Mammoth Energy Services, Inc.

Ladies and gentlemen, and welcome to the Mammoth Energy Services Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session, and instructions will follow at that time. As a reminder, this conference call is being recorded and will be available for replay on Mammoth Energy. Services website. I would now like to introduce your host for today's conference, Mr. Don Chris, Mammoth Energy Services Director of Investor Relations. Sir, you may begin.

Thank you, Daphne. Good afternoon and welcome to Mammoth Energy Services' third quarter 2020 earnings conference call. Joining me on today's call are Artie Strehler, Chief Executive Officer, and Mark Layton, Chief Financial Officer. Before I turn the call over to them, I'd like to read our safe harbor statement. Some of our comments today may include forward-looking statements reflecting Mammoth Energy Services' views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Mammoth Energy Services Form 10-K, Forms 10-Q, current reports on Form 8-K, and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Our comments today may also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our third quarter press release, which can be found on our website along with our updated presentation. Now I'd like to turn the call over to Artie.

Thank you, Don. And good afternoon, everyone. The third quarter of 2020 was a very active one as our team continued to adapt to the ongoing COVID-19 pandemic and the effects it's having on business today. Since the outbreak of the pandemic, nearly every aspect of our daily lives has been impacted, but our first priority is, and has always been the safety and health of our team. And we continue to take steps to protect our team members from the virus. Our infrastructure teams saw significant demand for their services during the third quarter. In addition to our normal operations, our teams responded to several natural disasters across the country during the third quarter. Storm work continues today on the Gulf Coast with our crews working to restore damage caused by Hurricane Laura, Delta, and Zeta in Louisiana. Given the current state of the electrical grid in that area, we would anticipate our crews to be active in the area throughout the fourth quarter. We have discussed our diversification strategy for several years, and it is now clear to see in our financials the effects the new infrastructure management team has made over the past year. The gross margin of the infrastructure division came in at 34 percent during the third quarter of 2020, with EBITDA growing over 300 percent, 350 percent quarter over quarter, when excluding interest on PREPA receivables. The new infrastructure management team is leveraging current operations to introduce our capabilities to potential customers. We believe industry demand and bidding opportunities will remain robust. With our cost structure streamlined and a core base of operations, we have built a solid foundation in our position to grow both our customer base and geographic footprint over the coming years. Our operating subsidiary is Higher Power and Five Star, are well respected amongst the utilities they work for and are expanding their customer base. These businesses have grown significantly since we acquired them and they are currently comprised of approximately 500 experienced field personnel spread across 120 crews. Our engineering business is expanding its footprint and we're looking at ways to integrate engineering into our infrastructure business and have bid some engineering procurement and construction or APC work In addition, we are exploring ways to integrate our manufacturing operation into our infrastructure offering through the manufacturing of equipment, materials, and products used by our infrastructure teams. We are encouraged by what our infrastructure engineering manufacturing teams have done over a short period of time and what the future holds for us. Turning to the oil field, the operating environment remains challenged as oil prices continue to be impacted by the effects of the COVID-19 pandemic. While we saw some stabilization of oil prices during the third quarter, current pricing continues to restrict a meaningful increase in activity levels. Our customers are indicating the possibility of incremental work over the coming months, but we believe activity levels will remain challenged for the remainder of the year. We are maintaining our oil field equipment and plan to be ready to ramp up our service lines when demand returns. During the third quarter of 2020, we pumped 449 stages with approximately one fleet utilized throughout the quarter on average. We have upgraded several of our pumps to dynamic gas blending, or DGB, and these units are in higher demand than our conventional units. Our sand division sold approximately 68,000 tons of sand during the third quarter of 2020. The average sales price for the sand sold during the third quarter was approximately $15.59 per ton. While the events of the past five months have caused significant impacts to both our daily and professional lives, Mammoth has adapted quickly to the changing environment. Our diverse portfolio of companies across several industries has performed as expected. The infrastructure business is positioned with a solid foundation from which to grow as it looks to ways to further integrate into our other businesses to lower costs. Let me turn the call over to Mark to take you through the financial performance during the third quarter, after which we will take questions.

