NexTier Oilfield Solutions Inc.

Good morning, everyone, and welcome to the next year Oilfield Solutions fourth quarter and full year 2020 conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. For opening remarks and introductions, I'd like to turn the conference call over to Kevin MacDonald, Chief Administrative Officer and General Counsel for next year. Sir? Please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the Next Tier Oilfield Solutions Earnings Conference Call to discuss our fourth quarter and full year 2020 results. With me today are Robert Drummond, President and Chief Executive Officer, and Kenny Pichu, Chief Financial Officer. Before we get started, I would like to direct your attention to the forward-looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the investor relations section of the company's website. Our call this morning includes statements that speak to the company's expectations, outlook, or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control which could cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or update publicly any forward-looking statements, except as may be required under applicable securities laws. We refer you to next year's disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission filings. Additionally, our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our earnings release for the fourth quarter of 2020 and with respect to 2019 related non-GAAP financial measures in our earnings release for the fourth quarter of 2019, each of which are posted on our website. With that, I will turn the call over to Robert Grumman, Chief Executive Officer of NextYear.

Robert Grumman Thank you, Kevin, and thank you everyone for joining us this morning. The fourth quarter capped off what was perhaps one of the most challenging years ever facing the oil and gas industry, driven in large part by the demand destruction resulting from COVID-19. Despite this, our team remained focused on delivering for our customers and best positioning next year for the future. As we stated during next year's second quarter 2020 earnings call, as we were in the depths of the downturn, Our objective was to position the company for the long term. Today we look forward to discussing how we delivered on this commitment by maintaining a strong balance sheet, establishing a leading market readiness program, and advancing initiatives positioning Nextier as a complete integrated solutions provider. We maintain a sharp focus on responsible operations and demonstrating balance between redeploying equipment into service pricing discipline I'll start with an overview of highlights for the fourth quarter we grew our revenue base by more than 30% driven by an overall rebound in activity from trough levels we were successful in driving this increase in activity through the profitability delivering fourth quarter adjusted EBITDA of eight billion dollars and expanding margins by over 500 basis points and resulting in incrementals of approximately 20%. We averaged 17 deployed and 14 fully utilized fleets for the quarter, up from 13 deployed and 11 fully utilized fleets in the prior quarter. We have successfully redeployed 11 fleets since the end of June with minimal startup costs evidencing the strength of our readiness program. Our readiness program is designed to promptly deliver job-ready equipment and trained personnel on demand. This gives us confidence in our ongoing ability to efficiently capture business development opportunities with new and returning customers. We furthered our work scope expansion strategy with meaningful growth and our integrated logistics services, while our new power solutions business announced last quarter has been met with client enthusiasm and interest, validating the strong future potential of this service. These two growth avenues continue to be an important component of our strategy to drive greater revenue and pull through to other services while upholding our commitment to sustainability by further lowering the emissions profile for next year and our customers. And lastly, we exited the year with $276 million of cash, meaningfully above the $255 million that we committed to in early 2020. This was achieved even with the additional strategic spending on Tier 4 dual fuel upgrades that we announced in the fourth quarter. Our success And increasing next year's cash balance reflects the vigilance we maintain around cost control and capital efficiency while balancing investments for the future. I'm proud of the team for their perseverance in continuing to deliver on our commitments and, again, demonstrating the quality of our people at all levels of the organization. While 2020 was challenging for economies, businesses, and communities around the world, We were very successful in driving results, adapting our business model, and focusing in on executing our long-term strategic initiatives. We advanced our strategic initiatives that will solidify our leadership position in responsible operations while improving our medium and long-term position. In a year filled with numerous challenges, we successfully integrated a merger of equals, solidifying the performance-driven culture of NextTier, streamlined our operations with a successful divestiture of a major operating segment, and navigated the unprecedented market impacts of COVID-19. With that backdrop in mind, I'd like to share several key highlights