FTS International, Inc. Class A

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Thank you and good morning, everyone. We appreciate you joining us for the FTS International conference call and webcast to review fourth quarter and full year 2020 results. As a reminder, this conference is being recorded for replay purposes. Presenting today's prepared remarks is FTSI's Chief Executive Officer, Michael Doss. Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, expectations, anticipations, or predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those expressed in any forward-looking statement. These risks and uncertainties are discussed in the company's annual report on Form 10-K and in other reports the company files with the SEC. Except as required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statements. The company's SEC filings may be obtained by contacting the company and are available on the company's website, FTSI.com, and on the SEC's website, SEC.gov. This conference call also includes discussions of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures, as well as reconciliations of these non-GAAP measures to their most direct comparable GAAP measure. We do not provide forward-looking reconciliations for forward-looking non-GAAP measures because the timing and nature of excluded items are unreasonably difficult to fully and accurately estimate. I'll now turn the call over to Mike Doss, FTSI CEO.

Well, thank you, and good morning, everyone. Let me begin by saying that I'm glad to be back to doing earnings calls. I couldn't be more excited to introduce a far stronger and more nimble FTSI. We emerged from our financial restructuring on November 19th and eliminated $488 million of debt and other liabilities. I'd like to thank everyone involved in that process for a job well done. I'm particularly pleased that we were able to complete the process efficiently and preserve some value for our prior shareholders. Now with zero debt and $94 million in cash, we have more financial flexibility than ever, and we are 100% focused on our customers and on creating long-term value for our shareholders. For today's call, I'll start by going over our financial results for the fourth quarter and full year 2020. I'll then cover several operational accomplishments and conclude with some comments on our outlook. I'll be discussing our financial results on a combined basis, that is, by combining the predecessor and successor periods that we are required to report. The predecessor period runs through November 19th. Revenue for the fourth quarter was $49.8 million, up from $32.1 million in the third quarter. Both the second and the third quarters of last year were low points in terms of industry activity, due to weak commodity prices resulting from the effects of COVID-19 and the Saudi-Russian oil price war earlier in the year. The increased revenue in the fourth quarter was due to more active fleets, 10.5 average fleets compared to 7.3 in the third quarter. We completed 5,243 stages in the fourth quarter. That's up 60% from the third quarter. Our revenue continues to reflect mostly equipment charges with only minimal pass-through commodities. This is a function of our customers' preferences, and we remain agnostic, instead focusing our attention on margin dollars and operational performance. We provided sand and last mile freight on only 2% of stages in the fourth quarter and none in the third quarter. Adjusted EBITDA was negative $5.2 million in the fourth quarter compared to negative $7.6 million in the third quarter. The improvement was primarily due to higher volume, as prices were roughly the same in both quarters. While we incurred fleet reactivation costs and labor and repairs in both quarters, we do not add these numbers back in our EBITDA reconciliation. As for the successor period from November 20th through year end, we had adjusted EBITDA of negative 5.8 million. Most of that was due to holiday impacts as well as the timing of repair expenses, much of which related to fleet reactivations. In other words, that period is not indicative of results that we are seeing in 2021. SG&A was $9.8 million in the fourth quarter, including $1.9 million of stock-based compensation. This compares to $11.8 million in the third quarter, including $2.8 million of stock-based compensation. Net income in the fourth quarter was $93.3 million, but that includes a net benefit of $114.9 million from reorganization-related items. Our P&L going forward will be a lot cleaner now that the restructuring process is behind us. Capital expenditures were $1.8 million in the fourth quarter compared to $2.5 million in the third quarter. We ended the year with $94 million in cash and $13.2 million of availability under our revolving credit facility. We also had $12.7 million of restricted cash at year end included in other current assets. Now turning to full-year 2020 results, revenue was $262.9 million compared to $776.6 million in 2019. We averaged 9.7 active fleets last year compared to 19.3 in 2019. Adjusted EBITDA was essentially break-even last year, and that compares to $129.6 million in 2019. SG&A was 50%. 