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spk02: Good morning and welcome to the Next-Tier Oilfield Solutions Second Quarter 2021 Conference Call. As a reminder, today's call is being recorded. At this time, all participants are in listen-only mode. A brief question and answer session will follow the formal presentation. For opening remarks and introductions, I would like to turn the call over to Kevin McDonald, Chief Administrative Officer and General Counsel for next year. Please go ahead, sir.
spk07: Thank you, operator. Good morning, everyone. and welcome to the Next Tier Oilfield Solutions Earnings Conference call to discuss our second quarter 2021 results. With me today are Robert Grumman, 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 calls include 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 disclosure regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly report 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 second quarter of 2021, which is posted on our website. With that, I will return the call over to Robert Drummond, Chief Executive Officer of NextYear.
spk08: Thank you, Kevin, and thanks, everyone, for joining us today. Yesterday, we announced the strategic acquisition of Alamo Pressure Pumping, a leading Permian well completion service provider. Before getting more into this transaction and its significant benefits to next year, I'd like to review our second quarter and ongoing results. Activity continues to recover and visibility into the second half of the year improved along with the plans of some of our legacy customers. We're now set up for growth in excess of 25% for consecutive quarters, and the visibility gave our team the confidence to make some strategic decisions to ramp the hiring of people and prepare equipment ahead of our high Q3 growth expectations. These decisions, though impacting Q2 results, put our team in a great position to capitalize on visibility of growth into the back half of 2021 and into 2022, where we expect a much more linear rebound in relative activity growth. We deployed three additional frac fleets during Q2, including two simulfrac fleets, and exited the corridor with 21 fleets deployed. As noted, late in the corridor, we also accelerated the fleet activation cost for two more Tier IV dual-fuel simulfrac fleets to be deployed into Q3. It was worth noting that simulfrac fleets can require as many as double the number of pumps of a normal zipperfrac job. Against this growing base of activity, total revenue grew 28% to $292 million. Our wireline, cementing, and coiled tubing services lines continued to improve margins and increase activity. Overall, while we're pleased with the sequential top line growth and have confidence in the continuation of that trend into Q3, unexpected transitory operational factors and fleet activation costs impacted Q2 profitability. Despite this impact to near-term profitability, we're confident that the investments made will allow us to begin to harvest the benefits during the back half of the year and set the business up for great trajectory into 2022. With that as an overview, I'd like to share more about what we're seeing in the market. Commodity prices continue to maintain strong improvement and momentum. Relative to the averages in March of this year, crude oil prices at the end of July are up 19%, while natural gas prices are up 47% over the same period. This marks the latest stair-step improvement in commodity prices as economic activity, along with demand, continues to grow in tune with reduced global economic restrictions. The supply side remains very disciplined overall, thanks to the leadership from both OPEC Plus and U.S. Shell producers. At the end of July, and compared to the average price realized in June of last year, Oil and gas prices are up 93 and 129% respectively. With this as a backdrop, demand for all of our services is increasing. As we continue our fleet deployments into Q3, enabling what we expect to be our second consecutive quarter with 25 plus percent revenue growth, we grew our team substantially in preparation. From the beginning of April through the end of June, we added over 400 next-year employees across our product lines to support our growing field operations. This cadence and level of hiring was significantly more than we had originally anticipated. Also, core to our execution is equipment quality and maintenance. This commitment is the foundation of our market readiness initiative and aligns with our low-cost, low-carbon strategy. Further, the increased frac intensity associated with simulfrac operations is changing the maintenance requirements and schedules in a manner that increases cost and requires ongoing adjustments to our commercial and operating models. Investments in our equipment over the last 18 months are the foundation for future profitable growth, and we have continued to make progress on converting our fleet to use natural gas as a primary fuel. From the beginning of May through the first week of July, we deployed over 100 pumps, the majority of which are Tier 4 dual fuel, a market that continues to be sold out. This included a Simulfrac fleet deployed in early July. We also began preparing for two more Tier 4 dual fuel fleets in the coming months, with at least one being for Simulfrac, and all for legacy customers returning to work. While we have continued to invest in converting our fleet to support our low carbon strategy, I want to emphasize that we are removing conventional diesel powered engines from the market in the process. In addition to enhancing the fleet with more dual fuel capability, we continue to standardize the fleet with our proprietary FRAC MDT control system which enables more digital interfaces with the equipment and lowering total cost of operations. The market continues to improve, and we are responding rapidly to scale our operations, but the activity growth has not been linear over the past few months. The market continues to improve, responding rapidly to scale our operations, but the activity growth has not been linear over the last few months. The industry recovery over the last year or so included extreme volatility in frack schedules, which, combined with continued increase in frack intensity, is posing unique challenges across the industry. Our team is skilled at navigating the staffing, equipment readiness, and operational challenges associated with these factors. However, the process of meeting these challenges was even more pronounced in the second quarter than originally