Q2 2019 Earnings Call
Good morning, welcome to the King Group second quarter 2019 conference call.
As a reminder, today's call is being recorded at this time all participants are in listen only mode and a brief question and answer session will follow the presentation.
For opening remarks, and introductions I would like to turn the call over to Kevin Macdonald Executive Vice President and General Counsel of Killen Group.
Thank you operator, and good morning, everyone.
Joining me today are Robert Drummond, Chief Executive Officer, and Greg Palle, President and Chief Financial Officer.
As a reminder, some of our comments today will include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
Reflecting kinch views about future events.
These matters involve risks and uncertainties that could cause actual results to materially differ from our forward looking statements.
The company's actual results could differ materially due to several important factors, including those risks and uncertainties described in the company's Form 10-K for the year ended December 31st 2018.
Recent current reports on form 8-K, and other Securities and Exchange Commission filings.
Many of these risks are beyond the company's control.
We undertake no obligation to revise or update publicly any forward looking statements for any reason.
Additionally, our comments today include non-GAAP financial measures, including adjusted EBITDA and adjusted gross profit.
Please refer to our public filings and disclosure.
Including our earnings press release for definitions of our non-GAAP measures and a reconciliation of these measures to the directly comparable GAAP measures with that I will turn the call over to Robert.
Thank you, Kevin and thanks, everyone for joining us on this call. This morning.
Kaine delivered excellent results during the second quarter and I'll start by highlighting several of the key accomplishments that contributed to this performance.
From a topline perspective revenue grew to nearly $428 million.
An increase of approximately 1.5% and above the high end of our guidance.
This was achieved despite the declining average U.S. rig count that occurred during the second quarter and since the end of 2018, which is down 5% and 10% respectively.
Our results reflect the strength of our model and our team's ability to execute during a challenging market environment.
Adjusted EBITDA also came in above the upper end of our guidance.
Improving nearly 30% sequentially to $82.4 million.
Gross profit per fleet continued to increase reaching the upper end of our guidance at $18.6 million.
Gene achieved record pump times during the second quarter driven by execution.
Deployment of technology and improvements and the Frac calendar.
This level of efficiency is a tremendous accomplishment in today's dynamic market environment.
It remains a key differentiator.
And it's why customers choose to partner with key.
During the quarter and in line with our strategy, we converted one spot fleet to a dedicated agreement with a major customer and the Permian basin.
We are excited about this new award and proud of our team's ability to further expand our portfolio of blue chip customers under dedicated agreements.
And finally, our second quarter performance resulted in attractive free cash flow generation of $36 million.
Keeping us on pace to generate more than $100 million of free cash flow in 2019.
While continuing to invest in technology, and maintaining the quality and readiness of our fleets.
We pride ourselves on delivering on our commitments and have a strong track record across a range of environments.
King's operating principles have been consistent since its inception.
And we believe our position today is a direct function of our unwavering execution and the following five key areas.
First it starts with the customer and our strategy of partnering with highly efficient operators under dedicated agreements.
This model provides consistency on a through cycle basis.
As evidence by our financial performance across a range of market environments.
These partnerships are based on a mutual commitment.
To deliver leading safety.
Efficiency and continuous improvement.
Second.
We have a proven ability and willingness to flex our operations in the most responsible manner.
Whether that's proactively expanding active capacity.
Or idling operations.
We have demonstrated that our ability to remain nimble and responsive to the market, while focusing on leading profitability.
Third is our establish approach to capital allocation.
This includes our unwavering commitment to maintaining the quality of our fleet, while investing in technology to advance service delivery.
It also includes our success and returning capital to investors.
Fourth is our focus on maintaining a strong and flexible balance sheet.
Which allows us to be both offensive and defensive in our decisions.
It also supports our investment and new technology to drive the next leg of safety and efficiency across our operations, which we continue to see in our results.
And finally as our track record of M&A.
Most recently this includes our consolidation announcements Sanjay.
Which will create an industry, leading diversified oilfield services company with a broader scope of completions and production services.
Summarizing our proven recipe.
Of generating leading returns in completion services is based on three key tenets.
Partnering with high efficient customers was shared values.
An insatiable appetite for safe operations with continuous improvement.
And it robust balance sheet, enabling multifaceted capital allocation.
So now turning to the market.
Completions activity and commodity prices remain dynamic.
With many operators focused on cap pulled discipline and living within their cash flow.
In this new paradigm.
It's critical that we remain vigilant in identifying opportunities to create value and deliver returns.
We currently have an expanding pipeline of opportunities that are based on our established and growing reputation of service execution and value creation.
Looking ahead at our own activity, we have good visibility into continued strength in the third quarter.
And our carrying momentum into the back half of the year.
As of today.
We have 23 fleets deployed.
With most of them committed through at least 2019, providing us with the visibility and a strong base load of cash flow.
We also retain significant upside potential from an inventory of idle market ready completion fleet.
Providing us the ability to quickly capitalize on the growing pipeline of opportunities mentioned earlier without any additional investment.
We also have additional upside potential associated with improving efficiency via operating cost reductions and further improvements and pop times.
As evidence last year.
Market dynamics can be quick to develop particularly during the latter part of the year.
Including budget exhaustion and other seasonal factors.
We'll continue to stay close to our customers and will remain nimble and responsive.
But as of today have not received indication of any plant slowdown in activity.