Thank you, Artie, and good afternoon, everyone. I hope that all of you have had a chance to read our press release, so I will keep my financial comments brief and focus on certain highlights. Mammoth's revenue during the third quarter of 2020 came in at $71 million, as compared to $60 million during the second quarter of 2020. A majority of the change quarter over quarter was due to an increase in infrastructure revenue. Our net income for the third quarter of 2020 was $3 million as compared to a net loss of $15 million during the second quarter of 2020. On a per share basis, the net profit for the third quarter came in at $0.07 per diluted share. Adjusted EBITDA for the third quarter of 2020 came in at $22 million as compared to $7 million during the second quarter of 2020. CapEx during the third quarter of 2020 was approximately $2 million with a total of $6 million spent through the first nine months of the year. Our full year 2020 CapEx budget remains at $10 million as oilfield service utilization and pricing remains challenged. We ended the third quarter with cash on hand of approximately $14 million and debt of approximately $90 million. We thank our stockholders for their support. This concludes our prepared remarks, and we thank you for your time and attention. We will now open the call for questions.

At this time, in order to ask a question, press star, then the number one on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Your first question comes from the line of Daniel Burke with Johnson Rice.

Hey, guys, can you hear me?

We can hear you just fine, Daniel.

All right, great. Hey, afternoon, guys. Let's see, a good quarter from infrastructure, certainly. Artie, this may be difficult to, I guess, to separate, but can you address, when we look at the performance of infrastructure in the third quarter, how to think about it in terms of storm-driven, the benefits of storm work versus the structural changes you've really implemented within the business?

Well, it's... Certainly, it's kind of complex to do that. The storms came through in primarily September and October, but before that we were having a pretty decent quarter as well. What's going on is that certainly as we put this team together and with their relationships and the things that they've been able to reach out to, our bidding opportunities are are continuing to grow pretty significantly. And I will tell you that we're probably getting right now about 25% of our bids. So we feel very good about the relationships and the companies that we're working for. So that part continues to grow. There is some, you know, obviously there's storm work in there and it's continuing even to yesterday. And I know, Daniel, you live in the New Orleans area and hopefully you and family are safe from Zeta, but we continue to work that today. And as we said, we think we'll be in parts of Louisiana for the next couple of months as we continue to move. And some of that has turned from pure restoration-type work to some of the reconstruction that goes on in the aftermath of hurricanes.

Got it. Thanks, Artie, and thanks for the well wishes. We're doing pretty well down here. Let's see. Maybe one other way to ask that question would be, with some level of storm response work continuing through the fourth quarter and healthy utilization of the business, are there any reasons infrastructure's results would look materially different in Q4 than they did in Q3?

Daniel, this is Mark. I think as we look at Q4 for infrastructure, it should be about in the same zip code of where we saw the results for Q3.

Okay, perfect. With the business performing well and already, as you said, winning 25% of bids, it feels like a good problem to have, but maybe you're almost constrained in terms of your ability to serve the business. What kind of capital allocation might you might you contemplate for infrastructure looking ahead to 2021?

Well, we're still working on our annual operating plan for that, but certainly you'll have a certain amount of maintenance capex and that type of thing. We're still a little bit constrained on cash, and we're not going to outrun our weight, but certainly, as you can tell from the numbers that Mark talked about earlier, cash position is improving and part of the reason why you see it just at the time of the end of the third quarter, we were kind of caught a little bit in between from a cash perspective of paying out all the payroll and labor parts without actually collecting the monies and that type of thing. I'll tell you, I'm very optimistic about what our team has done and what they continue to do. Some of the bids that we're seeing, we're starting to get into the EPC type of bidding where it's a little bit more robust and a little bit better than the standard MSA work that we do. The bidding opportunities have increased significantly over the last two to three months, and we think that is a very good trend for us. And we continue to build that team. We continue to add people in critical positions, and we continue to build that team up as we go. So very optimistic about where we're heading with our T&D group. On the oil and gas side, they've done a significant job of taking out the cost. Certainly, we've taken out quite a bit of – we had 1,607 people when we started the year, and today we have 807. And in the meantime, we've been continuing – we went down a little bit with our infrastructure crews, and then we're building them back up now. Very optimistic about where we're going and the cost controls that we put in place in the oil and gas side. With that said, from a CapEx standpoint, we haven't formulated everything for 21 yet.