expected. as we responded to an unusual concentrated level of growth. These dynamics, in conjunction with continued increases in frac intensity demands, created transitory startup costs and challenges in Q2. While Next Year has been a leader in deploying the simulfrac process with our customers at ever-increasing treatment rates, with hundreds of wells completed over the last two years, More equipment on each job cannot be the only answer to its adoption across the industry. New technologies must be applied to achieve optimal injectivity and improve the overall performance and utilization of the equipment on location. In the second quarter, Nextier launched a new offering from our lateral sciences portfolio called SimulFract Stage Pairing. This technique reduces the operator's cost per barrel by taking existing drilling data, analyzing the downhole rock properties, and matching the four or six wells across the simulfrac pad to create optimized pair for every simulfrac stage. We believe utilization of this technique will ultimately improve the injectivity of the frac treatments, improve the long-term production of the treated wells, and lower the equipment costs for each operation. all with minimal changes to the current Simulfrac processes and workflows being utilized today. Simulfrac stage pairing will help connect our extensive Simulfrac operational experience to real reservoir properties. We believe that this technology will allow NextTier to deploy a more cost-effective solution that delivers higher production to the operator. Associated with the growth in frac intensity, or incremental cost and enhanced maintenance requirements for some of the equipment. In Q2, we tested the boundaries of our Simulfrac experience and pushed to achieve rates higher than we had previously reached, which we underestimated in our Q2 commercial agreements. We are addressing these issues with our customers as we exit in Q2 and enter Q3. Compounding the financial impact of concentrated growth in the second quarter was an isolated fire-related incident on one of our fleets, resulting in a total loss. Due to our team's training, quick action, and adherence to strict safety protocols, I'm glad to report that there were no injuries to any parties at the well site. The lesson learned from the potential root causes have been applied across the overall fleet and supplier base to further de-risk future operations. We responded quickly and have already taken possession of the replacement equipment, which is largely being funded by insurance proceeds. To quantify the impact, our second quarter results included approximately $10 million of EBITDA degradation associated with these combined startup inefficiencies and operational factors. We believe this rapid ramp in activity during Q2 and Q3 is unprecedented and transitory. The cost incurred as our equipment and employees are deployed have significant impact on startup asset utilization and ultimately our financial performance. However, the associated operational adjustments made are already benefiting the business. As an example of the lessons learned, late in the quarter, we made a strategic decision to accelerate preventative maintenance processes in preparation for additional Q3 simulfrac fleet deployments. We expect Q3 revenue to increase at least another 25% sequentially and have already deployed the first of these fleets. The associated out-of-period fleet activation costs taken in Q2 are estimated at approximately $7 million. We made the decision to get ahead of the growth preparation rather than try to maximize Q2 profitability. Pricing continues to improve off the very low base resulting from concessions made during the downturn. At the same time, we have seen the benefits of gradual pricing improvements being offset by ongoing white space in the calendar. While pricing is improving, Overall economics and contract structure are below our requirements for deploying additional horsepower. Except for the three previously mentioned fleets of Tier 4 dual-fuel equipment addressing legacy customer demand, we do not anticipate deploying additional horsepower or increasing headcount throughout the remainder of the year unless the economics are much improved. We now plan to maximize the earnings opportunity created by the significant revenue growth we are experiencing. We have a significant amount of capacity deployed with the major cost to deploy already funded, which we believe positions us for a strong have to and beyond. We believe we are now incredibly well positioned as a leader in natural gas powered equipment, which constitutes a large portion of our deployed horsepower today. We've remained strategic throughout the downturn to best position next year for the eventual market recovery. With the recovery underway, we are positioned with one of the industry's largest fleets of tier four dual fuel equipment and a fully integrated completion solutions offering. This includes our power solutions business, which began commercial operations in July, supplying compressed natural gas, and making it easy for our customers to consume their own field gas. Our investments go beyond just gas-powered horsepower and surface equipment. Through the downturn, we remain focused on the long-term role that digital will play in our future operations. This focused approach, primarily investments in our Next Hub digital infrastructure and MDT control systems, has allowed Nextier to reduce overall well cost improve well site ESG performance, and optimize completions to drive increased production. However, we believe we have only just begun to scratch the surface of the benefits of our digital investment. At the recent URTC conference, we announced the launch of a strategic technology partnership with Corva, the leader in real-time drilling and completion analytics. We expect this partnership will allow Nextier to forego millions of dollars in development and immediately deliver a best-in-class customer portal to each of our frack fleets. We believe this partnership allows Nextier to rapidly increase our deployment of digital offerings, harnessing the power of data and visualization to deliver on our low-cost, low-carbon strategy. We believe the recent significant investments in our equipment and staffing will be harvested in 2022 and 2023 as market conditions continue to improve, which combined with an expected pricing reset should drive further momentum in our earnings power next year and beyond. I'll now like to pass the call over to Kenny to discuss our second quarter results.
