Mammoth Energy Services, Inc.

Good day and thank you for standing by. Welcome to the third quarter 2021 earnings conference call. At this time, all participants are in a listen only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you will need to press star 1 on your telephone. If you require any further assistance, please press star 0. I would now like to hand the conference over to your speaker today, Rick Black, Investor Relations. Please go ahead, sir.

Thank you, Operator, and good morning, everyone. We appreciate you joining us for the Mammoth Energy Conference call to review third quarter 2021 results. This call is also being webcast and can be accessed through the audio link on the events and presentations page of the Investor Relations section of mammothenergy.com. Information recorded on this call speaks only as of today, November 5th, 2021, so please be advised that any time-sensitive information may no longer be accurate as of the date of any replay, listening, or transcript reading. I would also like to remind you that the statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance, are forward-looking statements made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call that by their nature are uncertain and outside of the company's control. Actual results may differ materially. Please refer to the earnings release that was issued today for our disclosure on forward-looking statements. These factors and other risks and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management may also refer to non-GAAP measures, including adjusted net income loss and adjusted EBITDA. Reconciliation scenarios GAAP measures can be found at the end of the earnings release. Mammoth Energy assumes no obligation to publicly update or revise any forward-looking statements. And now, I would like to turn the call over to Mammoth Energy's CEO, Arti Strehl.

Arti? Thank you, Rick, and good morning, everyone. I'll begin with an overview of the third quarter and provide an update on our efforts to recover the PREPA receivable owed to the company before turning the call over to Mark to walk you through our financials. We are pleased with the positive trajectory throughout our business segments during the quarter that led to higher revenue and an improved bottom line compared to last quarter. Based on the directional improvement we experienced in September, we are encouraged by the positive trends in our infrastructure business due to increased storm work, a new fiber maintenance and installation contract, and increased bidding activity, as well as internal personnel changes that are gaining traction in this segment. Funding for projects in the infrastructure space remains strong with the added opportunity of a new federal infrastructure bill, which we are optimistic will be passed in the near future. While we recognize that this is a sector impacted by near-term seasonality, we believe that migrating the company further into the infrastructure space will allow us to enhance long-term growth and sustainability. In our oilfield businesses, improved commodity prices continue to contribute to a positive industry environment and increased equipment utilization as we ramped up the second hydraulic fracturing fleet during the third quarter. In our sand business, we continue to see increased market activity. I will now provide a bit more color on each of our primary segments. During the third quarter, we pumped 688 stages with approximately 1.2 fleets utilized on average. This compared to an average utilization of 0.9 fleets during the same quarter last year and during the second quarter. Our sand division sold approximately 315,000 tons of sand during the third quarter, and the average sales price for the sand sold was approximately $16.58 per ton. both metrics represented an increase sequentially from the second quarter. As these sectors continue to rebound from the significant economic impacts over the past year, we are beginning to see more positives in terms of activity, pricing, scheduling, and new inquiries, particularly focused in 2022. We believe our diverse portfolio and ability to adapt quickly to changing environments positions us well in these segments. As I mentioned earlier, Our infrastructure business improves sequentially. While the business contains seasonality and some inherent lumpiness, we continue to establish ourselves in new markets. Our fiber business, which we organically started only a few months ago, is gaining traction. We will kick off our first fiber project in coming weeks and recently won a second project that we expect will begin before the end of the year. We firmly believe that the migration into the infrastructure space will lead to more sustainable operating performance going forward. It is important to note that the infrastructure space contains improving macro trends related to increased project demand and opportunities in a sustainable macro environment with strong and growing funding capabilities. We continue to pursue other opportunities within this sector as we strategically structure our service offerings for growth in both the geographic footprint and the depth of projects. This type of work is very much needed in our country to improve infrastructure. Repairs, hardening, and modernization of the electrical grid, along with shift towards renewables, continue to grow nationwide. Bidding levels continue to be robust. In addition, we will We still believe that the federal government will pass an infrastructure bill in the near future. MAMIS vertical integration of service offerings through engineering procurement and construction as well as our manufacturing equipment refurbishing facility continues to differentiate our offerings to infrastructure project needs. We believe these capabilities will provide a competitive advantage going forward. In addition, having vertically integrated services and equipment manufacturing capabilities will be a key component to scaling operation and controlling costs. We continue to believe that the future of our company will reside primarily in the infrastructure space, which we believe has tremendous growth potential. I'd like to close my prepared remarks with an update regarding the efforts to collect a receivable from PREPA. As many of you are aware, PREPA continues to breach its contractual obligations by refusing to make payments for services that are subsidiary of COBRA provided. To date, PREPA has contended that they are withholding payment primarily because of the September 2019 indictment of COBRA's former president along with two FEMA officials. This position is at odds with several reviews that have taken place, including the determination memorandum from FEMA dated May 26, 2021. To date, FEMA, the grantor, has not raised the issue of the indictments in any report, and simply put, PREPA has chosen not to comply with its contractual obligations based on a position that not even the grantor recognizes. Sadly, PREPA has a long history of not paying contractors. As PREPA's bankruptcy filings demonstrate, PREPA has not paid other contractors who, just like COBRA, responded in a time of critical need and restored power in Puerto Rico following Hurricane Maria. As referenced in the October 6, 2021, U.S. House of Representatives Natural Resources Committee, the federal government has provided another 9.2 $9.5 billion in funding to Puerto Rico to rebuild its grid. To date, those federal funds, just like the funds for the work we perform, are stuck in PREPA's own gridlock. Even when significant amounts of federal funds are available, PREPA has repeatedly demonstrated an unwillingness to pay its contractors. In Mammoth's experience, this gridlock and inability to pay contractors is unique to PREPA. Our teams have responded to several other disaster declarations since we responded to PREPA in its time of need, including disasters caused by hurricanes Michael, Sally, Laura, and Ida, numerous ice storms, the direct go in 2020 that hit the Midwest. In each of these responses, we were paid for our work. In addition, PREPA owes COBRA approximately $69 million for services performed under the first contract as amended. Of this amount, approximately $62 million relates to what is commonly referred to as the tax gross-up provision of the contract. Despite the existence of two FEMA determination memorandums, a comprehensive review performed by the highly respected Rand Corporation, a review by the U.S. Army Corps of Engineers, and an internal conclusion by FEMA that the tax gross-up costs are eligible, PREPA continues to withhold payments of the amounts owed under the first contract and to knowingly breach their contractual obligations. While we have been extremely patient and have tried to work with PREPA, it has become apparent to us that the only way to change PREPA's behavior is to hold them accountable. We urge our stakeholders to visit our website and to contact their representatives. Congress has the power to right this wrong through the seven-person Puerto Rico Control Board, which was created in 2016 as a part of the bipartisan Puerto Rico Oversight Management and Economic Stability Act, which is commonly referred to as PROMESA. PROMESA's intent was to address Puerto Rico's financial crisis without a bailout by American taxpayers. We now need Congress to push the control board to hold PREPA accountable to meet its contractual obligations and to pay its debt. The alternative is that companies like ours, which responded in a time of crisis, pay the price. Again, please visit our website to review the documents that support the compliance of our contract and the quality of our work that our team performs. Additionally, our website contains information on how you can contact your representatives to help us get paid for the work we performed in Puerto Rico. Let me turn the call over to Mark to take you through the financial performance during the quarter before we open the call to questions.

