provides a powerful combination of our reliable and industry, leading sand handling equipment with the flexibility to use both high capacity belly dumps, while preserving pneumatic trucking as a backup this flexibility and reduces the total delivered cost of sand for our customers by reducing the number of truckloads required through higher payloads turning trucks more.
Quickly an industry, leading flexibility with multiple unloading options.
Our top filling units have become industry, leading in a short period as we're the largest provider of belly dump compatible and storage on the market today.
Brand electric blending system, there's another technology that complements our expanded offering and further develop our strategy to help operators increase efficiency.
Customers continue to see the benefits from increased automation smaller footprint built in redundancy enhanced safety and all electric design when compared to the downtime and costs associated with traditional and even some newer electric blenders.
In the second quarter, we more than doubled our average auto blend deployments, which helped drive improved cost management and profitability. During the quarter. We are encouraged by the strong backlog of demand and expect another quarter of improved profitability in this offering in the third quarter.
Longer term. We also continue to believe the strong backlog of demand for electric Frac fleets coming into the market. This year index, providing opportunity for continued auto blend adoption.
More recently, we have successfully integrated our auto blend tocqueville incentive systems on several well sites with the same power sources, our customers are using to supply their frac operations, including grid power turbines and natural gas powered engines, our systems have been 100% electric since inception, which is.
Become even more relevant today as operators are pushing toward electrification of oil and gas development to lower costs and improve their emissions footprint.
All of our systems are designed to be able to plug into virtually any of our customers on site power sources with no modifications required in some cases. This has already given us a competitive advantage, where an operator required equipment onsite to be plug and capable. We believe the trend of operators asking for are requiring all electrical equipment will continue.
To grow, especially as the demand for a fleet grows.
It's a unique opportunity for continued adoption of both our current and new technologies.
As we head towards the back half of the year and we expect our capital spending rate to slow down as we complete our budgeted capital program for New technology units, we will continue to reassess the market for signs of additional demand for more units, but at this time, our capital guidance remains unchanged with the enhanced earnings power of Solaris, We believe we will begin generating meaningful cash flow.
Again is this growth capital slows we began to see this during the second quarter as free cash flow inflected to a positive $7 million, we expect free cash flow to accelerate in the back half of this year.
Jerry are you providing shareholder returns has always been a paramount to Solaris strategy, we initiated a regular quarterly dividend in 2018 and it paid 19 consecutive dividend. Since then earlier this year, we committed to a long term framework for enhancing our existing shareholder returns program by returning at least 50% of free cash flow through dividends and <unk>.
Share repurchases.
Our base dividend by 5% to 11 cents per share, which represents the second dividend raise in our company's history and initiated a $50 million share repurchase authorization.
Since then we have repurchased approximately 3 million shares or six 5% of the company's fully diluted ownership for $26 million on accumulative basis. Since 2018, we returned nearly $150 million to shareholders, which includes the repurchase of approximately 12% of the total outstanding shares.
I'd like to summarize by highlighting that our results. So far in 2023 are showing success in our strategy of growing our earnings and return per Frac crew. We service, we expect our profitability to trend higher as we expand our offering per well pad free cash flow is expected to be strong moving forward are driven by an expanding margin per frac crew and the completion of this year.
There is growth capital program.
Operator activities expect to flatten out in the second half of this year the longer term commodity outlook remains healthy we will continue to be focused on delivering strong operational execution growing our earnings power and executing on our shareholder return framework through a consistent dividend and opportunistic share repurchases with that I'll turn it over to Kai.
For a more detailed financial and guidance with you.
Thanks, Bill and good morning, everyone I'll begin by recapping, our second quarter results, we generated over $77 million of revenue adjusted EBITDA of nearly $27 million, a 7% sequential increase and returned approximately $16 million to shareholders.
Revenue in the second quarter declined 7% sequentially, primarily due to softness in completions activity across several basins as the industry Frac crew count began to be impacted by the rig count decline we saw earlier in 2023.
Lower margin ancillary services revenue declined sequentially, which was modestly offset by a full quarter benefit of higher rental pricing across our sand storage offering.