As we've done in the past, we will manage whats in our control to drive performance in our business.
As mentioned earlier.
Were advancing on our journey of driving efficiency and enhance its safety through our multi pronged approach to surface.
Digital and downhole technologies.
In close collaboration with our customers and industry partners.
Keane has been investing in the development and deployment of a range of new technologies across integrated completions.
Our relentless focus on innovation is contributing to tangible results.
As evidenced by increased pumping hours per fleet.
Reduction in non productive time and cost savings.
These technologies are driving value creation across our integrated completions offering which includes frac.
In wireline.
Within Frac, we have deployed several key innovations.
Including.
Well swaps systems that eliminate NPT.
And reduce transition times.
Remote diagnostics sensor packages, providing actionable data vibration and pull station.
Extended life fluid and components, including valves seats unpacking.
And the fuel additive reducing consumption, while improving emissions.
Within our wireline business, most of which is integrated with our Frac operations. We've also deployed several key technologies.
Including modular gun systems currently deployed on 50% of our fleets.
Which improves safety efficiency and enables optimization of personnel.
Recently cable deployed on 80% of our fleet.
More than 9000 runs year to date.
And successful completions of wells with lateral links greater than three miles.
Quick quick latch systems on 80% of our fleet, which improves both safety and transition times.
Given our approach to integrated operations.
Benefits achieved in wireline business have a leveraging effect don't frac efficiency.
In addition, our experience clearly demonstrates a step function improvement in efficiency when Keane frac crews are integrated.
With keen wireline cruise.
As you as unconventional well completions continued to mature.
We are excited about our progress.
And future pipeline for innovation.
Supported by the strong technical platform keen is very well positioned to continue delivering differentiated value to our customers.
Technology also include next generation Frac fleets.
Which we define as newly developed solutions to take advantage of lower cost natural gas, which in combination with reductions in repair and maintenance will lower the total cost of ownership.
We are laser focused on ensuring that there is a return profile is attractive for both kean and our customers.
We're currently exploring a number of potential opportunities and when we identify the best fit solution that addresses our customer needs and provides a mutually beneficial return profile.
Then we'll execute.
Keynes long term commitment to investing in it and impactful technology is a key part of our DNA.
These investments improved throughput.
And reduce cost of operations.
Improving economics for both keen NR customers.
Further our investments are responsive to the communities, where we work by prioritizing health safety and environmental stewardship.
Our technology initiatives and company culture of finding a better way.
We'll continue to drive our efficiencies and returns on a through cycle basis.
Part of our surface technology includes the development of our Whisper fleet.
We are pleased to announce that we recently entered into a short term agreement to deploy this whisper fleet to support customer activity in a noise sensitive area of the Marcellus Utica.
This deployment will allow us to generate additional cash flow, while we continue to pursue the right long term partner in the DJ Basin.
Interest remains high and we are in active discussions with several customers regarding opportunities to deploy our wish briefly.
Andre dedicated agreement.
In that region.
Before turning it over to Greg I'd like to make a few comments on the exciting consolidation announcement that we made in June .
We announced plans to merge with CJ energy services and the transaction.
That will create one of the largest U.S. well completion service companies.
Since we announced this transaction I spoken with many of our employees and customers and the feedback has been overwhelmingly positive.
We remain on track to complete the merger during the fourth quarter of 2019.
Integration planning is progressing well and we look forward to implementing our plan following transaction closing.
We continue to expect annualized run rate cost synergies of approximately $100 million within one year of closing.
And we're excited about the value will create margin our two companies to establish an industry, leading diversified oilfield services company.
With that I'd now like to turn the call over to Greg to discuss the financials.
Thanks, Robert revenue during the second quarter totaled $427.7 million up from $421.7 million in the first quarter and above the high end of our guidance driven primarily by further improvements in efficiencies as well as a reduction in white space in our Frac calendar.
Within our completion services segment revenue totaled $420.4 million, reflecting a sequential increase of approximately $8 million driven by the factors I just discussed.
For the second quarter, we operated a total of 23 fleets and when factoring in white space, We had the equivalent of 20 to fully utilize fleets.
This improvement in utilization was driven by better execution between us and our customers, resulting in record pump times as Robert mentioned earlier.
On a fully utilized per fleet basis annualized adjusted gross profit was $18.6 million.
Almost 15% improvement compared to $16.2 million in the first quarter and towards the high end of our guidance, which was between 17 and $19 million. We believe this performance continues to position us at the top end of the competitive stack and remains a key differentiator for king.
Revenues for our other services segment, which includes our cementing operations totaled $7.4 million for the second quarter of 2019 compared to $9.7 million in the first quarter of 19 and slightly above our guidance of between six and $7 million.
Gross profit improved to $1.1 million up $2.4 million sequentially, representing 15% margin above our guidance of approximately 10%.
The improved profitability in our cementing business was driven by strong execution. In addition in addition to our decision to idle activity in one of our operating regions. We remain committed to Rightsizing our operations to maximize returns.
Adjusted gross profit totaled $103.2 million for the second quarter of 2019 compared to $84 million in the first quarter.
Total company adjusted EBITDA in the second quarter was $82.4 million above the high end of our $70 million to $80 million guidance and compared to $64.1 million in the prior quarter.