spk10: Thanks, Robert. Second quarter revenue totaled $292 million compared to $228 million in the first quarter marking a sequential increase of 28%, driven primarily by increased activity levels and added capacity across all our product and service lines. The total second quarter adjusted EBITDA was approximately $5 million, compared to $1 million in the first quarter, mainly driven by revenue activity growth in all our business lines, partially offset by approximately $10 million in costs related to operational inefficiencies, including the impact of the fire incident In addition, we faced an impact of approximately $7 million from future readiness and startup costs consisting mainly of labor and maintenance OPEX. In our completion services segment, second quarter revenue totaled $269 million compared to $209 million in the first quarter, a sequential increase of approximately 29%. Completion service segment adjusted gross profit totaled $20 million compared to $15 million in the first quarter. During the second quarter, we operated the equivalent of 18 fully utilized fleets, exiting with 21 fleets deployed with additional capacity of people and equipment for two additional fleets, one of which was a Tier 4 dual-fueled Simulfrac fleet deployed in the first week of July. On a fully utilized basis, annualized adjusted gross flat to the first quarter, mostly due to startup costs incurring to deploy the additional Q3 fleets already mentioned. In our well construction and intervention services segment, revenue totaled $23 million, an increase of approximately 21% compared to $19 million in the first quarter. Adjusted gross profit totaled $3 million compared to $2 million in the first quarter. EBITDA for the second quarter was $15 million. When excluding management net adjustments of $10 million, adjusted EBITDA for the second quarter was $5 million. Management adjustments included a gain on insurance proceeds from the fire, a reduction in pre-merger tax audit estimate, and a gain on the financial investment, partially offset by stock compensation expense, bad debt expense related to the wealth support Approximately $9 million of total net management adjustments were cash, mostly related to the insurance proceeds. Second quarter, selling, general, and administrative expense totaled $21 million, compared to $16 million in the first quarter. Excluding management net adjustments, adjusted SG&A expense totaled $20 million, down from $21 million in the prior quarter. We continue to hold our SG&A flat despite our strong revenue and activity growth. Turning to the balance sheet, we exited the second quarter with $250 million of cash compared to approximately $272 million in the first quarter, driven by ongoing capital investment and our low-cost, low-carbon strategy, partially offset by a strong sequential recovery and collections activity. Total debt at the end of the quarter was $334 million, net of debt discounts and deferred finance costs and excluding finance lease obligations compared to $335 million in the first quarter. Net debt at the end of the second quarter was approximately $84 million. We exited the second quarter with total available liquidity of approximately $372 million comprised of cash of $250 million and availability of approximately $122 million under our asset-based credit facility. Cash flow provided by operations was $15 million, driven mostly by strong cash collections. Cash flow used in investing activities totaled $34 million, driven mostly by additional investments in our Tier IV dual-fuel carbon-reducing technologies, maintenance CapEx, and investments in our power solutions business. This resulted in free cash flow use of $19 million for the second quarter.
spk08: Robert to discuss our acquisition of Alamo in greater detail thanks Kenny yesterday we announced the agreement to acquire 100% of the pressure pumping operations of Alamo pressure pumping we are incredibly excited to get the power of our combined platform and our ability transaction that fits hand-in-glove with the low cost low carbon strategy we have been communicating for the past year I encourage you to take a look at our investor presentation posted on our website. Let's start with a brief overview of Alamo. Headquartered in Stanton, Texas in the heart of the Midland Basin and founded in 2017, Alamo is positioned today as the largest private pressure pumper in the Permian as measured by active fleets and one of the largest Permian pressure pumpers as measured by next generation horsepower. The company primarily operates in the Midland Basin and has a superior track record for safety and execution on behalf of its high-quality and efficiency-focused customer base. The company's assets are primarily comprised of nine hydraulic fracturing fleets, a large majority of which are powered with the latest CAT Tier 4 engines, and most of which are naturally gas-powered or easily converted to Tier 4 DGB. In total, the company's fleet is comprised of approximately 460,000 of some of our industry's newest hydraulic horsepower, nearly all of which is fully utilized. We'd like to share several key strategic highlights of the transaction. The acquisition of Alamo accelerates and magnifies the impact of our next-generation technology strategy and is entirely complementary to with our low-cost, low-carbon ESG-focused approach. Over the last several quarters, we have invested in the conversion of existing horsepower to Tier IV dual-fuel technology. Today's acquisition of Alamo's highly utilized CAT Tier IV fleet with significant DGB capabilities combined with our own secures the leadership position in this important and sold-out portion of the market. Pro forma for this transaction, more than half of the combined next-year fleet will be natural gas powered and standardized around a CAT platform, providing comprehensive engine management, end-to-end enterprise telemetrics, a seamless operational system, and a low