2.5 million, including 11.3 million of stock-based comp, compared to 89.1 million, including 15.4 million of stock-based comp in 2019. The decrease was due to cost reductions taking a response to the drop-off in activity. We expected SG&A, excluding stock-based comp, to be between 40 and 45 million in 2021. Stock-based comp also will decrease in 2021 as our new equity awards have a lower value than the old awards that were being amortized in the predecessor periods. Capital expenditures were $21.1 million in 2020, with $16.4 million of that spent in the first quarter, pre-COVID. Included in this amount is about $3 million for dual fuel upgrade kits. Cash flow used in operations was $43.6 million in 2020, However, that includes 54.4 million of cash payments associated with the restructuring process, as well as sand shortfall payments of 18.8 million and cash interest paid of 14.6 million in the predecessor period that will not be continuing. Total sand shortfall payments for the year were 31.3 million, but 12.5 million of that was associated with the restructuring. Excluding all these items, operating cash flow was positive. for the year driven by a release of working capital. As mentioned in our earnings release, we terminated all sand supply contracts in connection with our restructuring. The carry on those contracts plus interest payments on the debt we had totaled nearly $50 million per year, cash that we'll now have to invest in the business or return to shareholders. Moving on to operational updates, we set a company record of 632 stages per fully utilized fleet in the fourth quarter. That's up from 579 stages per fully utilized fleet in the third quarter and way up from earlier periods. Pumping hours per day per fleet continues to increase, hitting a new high in the fourth quarter with fleets working for our most efficient customers, routinely averaging 17 to 19 hours per day. We frequently have days with fleets pumping over 20 hours. Much progress has been made in achieving ever higher efficiency in recent years, utilizing innovations and techniques to reduce time between stages and time between paths. Not only are we pumping more hours per day and more days per month, but our equipment is also pumping some of the most demanding job designs out there in terms of rate and pressure. All of our equipment has 15K iron. We're currently working closely with customers who are utilizing the SimulFrac technique that stimulates two wells simultaneously. We currently have two fleets performing . These jobs require more equipment and labor, but result in outstanding productivity. As customers continue to find ways to reduce completion costs, we expect this technique could gain traction. Another area where we have seen success in partnering with our customers relates to dual fuel. We currently have seven dual fuel fleets out in the field. Dual fuel allows our customers to reduce fuel costs, depending on the relative prices of diesel versus natural gas, as well as reduce CO2 emissions. It costs us about $2 million to install a kit to upgrade a Tier 2 fleet to dual fuel, which has a diesel displacement rate of approximately 50%, depending on operating conditions. We're working on software updates. to optimize the utilization of our dual fuel pumps, which could further improve these diesel displacement rates. We're also evaluating the efficacy of fuel additives. Next, you may have seen in our press release yesterday, I'm pleased to announce that we have successfully field tested machine IQ, or MIQ, in partnership with KCF Technologies. MIQ is integrated into our FRAC software and pump control and mimics the accuracy of a highly skilled operator. but does so automatically in the fraction of a second. MIQ constantly monitors equipment health, and if it detects a problem with a pump, it automatically shuts that pump down and rebalances the system to healthy pumps. This prevents more costly failures and does so with no downtime or loss of rate that might otherwise affect performance relative to job design. This is a major accomplishment and one that has been more than five years in the making. MIQ is much more than just equipment health monitoring that has become commonplace in our industry. It has the artificial intelligence to take corrective action without human intervention, saving critical time. This capability will improve our reliability, reduce downtime, increase efficiencies, and improve safety. Speaking of safety, I'm pleased to report that our total recordable incident rate, or TRIR, was 0.20 last year, a company record and far below the industry average of 0.8. We also had no lost time incidents last year. I couldn't be more proud of our operations and HSE teams for doing an outstanding job of making the safety of our employees a priority each and every day. Finally, let me provide some guidance on how we are performing so far in 2021. As mentioned in our release, we are off to a strong start. We currently have 13 fleets active and our efficiency numbers are strong. Of the 13 fleets, six are in West Texas, four are in South Texas, and we have one each in Oklahoma, the Northeast, and Utah. One of the South Texas fleets will soon be going to West Texas. Last month, all freight companies were negatively affected by the severe winter storm that came through. We estimate that we lost about 760 stages. Most locations shut down for the weather itself, but then experienced lingering delays related to fuel and sand deliveries. Despite this, we have seen pricing improvement that we expect will put us in EBITDA positive territory for the first quarter, likely a single mid-digit figure. As for the second quarter, we are currently working with customers on additional price increases that will improve our results further. We believe the market and our performance supports higher pricing, and we are optimistic about the remainder of the year. CapEx for the first quarter will be relatively light, and for the full year 2021, we currently expect to spend roughly $2.5 million per average active fleet for maintenance. Separately, we are actively considering investments in lower emissions equipment to assist our customers in achieving their ESG objectives. We like the performance of the new CAT Tier 4 DGB engines, but have not yet made any decisions. We also are monitoring developments in electric frac equipment. We continue to believe that there is room for more innovation in this area and that the economics are not currently justified, but we are starting to see some interesting ideas that could soon change the equation. That's all I have for prepared remarks. Operator, let's now open the lines for questions.