Adjusted EBITDA for the second quarter includes management adjustments of approximately $11.4 million accounted for and SGN, a driven by $6.1 million of transaction costs related to our recent merger announcement was Sanjay and $5.6 million a noncash stock compensation expense.
Selling general and administrative expenses totaled $32.6 million for the second quarter.
Compared to $27.9 million in the prior quarter, excluding the management adjustments as DNA totaled $21.2 million compared to $19.8 million in the first quarter of 2019.
Turning to the balance sheet, we remain committed to maintaining a high quality balance sheet and liquidity profile.
We exited the second quarter with cash and cash equivalents of $117.1 million, reflecting growth of $33 million to our cash balance compared to $83.7 million at the end of the first quarter.
We generated approximately $84 million of operating cash flow for the second quarter.
For the second quarter capital expenditures net of asset sales totaled approximately $48 million driven by maintenance Capex and investments in technology, resulting in second quarter free cash flow of $36 million.
Total debt at the end of the second quarter was approximately $339 million net of unamortized deferred charges and excluding capital lease obligations effectively unchanged versus the first quarter.
Net debt at the end of the second quarter was approximately $222 million, resulting in a leverage ratio of less than <unk> 0.7 times on a trailing 12 month basis.
We exited the second quarter with total available liquidity of approximately $290.6 million, which includes cash and availability under our asset based credit facility.
From a capital return perspective, and under the terms of our merger agreement with Sanjay our stock repurchase program has been temporarily suspended upon closing the combined companies will determine a capital return approach.
Turning now to our third quarter guidance.
For the third quarter, our assets will be comprised of 29 fleets of which we expect 24 to be deployed.
Of these 24 deployed fleets, we expect to achieve utilization of approximately 96%, resulting in the equivalent of 23 fully utilized fleets for the quarter.
On this basis total revenue for the third quarter is expected to range between 430 and $450 million, while annualized adjusted gross profit as forecasted to range between 18 and $20 million on a fully utilized per fleet basis.
For our other services segment, which is made up of our smelting business, we expect third quarter revenue to be in the range of $7 million to $8 million on gross margins of approximately 15%.
Layering in approximately $20 million of Gionee. This would imply adjusted EBITDA between approximately 85 and $95 million.
In summary came delivered another strong performance during the second quarter, beating our guidance on nearly all metrics and achieving record efficiencies, we have clear visibility for the third quarter, where we are forecasting continued improvement in performance and cash flow I would now like to hand, the call back over to Robert for some final remarks.
Thanks, Greg.
I'm proud of the track record that kenyans achieved by continuously delivering on our commitments and I'm confident we will continue to take the right actions to be successful in this market.
Before we open up the lines for Q and I I want to reiterate a few key points.
First it was a great quarter for gain we delivered on our commitment achieved company record efficiencies delivered value for our customers maintain leading safety performance and added a new dedicated agreement with a major Permian operator.
Second.
Our business is carrying momentum and due to the nature of our partnerships and quality of our customers.
We have good visibility into continued strength during the second half of 2019.
Including 24 deployed fleet in the third quarter.
Additionally, we retain attractive earnings upside should market conditions warrant with five market ready idle fleets deployable with no additional investment.
Third we are committed to generating leading returns.
Maintaining a strong balance sheet.
And allocating capital in a manner that balances growth opportunities with free cash flow.
As such we continue to expect greater than $100 million of free cash flow generation and 2019, reflecting a free cash flow yield of 19% or greater on yesterday's closing share price.
And finally.
We're committed to investing in additional technology that will drive further improvement in safety and efficiency for us and our customers.
With that we'd like to open up the lines for Q and a.
Operator.
Thank you. Please ask a question at this time, please press Star Wars.
Keybanc.
Confirmation tone, which indicates that your line is in the question queue. You May Press Star two if you would like to remove your question from Q.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key.
Again it is star one question at this time.
Our first question comes from the line of Tommy Mall with Stephens.
Good morning, and thanks for taking my questions.
Hi, Good morning, Tom.
I want to start on the efficiency lift that you had in the second quarter and maybe you're seeing continue into the third quarter. What can you give us in terms of the drivers behind that in terms of.
Maybe something specific to some customers or region anything to help us understand that positive progression. Thanks.
Thanks for the question Tommy.
Look as we mentioned in the.
Prepared remarks.
We've been in the process of deploying a lot of new technology, both on the wireline side and on the Frac side that are focused around doing just that improvement efficiency as we saw in the well switching times to a reducing NPT by being able to deploy for example grades as wireline cables on nearly 80% of our fleet, where we can then extend the range of operating parameters that give you the ability to reduce MPT overtime.
All those things have a positive impact as well as as we guided last quarter that we had significant white space in the calendar in Q1 that we were able to work with our customers out of the schedule in Q2.
And that gives us the same kind of visibility.
Those same reasons, we're guiding the way we are for Q3.
But Q2 for US was very solid from an efficiency quarter over quarter perspective.
Our next questions are from the line of Sean Meakim with JP Morgan.
Thank you good morning.
Oh no.
So could you maybe just walk us through the bridge from your Twoq results to your Threeq guidance. It sounds like basically utilization should be pretty flat, but there could be some upside to revenue if you're driving more volume at those fleets.
Sounds like maybe looking for flattish pricing and then these further impact shipping away more of the cost savings that you had some successes in the second quarter that kind of gets you to where you guided for Threeq does that does that kind of sum it up anything I'm missing there as we think through those moving pieces.