from 2020. First, we marked the first year anniversary of Keene's merger with C&J to form next year. we have achieved and in most instances outperformed the milestones and rationale set forth at the announcement of the deal. We advanced our position as the largest natural gas-powered fleet deployed in the U.S. We increased our investment in Tier IV dual fuel capabilities through the conversion of existing equipment, an integral part of our carbon reduction and overall ESG strategy. Since the merger, We've announced a reduction of 650,000 nameplate Tier 2 diesel horsepower that can be considered as permanently out of the market. Taking these steps will bolster our maintenance inventory over time and partially fund our carbon reduction initiatives. Additionally, through our Tier 4 DGB strategy, we continue converting more existing horsepower in our fleet to be fueled by natural gas. We launched next-tier power solutions, which integrates our completions and logistics capabilities with field gas treatment, gas compression, and gas delivery. This effort makes it cost-effective and easier for our customers to transition their operations to a lower carbon footprint. We fully integrated our digital platform across the value chain, A key enabler to our low-cost, low-carbon strategy and next hub is at the center of our operating model. We continued to structurally drive out cost with fourth quarter adjusted SG&A nearly 57% lower than the first quarter. We executed a full ERP and HRIS system upgrade during the integration. which arms next year with a world-class platform for conducting our business, realizing back office efficiencies, as well as an even stronger platform for future acquisitions and integrations. We evidenced our market readiness strategy and business development capabilities by nearly tripling our fleet count since the trough with minimal startup costs. And even with this high level of recommissioned activity, We upheld our commitment to customers by delivering operational efficiencies and safety performance at our best in our combined company's history. As I said before, we have the best people in the industry, and I would like to thank each and every next-year employee for their contribution and resilience. I have no doubt that we will look back on 2020 as a pivotal year for next year. Our actions set up the company for the long-term success despite the unprecedented challenges that we faced. So turning now to Q4 market conditions, completion activity improved throughout the third quarter, with this momentum extending into the fourth quarter. Our customers upheld a robust seasonal pace of activity through the end of the year. While this dynamic was generally expected, the overall resiliency of activity in December was somewhat better than we anticipated. While activity levels have improved, the mix of customer work and other factors is leading to continued utilization headwinds. We are experiencing calendar utilization challenges as customer schedules open up gaps between jobs as operators continue to ramp up activity. As anticipated, this coupled with continued weak market pricing, weighed on the earnings power of our platform in the fourth quarter. As we advance through the first quarter, we're seeing similar levels of activity gaps and some unplanned weather delays that will put pressure on the rate of recovery in Q1. However, looking into the future, we do see some of these calendar inefficiencies beginning to abate, especially as some of our long-term customers begin to add meaningful activity through the year. Turning to the overall market fundamentals, we are encouraged by the recent stabilization of crude oil prices around $50 to $60 per barrel, which, if maintained, we believe could drive a healthy level of future investment and activity in U.S. shale. By most estimates, U.S. land began 2020 with $20 million and nameplate hydraulic horsepower. However, a significant portion of that has not been active in a long time and is not in any condition to be able to address future demand. Since then, a healthy amount of supply has been retired. Next year, like many others, did our part to retire excess diesel-powered capacity and permanently remove equipment, much of which had worked in the previous year. With this recent supply attrition, it's now estimated that the total marketed supply base is approximately 12 to 13 million horsepower, and we believe that not all of it is marketable due to the high cost of reactivation. In addition, horsepower intensity for each fleet continues to grow as our industry adopts more complex completion techniques, and we believe that when horsepower returns, it will likely be utilized across fewer fleets. From a macro perspective, as an increasing percentage of people are vaccinated and economies continue to recover and improve, we believe a greater call on US shale production will be needed to meet returning global energy demands. Supported by higher oil prices, we expect this dynamic to drive a robust US land activity increase in 2022 that begins to emerge in customer planning in the second half of this year. In this scenario, we agreed with estimates by many industry participants that the market could require about 200 to 225 freight fleets to keep U.S. shale production flat. We believe this level of activity sets up a favorable climate to recruit service pricing that was conceded at the bottom of the