Thank you, Artie, and hello, 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 total revenue during the third quarter of 2021 came in at $57.5 million as compared to $70.5 million during the prior quarter and $47.4 million during the second quarter of this year. The sequential revenue increase represented revenue increases in each of our segments. As already indicated in his remarks, we believe that we are well equipped, experienced, and engaged to lead these businesses to more sustainable operating performance going forward. The net loss for the third quarter of 2021 was $40.9 million, or $0.88 loss per share, as compared to net income of $3.4 million, or $0.07 income per share, for the same quarter last year and a net loss of $34.8 million, or $0.75 loss per share, for the second quarter of 2021. Adjusted EBITDA, as defined and reconciled in our earnings release, was negative $29.7 million for the third quarter of 2021 as compared to $22.1 million for the same quarter last year and negative $5.5 million for the second quarter of 2021. During the third quarter of 2021, Mammoth recognized a non-recurring, non-cash expense of $32.6 million related to its settlement with Goldport Energy Corporation. Excluding this expense, adjusted EBITDA was $2.9 million for the third quarter of 2021. CapEx during the third quarter of 2021 was approximately $2.8 million. Our full year 2021 CapEx budget is $5 million. As of September 30th, 2021, we had cash on hand of approximately $8 million and debt of approximately $80.6 million. In conclusion, we would like to thank our 825 employees throughout the company for their hard work, dedication, and commitment to maintaining safe worksites for themselves and their teammates. We also want to thank all of our stakeholders for their support as we work diligently to enhance stockholder value. Operator, we would now like to open the call for questions.

As a reminder, to ask a question, you will need to press star 1 on your telephone. To withdraw your question, press the pound key. Please stand by while we compile the Q&A roster. Our first question comes from the line of Daniel Burke from Johnson and Rice. Your line is open.

Yeah, hey, good morning, guys. Morning, Daniel. Let's see. Artie, I appreciate the detailed update on PREPA. I'll direct my questions, therefore, to maybe more the fundamental side of the business. On infrastructure, it was good to see the sequential improvement in the business. I'm wondering if you could highlight maybe some of the drivers of that improvement in a little greater detail, and then at least give us a bit of a look ahead. I heard you guys reference seasonality in Q4, so... I mean, can you sustain the performance of the business in Q3? Can you drive closer to EBITDA breakeven, excluding the interest on receivable? Or is that realistically more of a 2022 progression?

Daniel, as we look at Q3, we saw improvement July to August and then August to September. September received a lift from storm activity. As we look into Q4, it's hard for us to forecast storm activity, but I think as you look at the underlying business itself through the management changes we've made, we saw improvement throughout Q3 and continue to see that. into Q4. As we look forward on a break-even basis, excluding the interest on the prep or receivable, that's more than likely a Q1 of 2022 event. That being said, we continue to expect improvement throughout Q4X storm activity.