No I think thats right, Sean its a little bit of volume, we got one more one more fleet. So we're going from 23 to 24 deployed.
Price I'd say is flat and were just laser focused on driving these efficiencies are the same benefits we're seeing from the technology.
Which is allowing us to both you know do do more with the same assets in a day as well as reduce cost.
The benefits of the integrated Frac in wireline and the technologies, we're injecting are allowing us to optimize the personnel in share personnel across tasks.
So it's just a combination of those factors in a stable price environment that are allowing us to help the customers be more efficient lower their spread cost and get to the next Pat faster.
And.
And improve the efficiencies on our end and that's the win win value proposition, we're really selling to the customer.
Got it thank you for that I appreciate the clarity.
And then you indicated that.
You don't have any.
Any any.
From visibility into shortfalls in volumes in the fourth quarter.
Yeah White spaces that are challenged in the first quarter and of course into year end was a challenge for the whole industry last year could you maybe just.
Give us a sense of what you've learned and kind of how customer exchanges have evolved over the past year give you give you relative comfort in terms of how things could shape up this year compared to the fourth quarter of 18.
We spend a lot of time with our customers recently not only.
Thinking about the future for activity, but also in discussions around our merger with CJ. So we have got a lot of time with them lately and I would just say is that.
When they did their planning for 2019 activity.
The oil price they planned around most of our customers around 55, I think would be kind of a mid point average and we're well north of that now so I don't think there's any many surprises for the guys that we typically are working for.
However, you know, we always see a seasonal activity impacts that related to the holidays, and even a little bit of weather and a back in Q4, we wouldn't be surprised to see a little bit of that as you compare it to say Q2 or Q3.
But no signaling you know from a from our customer base.
On a macro market you know I think that would be very much related to.
Well price does the rest of the year and have that if that impacts your own cash each customers cash flow because I do believe the market without a doubt.
In general.
We are going to operate within their cash flow guidance and if that means your budget get exhausted.
That may affect.
A large part of the market, but just our customer base, we just don't see that much of it at this point.
And would you characterize as being different from a year ago.
Not really.
I think it depends on what the outlook not only what the oil price actually is that what the outlook for 2020 is at the time they are doing their fourth quarter planning, but.
It's very similar to our fourth quarter last year showing was it was less disruptive it had the normal factors that Robert discussed but.
Our our customer base, we work for is a little bit.
Less.
Less less budget exhausted sensitive I think than than the general pull out there. So our fourth quarter last year was was was.
Hung in there you know in relation to third quarter.
Right right that's fair great. Thank you.
Thank you thanks for the question.
Our next question is from the line of Brad handler with Jefferies.
Thanks, Good morning, guys.
Good morning, Brian Robert Thank you. Thank you for sort of leading a little bit with your next generation limits.
It's an interesting topical question I guess for all of us.
So maybe I could ask you to just delve a little deeper in your thinking around that so.
Maybe if I could ask you to try to calibrate like how far along do you think the technology is.
Today that makes you that much more interested in how far along do you think customers are in in their own interest and comfort level.
Both of which may be suggesting that we could start to think about when you might move forward.
With some next generation fleet.
Hi, Thanks for the question Brad.
Look I would say that.
We've been thinking about this for a couple of years and.
Working on things internally and also working closely with our long term vendor partners externally.
When we hear eight frac.
Which would typically we want to say next generation because whatever it develops technically it's going to be developed to take advantage of the fuel arbitrage between diesel.
And feel guest as well as perhaps need pump designs.
The lower the cost of operations tilt repair and maintenance related.
So where we are technically I would just say is that.
There are a number of different options out there in the market today that are under different degrees of development to do that.
And I feel that we feel and I think many of the customer base feels that maybe were a little bit early on these bets on technology.
And that.
You know it might behoove us to take a look at it and certainly plan to evolve in that direction.
But in the meantime.
There are a lot of things that we can do to bridge to that they begin to take advantage of the field field gas arbitrage.
And working towards lower cost of repair and maintenance related to the conventional fleet and preferred and maybe there to dual fuel optionality, we see the demand for dual fuel increasing.
And we think that the evolution to whether or not the customers are ready.
Has a lot to do with the field gas network availability on a routine basis everywhere that they plan to be operating.
But certainly.
That arbitrage does it provide a means for a return on investment.
So we've been I would say the last six months or so working closely with our current customers.
So too.
Help us mutually get to the best technical solution.
While also.
Investigating the best economic model to provide a mutual return on investment for both parties.
If.
If you ask me.
Is the rate of interest only increase I would say, yes, I mean, the markets got a lot of buzz about it of course and probably rightfully so.
And the interest level of of our customers I'd say, they're being cautious Lee and they are investigating it cautiously.
So we're right there in front with them I think that.
A solution that takes advantage of.
Of the field guess ultimately does not necessarily include electric but it probably does include no question about it the burning of feel natural gas so.
Lot of evolution going on there we're right in the middle of it we've been field test in one of these tier four dual fuel systems that you've been here a little bit about in the market. We got one plug into one of our fleets today and we'd like to be thought of as being on the technical agent. This providing a number of options for our customers as we determine which one technically is ultimate.
Okay, Okay, well how about.
It does it does thank you guys I appreciate the thoughtful answer.