Understood. And maybe just to ask one on the OFS side then, maybe a quick focus on the sand business. You all have a pretty good window, obviously, into the northern white market. What are you seeing at this juncture in the sand market?

Daniel, this is Don. You know, it's pretty interesting. You know, we've seen a couple of the major publics go bankrupt over the last several months, and a lot of people have either idled or completely closed mines. As of today, I'm pretty sure that we're the only northern white mine on the UP that is still able to operate. Obviously, we're not operating at full utilization today. It's down from that. But we are able to ramp up rapidly if the need and demand arises. And a lot of other people can't say that today. Another thing that you're seeing out there is you're seeing a lot of people actually let their mine certificates lapse. They're not renewing them, which basically at that stage means you're going to reclaim the mine and sell off the equipment. So the amount of northern white mines is definitely dwindling out there. Outside of that, on the demand side, demand has picked up a little bit over the last three weeks or so, month or so. but it's still not in any sort of area or zip code where we would like it today, and pricing is still depressed. So, you know, that market will come back at some time, but at this stage it's still pretty challenged.

Yeah, let me take it a little bit further, Daniel, and it obviously gives me an opportunity to brag on our SAN team. The team, under very challenging circumstances with rail car leases and all that that everybody faces in the industry, was able to produce positive EBITDA in Q3. That's a huge step because they actually are in position where their fixed costs that we have on leases and that type of thing really takes away from them. But they've done a number of different things, including renegotiations with the rail car leases and different things like that, they've done a fantastic job, and they're to be congratulated for what they did. We continue to roll off rail car leases, and we are managing that process very closely, and the team has just done an excellent job.

Got it. I guess I'll append maybe one last question and then half answer it myself, I assume. Not too much commentary today on the status of your efforts to collect from PREPA. I assume not much to add maybe to that observation already, but if there's anything, any timeline or any elements to be attentive to right now with regard to those efforts, it would be good for an update.

No, we continue to pursue a lot of different venues. I've had communication with PREPA this week and continue to. to try to help them capture the money that they have coming from FEMA so that they can pay us ultimately. We continue to challenge them in some in the bankruptcy court proceedings and different things of that nature. So a lot of different venues are going. We do continue to pursue FOIA requests. And we think that we'll see a significant FOIA request sometime in November. FOIA, of course, is an acronym for Freedom of Information Act. And we think that that shows us in a very, very good light, much like the RAND report did for us. The RAND report unequivocally was complimentary of the COBRA team. The assets we brought into there, the work that our teams did, the efficiencies that they were able to achieve. We will continue to pursue that, and we're going to continue to pursue a prep of money. As you know, it's a big receivable, and we continue to pursue all avenues to collect.

That makes sense. Okay, guys, I appreciate it. I'll leave it there. Thanks.

Thank you, Daniel. Any other questions? I will now turn the conference back over to Mr. Artie Strelak.

Thank you very much, Daphne. We certainly appreciate your help today. We want to thank everyone for dialing in today. I want to personally thank our team. We believe the future is bright for Mammoth and our team members as we intend to strategically develop our service offerings to grow and deliver stockholder value in the years to come. Thank you to our stockholders for your support and interest in our company. While the current oil field market conditions are challenging, the infrastructure side of the business is growing just the way that we planned when we made the pivot. three years ago. We are working hard to control costs and continue to pivot Mammoth into a more industrial-focused company. This concludes our third quarter conference call. Thank you very much.

Ladies and gentlemen, this concludes today's conference call. Thank you for participating. You may now disconnect.