Yeah, and Daniel, I'd add to that that we're encouraged with what we're seeing on the fiber side. As you well know, we started that up organically, hired the first person in the May timeframe and starting to build that business. We think that's going to be a great business for us. But we've been awarded a couple of contracts now that are pretty good and the margins seem to be a little bit better than traditional transmission and distribution work. It does utilize a lot of the same equipment. We think equipment will get tight as things go on and more and more work and more and more hardening is done and that type of thing, and we think we have a competitive advantage there. One, with the equipment that we have, and two, the ability to refurbish it, get it ready, and even manufacture. We've switched our manufacturing over from the oil field type equipment to making infrastructure equipment. So we feel pretty good about where that's going. Our engineering group continues to grow. They were awarded a contract to do 500 electric vehicle sites in Southern California. And we believe that becomes a segue into doing a little bit more than engineering as we go forward. So a lot of inner workings that are going on, working hard to work on the business and to make it more profitable and holding with accountability and the things you normally do through management. So we're pretty encouraged with where that segment is going to go. And we still believe it was the right decision when we started the infrastructure segment several years ago as a way to offset the cyclicality of oil and gas.

Okay. Thank you, Artie. I appreciate all that detail. Let me ask one on the oil fill side. If you're willing to kind of share, I mean, Artie, how many pressure pumping fleets do you think you could be operating in by kind of mid-22? Just want to understand kind of the depth of inquiries you're seeing right now, and then maybe as a follow-up, could you talk about the scope of your DGB program and to what extent that's helping win work or support inquiry levels?

Yeah. As you well know, we've got two spreads running now, and we're in discussions about bringing the third When you talk about mid-22, we actually think with where commodities, you've seen the fluctuations in oil, but still staying around the $80, $82 per barrel pricing. We think that oil has a significant opportunity to get tight in the May-June timeframe. I think you've got a lot of factors and a lot of variables in there, such as winter and such as gas to oil switching and within coal and all those type things. But we think the possibility exists to get back up to around four spreads with everything that we are seeing right now by mid 2022.

Okay, great. Let's see. Let me finish. Maybe one last one. I just wanted to ask you about the credit facility. I guess as I read the language, it talks about waivers to the ratios. It looks like through year end. I mean, I would imagine you may have some challenges with those ratios into the first half of 22. So could you talk about maybe your strategy or how that situation evolves?

Yep. Daniel, I think we've got a long history with DNC and the bank group, and that's been a great relationship, so we certainly continue to appreciate their support of the company. Looking into 2022, you know, really as we look at the infrastructure business, we've got a number of tailwinds there. We've got a number of tailwinds on the OFS side of the business, so we're encouraged by what we're seeing on both sides of the business going into 2022. And to your point, the ratios go back into effect beginning in Q1 of 22, but based on our analysis of Q1 and the remainder of 2022, we think the opportunity exists for us to get back into compliance with the covenants as they exist.

Yeah, and Daniel, I'd add to that. You've seen a a definitive change in effort and urgency to collect the PREPA receivable. We have a lot of underlying efforts going on currently that are pursuing that. We learned in one of their filings over the summer that the money had been allocated, $250 million had been allocated to our specific PW or project worksheet. So with that, PREPA has accessibility. Now PREPA has, despite numerous power outages and lots of problems, they have not made any progress whatsoever. They continue to have all kinds of problems. Two weeks ago there was a protest where they blocked one of the largest avenues or largest streets in in Puerto Rico. They also have been protesting at the governor's mansion. And Puerto Rico, unfortunately, has the highest electrical rates of any of the United States or Commonwealth, and they have the poorest service. And that hadn't changed. I touched on that there has been another $9.6 billion allocated to PREPA. And when the House and Natural Resources Board went through and they started asking questions, it was kind of a deer in the headlights look in that none of that money has been spent. They can't get out of their own way. Their engineering is incomplete. So there are a lot of things. There's a lot of things that we're communicating with the House and Natural Resources Board. We're communicating with FOMB. We're communicating with Core 3. And we're communicating with a lot of other stakeholders that we're looking to get paid. The easiest and simple way is the tax gross up. They owe us $69 million on the first contract, and the tax gross up comprises $62 million of that. We did a press release about three weeks ago that said that FEMA had signed off in February of 2019 and said this is eligible. It could have been funded then. and yet they still don't pay. We're going to pursue our money. We're going to continue to pursue our money, and that will make a difference in the whole trajectory and reinvestment in growing this company.

Understood. Okay, well, look, I appreciate the chance to ask some questions. Thank you guys for the time.

Thank you, Daniel. Thanks, Daniel.

There are no questions at this time. I would now like to turn the call back to our management for any closing remarks.

Thank you very much. We believe the future is bright for Mammoth and our team members as we continue to strategically develop our service offerings to grow and deliver stockholder value in the years to come. This concludes our conference call. Thank you all very much for joining. Have a good day.

This concludes today's conference call. You may now disconnect. Thank you for participating.