And I guess just to.
Just to make sure I have heard you, obviously, you're you're actively engaging with this I'm sure but your customers.
Our.
It sounds like they are at in your conversations are being realistic around sort of understanding that there might be capital components here and so thats going to wind up figuring into the commercial side.
Or do you sense that the market is being set.
In a way that might disadvantaged you in that respect right because others may be kind of.
Incorporating higher capital costs just into a model that's still resemble like a commercial model that resembles current technology.
Yes, Brad its Greg I would I would characterize it is we're we're aggressively working to have a portfolio of technical options for the customers from bridge technologies to full blown.
You know solutions that are out there today, but we will pace the deployment of that technology based on the customers roadmap and what they want to do and we're fortunate to have.
An existing set of customers that are going to help us define that.
And then the final piece that you're asking about is making sure. We can find a an arrangement the contract structure that provides a mutual win win both on RM savings and on fuel savings that both of us get a.
Hey, adequate return profile and that's kind of the glue that connects to technology to their customer base and what pace. They want to move out. So those are those are the active dialogues want where we're in and when that plant is up like we said in the prepared remarks, then we'll move forward and those discussions with the customer has been very reasonable to this point.
Gotcha Gotcha, Okay. All right. Thanks for the color I appreciate it I'll turn it back.
Thanks, Brett.
Our next questions are from the line of Chris Hoy with Wells Fargo.
Good morning, guys.
Good morning, Chris.
So in the context of these new technologies that you're deploying and potentially you frac related technologies I'm wondering if you could give an update on what you expect in terms of.
Maybe maintenance Capex per fleet this year and next year.
And any other like special project budget that you might have a corporate just so we can think about 2020 capitals.
Sure Yeah, Let me, let me give an update there is a few points on capex. So look our capex was always planning to be front end loaded this year as we communicated.
Earlier, the maintenance Capex is hanging in there at four and a half million. That's in light of the increased pump hours theres more pressure on the fleet and they're put more hours on the equipment, but we're.
Like we said we are unwavering on keeping those fleets fresh so.
The technology, we're starting to see tangible benefits in our numbers and we've decided to accelerate some of that spending into 2019, because we're seeing a nice return profile on it.
In addition, we're also.
Working very hard on digital and rubber mentioned dual fuel given the demand we're seeing on that.
So as a result, we will see a slight increase in our previously guided capex. We guided 140, we are now likely to see 150 or 150 to 160 is the new range with some additions of technology into 2019.
Including this slight increase in Capex were.
We're still confident in delivering over $100 million cash flow that we've been kind of communicating since the beginning of the year.
And as it relates to 2020.
I think some of these projects, we're doing we're going to start to chip away at that Capex per fleet and get some productivity. So we're hoping that 4.5 goes down by.
Projects, we are investing in to extend the useful life of the components. So it's early days on that but we're trying to drive productivity into the four or five and then use that productivity to fund.
This technical Revolution, we're on is going to be.
A couple of year venture some of it's low hanging fruit in some of its harder to get at and we will take continued investment but the nice thing is we think it has a nice payback profile and efficiency.
So I still think in the ZIP code of.
Of 150 as a good marker now to use for 2020 and as we firm up the.
The technology pipeline and what we're going to execute on we'll communicate accordingly.
Okay. That's helpful. Thank you and for my follow up I think there's a perception that and probably right rightfully. So that you guys have stick your pricing your dedicated agreements given.
Hello, it's been performing.
As as we get into the back half of the year and discussions with customers and potentially since the end of Twoq you had it feels like there's been a little bit more aggressive bidding and in some cases do you feel like you'll be able to maintain current pricing levels and your dedicated agreements in 2020.
Thanks for the question look I think our current customer base.
I have a long term activity outlook and a they understand that.
I think the balance between overall frac values associated with efficiency and price.
And.
We have been able to consistently kind of year after year sequentially, showing better Frac economics, I think they will continue to expect that.
And that the balance of that.
The efficiency side being.
Continuously improve via the technology deployments weve been mentioning help them to achieve better frac economic so.
I think it's a customer by customer process, we've got.
Our dedicated agreements have in general staggered terms.
And we will address those when when it's mutually acceptable for both of us.
But I don't think that the spot market pricing.
It may have an impact on our overall strategy about how we bring additional fleets into them marketplace. Another. Recent example, I just gave this quarter is a case, where we roll them fleet into the market.
The customer.
It's a taste of the or the activity looks at our efficiency closely and decides whether or not move into a dedicated agreement makes sense. So that's our strategy won't change that way.
So I hope I kind of addressed it your question or overall, but we don't see a lot of different as we roll into 2020.
As compared to when we rolled into 2019 last year.
Okay, great. Thanks, a lot.
Our next question from the line.
No.
Please go ahead.
Yes, Im sorry hold on one moment.
Oh, I'm, sorry, we had a somewhat move out of the queue. Our next questions I for line of Steven Gardner.
Dave.
Okay. Thank you.
Good morning, gentlemen.
Morning.
I just wanted to just follow up quickly when when you and I'm not sure how much you can comment on this as you've done more homework as far as the.
Acquisition is concerned but have you thought about I mean, your your EBITDA per fleet performance. Your gross profit per fleet performance is obviously very strong in at the higher end of that.
The competitive list.
Are you.