EBITDA grew 7% sequentially as we saw strong incremental margin and contribution from additional pop Bill and auto blend deployments and improved cost management across our ancillary services, which drove higher margins from that offering.
The additional top fill in at a blend deployments contributed to pull through sand pilot work and incremental gross profit percent system equivalent despite softness in the broader completion market.
Before I give some color on the drivers of Soliris as activity in the quarter I would like to provide context to the evolving and expanding nature of our equipment offering and our earnings per well that historically, we earn the majority of our revenue and earnings from our sand system offering. So we focused on fully utilized stand systems as our key metric as we have.
Band It our rental offering to include top bills in auto Glenn systems, we feel that a fully utilized total system count is the more relevant measure of our activity, particularly as each offering offers and similar earnings contribution margin.
During the second quarter, our total fully utilized system count was 100 and ate systems, which was down 8% sequentially as a decline in frac activity was partially offset by incremental deployments of both top fill and auto blend systems.
Excluding the contribution from ancillary trucking services, our contribution margin per fully utilized system was up 11% sequentially just slightly over $1 million per system on an annualized basis as we benefited from a combination of mix and a full quarter of the pricing increases implemented during the first quarter.
Absent any significant customer mix changes, we expect contribution margin per fully utilized system to remain flat over the remainder of the year as we expect pricing to remain flat.
Excluding the contribution from ancillary trucking services, our contribution margin per fully utilized Frac crew also increased by 19% sequentially to approximately $1.6 million on annualized basis.
The primary driver of this growth per well site as a result of having multiple flare systems on a single site during the second quarter, 44% of the well sites. We operated on had multiple Solaris systems in the form of fan systems, plus either a top fill or auto blend system.
This compares to the first quarter were approximately 29% of the Frac crews. We followed had multiple Solaris systems. We expect contribution margin per fully covered frac crew to increase in the remainder of the year as we expect to increase top Phil and auto blend deployment. Despite the movements in underlying frac activity.
During the second quarter ancillary services of approximately $3 million contributed approximately 10% of total gross profit and was up over 100% from first quarter of 2023.
Primary driver of the improvement in ancillary services margin in the second quarter was improved cost management and a more favorable job mix and our last mile sand hauling offering as tons hauled remained relatively flat.
As a reminder, our trucking services, which include last mile sand hauling and Solaris equipment transportation can be harder to predict and due to their high revenue low margin pass through characteristics basic changes in trucking activity such as longer distances between minded while sites can drive disproportionate changes in revenue and margin.
For example, ancillary services comprised 10% of total gross profit in the second quarter of 2023 compared to 5% of gross profit in the first quarter of 2023 and 24% in the second quarter of 2022.
In the third quarter of 2023, we expect lower tons transported in our last mile sand hauling offering to drive total dollar contribution from ancillary services closer to first quarter levels at around $1.5 million.
To recap our third quarter outlook, we continue to see demand backlog for a new technology offerings, which should drive incremental share and cash flow. As a result, we expect our total system count in the third quarter to be up by a few system sequentially. After netting the impact of flattening industry completions activity with continued increases.
And the deployment of our top fill in auto blend systems.
We expect profit per system to be flat in the third quarter, but these increased deployments should drive continued improvement in contribution margin per frac crew when excluding the impact of ancillary services S.
SG&A in the second quarter was $6 $8 million and we expect it to remain flat in the third quarter.
We expect third quarter adjusted EBITDA to be roughly in line with the second quarter of 2023, the third quarter should see increasing contribution margin per frac crews, but is expected to be offset by fewer frac crews and lower ancillary services contribution.
This estimate is close to where street estimates already are.
For our capital expenditure outlook. Following the initial build out of our top film fleet, we expect our capital spending rate to decrease significantly which should yield significant cash flow over the coming quarters.
For the third quarter, we expect capital expenditures to be approximately $15 million. We continue to expect full year 2023 capital expenditures to be between 65 million to $75 million.
Turning to cash and shareholder returns.
Operating cash flow during the quarter was approximately $28 million and reflected a $3 million source of cash from working capital. After total capital expenditures of approximately $21 million free cash flow was positive $7 million in the quarter.