downturn. With the increasing call on emissions reduction, we expect there to be an even greater demand for gas-powered fleets than we're seeing today. We're overall bullish on this equation. Compounding our optimism is a relatively undersupply of natural gas-powered horsepower, as we estimate only 20% to 25% of the horsepower that is deployed and working in the market today can utilize natural gas as a power source and meet the growing need for carbon reducing solutions. While the macro continues to play out, we are focused on what's in our control and best positioning next year for the market recovery. We are excited and motivated by several of our key growth initiatives that we have completed and are currently underway. First, our low-cost low-carbon strategy is now deeply ingrained in all aspects of our organization and culture. The additional DGB conversion upgrades to our current fleet bolster our capabilities to drive lower cost and reduced emissions for NextTier and our customers. We are intensely focused on optimizing gas substitution across our fleet, enabled by proprietary capabilities like NextHub and MDP frack controls, coupled with the growing expertise of our power solutions business. Importantly, we have included cost-effective gas substitution and safety performance as components of executive compensation, demonstrating our complete alignment with these ESG goals. Additionally, we are currently field testing an EFRAX system under our new arrangement with NOV. further advancing our options for deploying carbon reducing technologies into the market. In support of our strategy of prioritizing responsible operations, we remain committed to allocating all future FRAC growth capital to equipment that lowers emissions. We believe that multiple natural gas powered technologies will be utilized as we strive to lower the emissions of our industry and Nextier intends to maintain a leading position by providing our customers with solutions and price points that meet their specific requirements. Second is the launch of our power solutions business. This business provides the expertise, treatment, and delivery services to integrate and optimize the supply of natural gas to our freight fleets via CNG, compressed natural gas, or field gas, or ideally both. The rationale behind power solutions is to make it easy for our customers to reduce their carbon emissions by transitioning from diesel to natural gas through Nextier's integrated platform that aligns our priorities. We are positioned to do this more effectively than current solutions. Since announcing this business last quarter, we've received incredible interest and positive feedback from our customers. We're now having conversations with customers about integrating gas supply that we've never had before, evidencing the tremendous value of an even more fully integrated completions platform. These are strategic investments that allow us to expand our work scope while leveraging the infrastructure already embedded in our footprint. We expect our power solutions business to be a key driver of returns, and we are expecting attractive threshold economics. Third, presently, we are seeing a more rapid growth rate in our logistics business than our underlying frac business. Our logistics business provides last mile logistics and optimized commodity management, providing the lowest landed cost to the well site. With the implementation of digital and AI-driven logistics, The tools have changed and more and more customers are realizing that NextTier is positioned to provide a more cost efficient and reliable logistics platform. We have been successful in converting customers who are looking to optimize their self-sourced logistics and commodity management. We are extremely excited about the potential pull-through opportunity into our core completion services offering as well as supporting our power solutions business in the future. Fourth, we have line of sight into greater activity with customers with which we have a strong incumbent position and a strong track record of achieving high efficiencies. These customers are expected to come back later in the year and into 2022, which combined with our strong foundation of current customers, form a strong base of activity over the next several quarters. Our expanded well site offering and diverse geographic footprint provides an integrated platform at the well site. Wireline, BRAC, power solutions, and logistics services working as a completion team. This integrated approach combined with the new digital tools within Next Hub provides a higher level of efficiency to help the operator and lower commodity costs to the well site while reducing emissions and improving safety performance. Together, this reflects the strong embedded earnings potential of our platform as activity recovers and normalizes over the next 12 months. We use the integration period during 2020 to rebuild NextTier to adapt and create value through the full multi-year cycle. We will continue to maintain a strong balance sheet and financial flexibility, which remain core to our strategy. We are encouraged by improvement in activity in 2021, and our strategic investments will allow us to continue to build out our low-carbon platform. Our team remains intensely focused on positioning NextTier to drive differentiation and value for all of our stakeholders. With that, I'll now turn things over to Kenny.