Have you made any progress or any comments on how you think you can bolster what you're merging worth going forward.
Well. Thank you very much for the question and obviously, we're very excited about being able to create one of the largest us well completion service company going forward.
We are still in a point, where right now we can't really get involved in each other's business very much other than planning for post close.
But I would say that.
The integration process is going very well.
And that we're working together as a team.
To to to get the plant set up so that we can hit the ground running on day one.
You may have noticed that we.
Filed our S four registration and July 16th.
And that things are going well there we got good news on a on our agent HSR process.
On July 18th we got notification of early termination of the waiting period.
So I would just say is that.
The transaction is progressing as we had anticipated.
But we really can't talk much about what the new code looks like because we just not there yet yeah. Stephen I would just tell you I mean, we've got a 100 million of synergies that we've communicated that are primarily cost driven.
And any any.
Opportunity to share best practices on performance between product lines will absolutely be laser focused on when we close the deal and.
And are able to address those the types of issues or opportunities you mentioned.
Thank you and if you don't mind, commenting you mentioned.
The move I think you're deploying 50% of your.
Your persistence with modular systems now.
Are you seeing when when you're doing that is that cost benefit accruing to you and are you, making those decisions are you getting that from the MP and do you think you what kind of continued to advance down that path.
So look any to any deployment into a customer's wells.
It's a mutual.
Arrangement of course, they would that anything that we were move and technically towards but when you talking about deploying in wireline technology and this is one of the strengths of our of our offerings.
And the reason we're focused on Haven completion crews, where we have wireline and Frac merged together is it.
Deploying the technology like that one.
Takes some risk out of the system.
So that you would expect to have.
More runs per Miss run less nonproductive time, and so forth that accrues to the Frac efficiency and you can see that in our numbers in Q2 as well.
So I would just say that not only does it improve the profitability of the wireline business through.
Better efficiency.
And lower operating costs ultimately because you can deploy with less field personnel, but it also accrued accrete a bridge to the Frac performance. So that's one thing we like it so much on and we put so much focus on.
That technology, along with kind of Greece, plus cable to deployment and these quick latch systems. All for the same reason, yeah and I would just add that on any of these decisions and this is part of what makes our relationship sticky is is we try to find a way to share the cost and the benefits of such that it's a mutual investment decision and we both benefit from it and the more technology we can.
Interject to lower the customers dollar per barrel thats.
That's it that's the end game.
And obviously they've manager that result.
Great. Thank you I appreciate the color.
Thank you Sir.
Our next question from the line of John Daniel.
Hey, guys nice quarter.
Hi, Robert Jennifer.
For me is I know you mentioned earlier that your customers have a long term outlook, but they also are concerned with well costs.
And we keep hearing about frac price concessions. So I'm just curious if this is a reasonable scenario, which would apply to you which is you provided then price breaks, but you're making up for that with more stages per day, such that it's a win win for both of you.
John Yes, that's what I was trying to say.
And 2019, and I think even previous that's exactly the.
The situation.
Sure Okay.
You referenced test in the cat tier four DGD engine.
I'm curious how the results have been and when would you make that decision to order.
Enough that you can fully retrofit entire fleets.
Yes, Thanks, John So I mean, we're seeing the results of inconsistent with what.
You've seen externally in the you know 75, sometimes 80% substitution rate which is.
You know.
220 basis points above what we see on the tier twos there the tier four does not offer a kit option. So you do have to replace the engine. So it's a little bit more expensive proposition, but on the investment side for cane. This is all going to be dictated by the customer. So we're going to present a portfolio of options to the customer and where are they in the roadmap and then what is the what's the joint economics look like so so theres a return profile for both parties.
But I mean, there is only three of these units being tested we've had one out running on natural gas in the field. So we're collecting good data on it and partnering with cat.
And as soon as we get the demand signal from from a customer that thats an option. They want to move forward with we will I don't think you'll see us do it on a speculative basis.
We do I've been in it shouldnt have multiple solutions for the customers particular situation.
Let me ask you this though.
Kind of a marketing question, but I mean, you are always replacing engines just because of the useful life right. You guys run this is a hard because well utilized.
When engine sale going forward are you going to replace the tier two with the tier two or would you take that opportunity to upgrade.
Because if nothing else. It does give you a marketing advantage versus competition.
Yes, I think it comes down to the cost benefit.
She is going to be a math equation other than the fact, if you're talking dual fuel, but if you're just talking straight tier four versus tier two that's a math decision if you're talking taken off and engine and putting on a tier four dual fuel that's.
A different decision, but there when you look at the math Theres Theres definitely the maintenance Capex savings that helps to offset the the initial investment for for making those upgrades for sure.
Okay. Thank you nice to see stocks going up today.
Thanks, guys.
Thanks.
And our next question from the line of his question Howard Weil.
Hey, Thank you for getting me back in.
Hi, Thanks, again have a good quarter.
Congratulations.
Okay. Thank you.
You guys talked about correct could pump time can you help us just think about how much improvement was data that income is up by some others.
Yeah, we had 9% sequentially quarter over quarter.
And then previously we said year over year 18 to.
18 to 17, we had 15% so we're kind of continuing to move the needle.
A lot of it in the past has been brute force just tracking the minutes Symbian zealots it focusing on it at all levels of the organization and the next leg is coming through technology.
Okay. Thanks, that's helpful.