We ended the quarter with approximately $9 million in cash and $43 million borrowed under our credit facility, resulting in approximately $41 million of liquidity our year to date operating cash flow of $45 million covered our year to date dividends of $10 million and the majority of our $40 million capital expenditures.
We borrowed on our facility during the first half of 2023 primarily to fund $26 million of opportunistic share repurchases and remaining capital expenditures not covered by operating cash flow.
The accelerated return of cash to shareholders in the first six months as a result of our confidence in the continued free cash flow generation that we expect to increase significantly in the second half of 2023. Therefore.
Therefore, we anticipate these borrowings on our credit facility to be temporary.
In conclusion, the investments we've made in our business over the last few years are driving earnings growth and enabling us to return meaningful cash to shareholders. Our customers value technologies that are safer automated and help lower costs and that is what we are focused on providing therefore, we expect to continue our new technology deployments.
Which will help us continue to improve our earnings power and cash generation and we look forward to sharing our progress with you over the coming quarters.
With that we'd be happy to take your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone. 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 momentarily.
To assemble our roster.
Our first question comes from Luke Lemoine of Piper Sandler. Please go ahead.
Hey, good morning.
Good morning.
Good morning, Little change in the asset count methodology, and you previously talked about a well site with tocqueville in auto brand.
It would be about two to 3 million of G P per year.
We think about the new count is it better to look at the value that can be derived for Frac fleet, followed as potential here still two to 3 million per year. If you look at it like that in call. I believe you said kind of using that metric you're at 1.6 million per Frac fleet, followed annualized into Q.
Yeah, that's exactly right Luke I'm you know, we think providing this full system count gives you visibility into the sort of rough.
Roughly $1 million annualized EBITDA per system.
And we're also providing what that looks like kind of fully covered basis from a frac fleet standpoint.
But yes, the two to 3 million our earnings per Frac fleet is still the way we're thinking about it we're just trying to provide them a little bit more context.
To you all and investors as to what that makeup looks like.
Got it alright, thanks, a bunch.
Okay.
The next question comes from Stephen King Garro of Stifel Stifel. Please go ahead.
Oh, Thanks, good morning, everybody.
Sue.
Two for me first call. Thanks for all the detail that was that was very useful.
One of the things that we normally would do would be kind of back into your.
Fleet count off of and assumed market share and our expectation for Frac fleets right you've got about third of the market usually.
As we think about your market share as far as.
We served right now has there been any movement in that from your perspective.
Yeah, I'll kick it off with Bill you should definitely chime in on it.
Certainly the new technologies have driven market share its targeted to certain majors that we've been chasing for a long time and without some of these new technologies, we wouldn't be there from a capability standpoint.
I say that that really around the debt bucket over there. But then you also the other piece that we alluded to on the call is around the electrification and we've got customers that are really pushing hard on that and obviously demanding that service from the pressure pumper, where a plug and play solution for that both with our with the bucket elevated the sand system.
As well as the blender and that that's a real edge and differentiator for us and that's driven incremental market share and then the second piece to that I would say is just regionally. The Rockies basin continues to be a growth area for us which is just historically been underserved due.
Due to the use of bellied I'm tripping up in that market.
And for those two pieces really have significantly given us opportunities to work for.
New customers and as we look at the backlog that continues to grow.
I think you hit it all.
Yeah.
Yeah.
Uh huh.
Great and then and then just just the cycle more as.
As we think about the deployment of.
More systems on a on a per Frac fleet basis, and you've talked about the sharp rise you saw two tiered versus once you.
Is there I mean I guess the question is you talked to more customers about about this is there a stickiness where the customers who are using it.
On it across the spectrum.
Yeah.
I'm trying to think about how how that impacts adoption.
I think it does stay I'll answer this one it does but the difference between running a pneumatic truck versus running a belly dump truck is very dependent on.
How far youre going with that load with the local rules are on loads and so for instance in Wyoming Youre running 60 to 70000 pounds of truck sand and southern New Mexico. All of that so there are some regional specifics around around how that adoption I mean, our goal is to once a customer uses it that the reliability and all the.
Ancillary benefits that come along with the systems in terms of data technology, using the blender with the way it actually.
Can help the reliability as well as cleaning up staying in the process.
Leached it leads to.