There have been many questions about what's going on in the northeast Basin can you just can you see what you guys are looking at and not based not is this and how the conversations with customers.
Look on the macro I would just say, it's a bit early perhaps for 2020 planning for for for most of the market outside.
Although.
We do have a long term relationship with a number of our customers and our little microcosm of the thing that we look at I would say is that these guys have been on a multi year plan anyway.
Most of them and I would say activity is more.
Flattish as you look into 2020.
And I might even say, if I did say up or down slightly I'd say slightly perhaps up because they've been gotten that way for not just a few quarters, but maybe more than a year.
So for US I guess, you'd say that when we plan around a 2020, obviously subject to.
Oil price, having a huge swing one way or the other.
Relatively flat.
19 versus 20 in the oil markets.
And the Marcellus the pen same story around the commodity.
Around around oil and gas prices do but again, even there were partnered with market leaders there that have a long term view and.
We've been able to continuously show them improve economics year to year, and we'll continue to do that so.
We feel pretty good about looking into 2020, frankly, and you know we we did mention that we added a fleet.
This quarter, even though the market rig count was down.
I just had a plug this in a while but no. We've we only started really selling it king.
And in the first of this year.
I would just say is that many parts of the market didn't know much about us as a company and we're doing a little bit better now of getting to become known from our perspective, a service delivery. So I think the opportunity base for US is it is not just.
Purely link to what was going on in the macro and that's I'm really excited about that and.
That's what I would say as we roll into 2020.
Okay. That's helpful.
Just a clarification and I don't know if you guys.
So what that so one more fleet into Q and one must lead into Q. I know you guys talked about converting one spot into dedicated in Permian and you also spoke about Mr. So is the developer fleet started into Q R that smaller the put quite a number that you're talking about.
Yes, so the reconciliation as we go up one fleet second quarter to third quarter. Its a combination of one fleet starting late in the second quarter and then the whisper fleets going to do a short term job starting mid August so when you add the math on the kind of partial as you get to 24 active fleets in the third quarter with 23 fully utilized.
That's helpful and one last question if I may.
They have been lots of discussion on integrating before perforating guns on the manufactured as calls you also mentioned modular gun systems can you talk about what's your view on integrated tons are that kind of new technologies Ondeck perforating systems.
Yeah look theres been a lot of innovation, there's there's there's theres multiple.
Vendors coming up with solutions it.
It allows you to deliver loaded guns to the well site. They are safer more reliable it gives us an efficiency on the personnel staffing or gun shops in the yards and transporting them back and forth to the.
To the well site. So it's an evolving area. There's we're working with multiple vendors out there and we're excited about the the innovation and the the improvements we're seeing in performance of the well site.
It's competitive arena for sure and we like having Optionality as these as the technology continues to evolve.
I guess, where I was going to take given the competitive dynamics are you actually seeing some pricing help on that indicates to us.
No I don't think it would be something I would just wouldn't prefer not to comment on competitively.
Obviously supply and demand of impacts them as well and they want to be long term partners with us and for US we do try to treat.
Our vendor community just like we have the relationship we have with our customers and its long term minded in its focused on getting to the best overall long term value proposition. So.
Yes, we get good cooperation from our from our vendors.
Thank you for taking my questions and again, congratulations on a good quarter.
Hey, Thank you.
Our next question from the line of Waqar Syed.
The core Corporation.
Thanks for taking my question and once again, congrats on an excellent quarter and the differential performance.
My question relates to the upcoming merger with CJ.
What steps are you taking upfront.
To make it inefficient.
Merger with respect to people management and systems integration because those are the areas where.
Typically mergers have initial problems.
Yes, no I appreciate that and we all I think we all get some scar tissue over the years from and lessons learned on these things and.
Look we're cognizant that that the integration and the integration planning.
One mergers this size is what makes them successful so.
You know we've we've got some third party some top tier third party support helping us on the integration planning, we have allocated resources from both sides and we're putting a very robust planning process in place where were all spending a good chunk of time on it now to make sure. We got good day, one plans in that.
We move we move a lot of our experience says the longer you wait on these things the more they come back to bite. Just so you know systems integration and org structures. That's that's all the planning we're doing now so when we hit they won there's clear communications to the organization on what the strategy is how we're going to operate and then the the plumbing. If you will all gets integrated so we're in the planning phase if that's all we can do at this point, but we're excited with the progress and.
We're very cognizant of the point, you're making that effective planning is critical to make these things success and I'd also add it maybe was a little bit less risk in this one and then many others simply because we have minimal overlap minimal overlap on our customer base as well as in some of the geography and some of the business line. So.
Yeah, we are definitely switched on to that.
And secondly, you asked.
You know as your customer base expands with the with an added fleets from the merger.
Do you think that would be dilutive to overall efficiency.
Your frac efficiency or you think that you'll be able to maintain that.
Because when we divide the bigger larger size fleets.
Good choices may become more limited in terms of.
You know that the quality of the customer base.
On customers that are willing to.
Have the share your same efficiency views.
Yeah look I mean team you know the story I mean things started with one fleet in 2011, and we are up to almost 30. So we've kind of dealt with that same same the challenge of maintaining the core principles as you grow.
And we'll we'll approach it the same way partnering with Sanjay and try to get the best practices out of both.
Both companies to maximize returns in the business that whenever you grow which you mentioned is a challenge, but we think theres more customers with the push for returns that are moving into this camp. So there should be a bigger pool to address.
Great. Thank you very much that saw the half.
Thanks, Okay. Thank you.
Thank you and as a reminder, you May press Star one question.
Our next question from the line of Harry Potter with Bank of America.
Hey, guys. Thanks for squeezing me in.
Yep.
Morning.
Thank you back in on a couple of the perfectly on questions earlier.
So are these.
Are you guys.
I know you highlighted in the CJ presentation.
Vertical manufacturing on the wireline side as potential synergy would you ever consider building your own.
Assemble perf gun.
The of that.
Yes look I would say everything's on the table Sanjay does some of that today and that will be part of the integration planning on what is the best solution for Newco.
Got it makes sense and then when you talked about the accelerated spending.
Hi, this year on some new technologies.
Are you able to identify which technologies those are and if we're going to see the return on those hit the bottom line this year.
Yes look we shared a basket of them in the prepared remarks, some frac someone wireline, there's probably about 10 more behind that when each product line.
And.
We're not going to get into the specific technologies, but there is a really good pipeline and then the other one we're really excited about that takes a little more time as the digital rights. So we're revamping our digital infrastructure to get.
Better faster data and better decision, making and some of the AI tools in an automated control systems in the field, that's a little bit longer lead time, but I think as we've said before this is a two year journey.
You know to really change the game on the cost structure and we're excited about the second quarter results and we're starting to chip away at it and we expect to see continued progress and I would reiterate to the dual fuel is one of those areas that we we just want to keep up with the demand associated with the with that.
Often that makes sense. Thanks, so much guys I appreciate it all right. Thanks, guys. Good. Thanks.
And our next question from the line of Daniel Boyd with BMO capital.
Hi, Thanks, guys.
Hi, Thank you guys just continue to blow it out on the execution front proven the skeptics wrong.
You mentioned the free cash flow yield earlier on the call and I think there's still some skepticism there in terms of the sustainability of those free cash flow. So just want to see if you could speak a bit to how much flex there is in your Capex plan if the.
The outlook takes a turn for the worse or for how we should think about.
How you think basically how should how do we think about the long term cash flow generation free cash flow generation of your business.
Yeah, Hey look I appreciate your positive comments I'm not I'm not convinced we've moved a lot of the skeptics based on the stock price, but look this is.
You know.
All we can do is kind of put our heads down and execute and be consistent on the playbook, which we've we've been for nine years now. So we'll continue to do so when it comes to flex I think we've shown the ability to be incredibly nimble in the business. So.
We generated we generated.
$44 million of free cash flow year to date second quarter. If you look at the third quarter guide that's going to be another 50 million, so you're almost at $95 million coming out of third quarter.
If we had if we hit what we we guided here the midpoint of that guidance range. So look can we flex capex of course, the maintenance Capex is variable that's very easy to flex based on activity. If we were to see a slowdown and then on the strategic projects you know they have a nice return profile, but by definition being strategic their discretionary so.
We maintain very close handle on the business and the levers.
And should we see a change in the macro environment will absolutely adjust capital spend and the cost structure accordingly, like we've done in the past.
Great that's what I thought thanks, guys.
Thanks, Dan Thanks.
Our next question.
Tony Marino with Stephens.
Hi, thanks, allowing backend.
Yes, no worries.
So I wanted to finish with a higher level question, where.
You guys have shown some momentum for a couple of quarters now.
Into Q.
You mentioned you added a new customer with a dedicated agreement your profitability per fleet.
Ticked higher and should again in Q3 and you are leaning in to some of the tech related Capex spend that should drive efficiency, you set that against the commentary and posture from some of the larger players in the market.
Where they're idling more capacity.
Cutting more capex this year and maybe beyond.
And so I just wonder.
From your competitive.
Standpoint.
Is that an opportunity to advance the front line and take some territory.
Or how should we reconcile the.
Recent trend that you guys have put up.
Versus as I said some of the larger players in the market how does that play out.
So good question, Tom It look I would say our strategy.
We remain the same almost no matter what happens in the market and when I go back and say that.
You know I've been here almost a year now and I don't think Keane was will.
Known across the entire market.
So you know the ones you referred to it had been after a long time and they got a huge base of operations.
We got continued upside will it be at someone's expense I mean, I mean, I guess at the rig count is not going up perhaps us.
The case.
But I do think that as customers get a chance to get a view of our safety and efficiency.
They won't some of it and they're interested in and we're going to continue to try to to grow into that simply by demonstrating what we do get a toehold.
Prove it and then try to expand upon it I think historically, we've been successful once we get the first fleet. It gives us an opportunity to get to know and then the other one then we've got a number of cases, where that's been the case in.
That playbook has worked for us and we're going to continue to use it.
You know I think that.
If you are participating in it the bigger part of the market or perhaps in a different part of the market with different type customers. Your playbook might look a little different. So that's just all I'd say.
Thank you Thats all from me.
Thanks Good question.
Thank you Barry Sanders, our question and answer session I would like to turn the floor back to Robert Dunn for closing remarks.
Well. Thank you very much and we appreciate your interest in Kenya, and thanks again for joining the call. This morning.
In closing I always want to thank all the hard working employees for their dedication day in and day out to helping our customers be successful.
Thanks, and hope you have a great day.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.
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