Very consistent use of the product by our customers for a long period of time and hopefully very sticky.
Uh huh.
We've got multi basin customers that are using the new technologies across multiple basins.
Okay.
Hi.
That that makes sense. Thanks, and then just one final one you mentioned kind of a.
Price for the I guess.
Maybe it's the wrong word, but sort of see standard.
Sam Silo system.
Is that Oh.
I imagine that just based on conversations with customers and what you're seeing or just kind of a back of that we've also started to hear that maybe there's a little bit of a pick up in <unk> just as some of their consumable costs have come down what are you guys seeing from that perspective, you usually have a good insight into activity changes before.
Some of the others there.
Well I think that's right I mean, I do think you're going to see it it feels like if we look at the profile of the second quarter. You know are kind of law was wasn't was May June picked up a hair I think July feels sort of in that same level and we'll see how the rest of the quarter shapes up I think it's it's trending flat to slightly down with.
Talk of momentum, it's really too early to completely predict the fourth quarter, but we did we do see in general, especially if commodity prices remain where they are that there's a bit of optimism and maybe some early spending for their 24 program and getting ahead of the game, especially when it comes to locking in some lower costs.
Operations in terms of our cost and the way we tend to work with our customers, where we're less volatile on pricing than most other services, we've tended not to not to raise them overly in the in the good times, but but not give them up too much in the downtime so that the pricing level with us is realm.
We've muted compared to other aspects of the industry.
Great.
Thanks for the detail.
Okay.
Yeah.
Again, if you'd like to ask a question. Please press Star then one our next question comes from Sean Mitchell.
Daniel Energy partners.
Please go ahead.
Good morning can you guys hear me.
Perfectly Sean.
Thanks for taking my question I kind of want to hit on the on this last question that was asked a little bit more if you can just we've heard several anecdotes not.
Leading into the quarter, but also on some other calls recently about a frac activity slowdown in Q3, but then accelerates in Q4 just wanted to see if there's any additional color you can provide on that and then number two maybe just.
From what you have left to deliver in terms of systems or capital spend any bottlenecks in the supply chain side that that.
It may be coming up.
Well I'll answer your second question first no we have planned for the the capital program all year, and we spread it out a bit and we had it originally a little bit of a flattened loaded, but we are spread out to build through the second half of the year. So that's on track or utilization isn't isn't where we'd like it to be on the new technology.
Because we have had a couple as we launch this very quickly we've had some generations. The early ones that are in refurbishment, but we've identified key.
Key issues with them and things that we can improve and so we've got you know Notionally you know eight to 10 in refurbishment with low capital refurbishment, but but I think as our customers see it evolve the versions that are running today and coming off the line at a refurbished or different than the ones a year ago that they're much improved and we have not had a significant supply.
Shane we'd be able to be ahead of that for the most part for for our plan for this year.
With respect to the market it feels like it's flat to drifting down a bit in the third quarter I think the momentum is it's yeah I think the nuance around his doctor those things pick up you know in September or is it knocked over November December it's hard to say from this point there does feel like there's additional tour.
On momentum to pick things back up as the year progresses, where that falls over the course of the next three or four months is very hard to predict.
Yeah got it differently different way of saying that Sean is that once we get through these upgrades and improvements in some of the early bucket elevators, but if we assume that our system count would have been higher if we.
We were able to put those out in the field because of the backlog is for demand is definitely there. So that is an opportunity for us in the back half of the year.
Okay, great. Thanks, guys. Thanks.
Thanks, Joe.
Yeah.
We have reached the end of the question and answer session I would like now to turn the call back over to Mr. Bills aren't there for any closing remarks.
I'd like to conclude our call by thanking all of our employees customers and suppliers for their continued support and Soliris. Our team has done a tremendous job in helping our customers realize the benefits of safer lower cost and automated solutions, we provide and I'm impressed with how our internal manufacturing and operations group have been able to keep up.
With the incremental new technology deployments to support this backlog of demand we remain constructive on the long term commodity outlook.
We are confident they will continue to deliver on our earnings and cash flow growth and our cash return strategy. Thank you all stay safe.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
Yeah.
Yeah.
Okay.
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Yeah.
Yeah.
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