total cost of ownership. We think we have the most gas-powered fleets deployed in the market, which includes all dual-fuel and EFRAC combined. Pro forma, our fleet will be a Permian leader for low-carbon well completions. As a result of this combination, Nextier will be the third largest deployed fleet in U.S. land and a leader in the Permian, meaningfully adding to our presence in this growing market. Alamo's predominantly Midland Basin-focused Permian position, combined with Nextier's existing Delaware Basin-centric position, provides attractive intra-basin diversification within the Permian. This new dynamic strengthens Nextier's overall attractive geographic diversification that now covers most major producing basins in the U.S. In addition, Alamo's customer base is highly complementary to Nextier's, making the combined company's customer portfolio truly best in class. We also believe this acquisition will be easy to integrate into NextTier while providing significant pull-through opportunities. The Alamo president and CEO, Joe McKee, will continue to run the Alamo operations under the Alamo brand without disruption to their existing customers or employees. Joe and I will pursue customer value-added opportunities to plug into NextTier's well-established digital capabilities, last mile logistics, and newly established power solution capabilities. This will be a relatively simple and low-risk integration process since Alamo's operations are based on a single, high-performing operating base. While we expect to create an estimated $10 million in synergies and generate additional revenue associated with integrating wireline pump-down perforating and last-mile logistics, the value of this merger is not driven by cost synergies but by accelerating and providing for long-term cash flow generation. As we have successfully launched our power solutions integrated fuel services, the addition of significant low-carbon natural gas-powered hydraulic horsepower to the next-tier platform expands the potential for additional value creation for next-tier intercustomers. Before I turn the call over to Kenny to discuss the financial rationale of the deal, I want to point out that we were very successful at conserving our cash during the COVID downturn so as to give us the ability to make strategic moves like this one at the right time. We have frequently stated that the strength of our balance sheet was a key differentiator for next year, and now is the time we shift to using it offensively. I believe that this is exactly the right time for this acquisition. With that, I'd like to ask Kenny to provide more details around the financial merits of this acquisition.
spk10: Thanks, Robert. I will now share the financial rationale for the transaction. First, attractive valuation and accretion. At a transaction valuation of approximately $268 million, we are acquiring roughly $460,000 of predominantly next-gen or easily convertible horsepower for $582 per horsepower based on expected achieved EBITDA earn-out thresholds, which is significantly below next year's current trading multiples and that of our public peers. Second, accelerating free cash flow generation. Today's transaction accelerates next year's path to positive free cash flow in early 2022, driving shareholder value and improving next year's already strong liquidity position. Third, maintaining a strong and flexible balance sheet. Pro forma for the transaction, we are positioned with $272 million of total liquidity. Additionally, with the accelerated path to free cash flow generation, we meaningfully improve our ability to drive cash flow back onto the balance sheet with a high-performing set of assets. We remain positioned with no near-term debt maturities, which combined with our strong liquidity position allows us to continue to remain both offensive and defensive. Before passing things back over to Robert for closing comments, I'd like to comment on our outlook. As macro conditions and commodity prices further improve and become increasingly constructive, we are seeing further improvement in demand for completion services. For standalone next year, our calendar is expected to be effectively full for the third quarter. We expect to operate 21 fully utilized FRAC fleets during the quarter and forecast to exit the quarter In addition, we will be adding highly utilized capacity from Alamo with a transaction close date expected at the end of August. Combined and based on this forecasted transaction close timing, we expect to generate total revenue of between $390 and $420 million. This forecast reflects a sequential increase of between 35 and 44%. driven by the addition of Alamo's business for approximately one month, and previously mentioned increased Tier 4 dual-field work that carries improved profitability. On this base of activity, on a combined basis, we expect to generate at least $30 million of adjusted EBITDA in the third quarter. The increased cadence of profitability of next year at the back half of the quarter and the addition of Alamo The Q3 monthly exit run rate is expected to reach approximately $18 to $20 million. With our fleet upgrade program largely completed during the first half of the year, in addition to the fleet we added in early July, we are expected to convert two additional fleets to Tier 4 dual fuel during the second half of the year for standalone next year. We will provide additional details on Alamo's upgrade program following the completion of the transaction. For the full year of 2021, we reiterate that the second half of the year will see increased strategic CAPEX investments as compared to the first half of the year, in addition to the increased capacity for maintenance CAPEX of additional fleets for next year and the Alamo transaction. Our investments for the year are primarily comprised of Tier IV bill fuel upgrades, investments in our power solutions business, and maintenance. Our readiness program, in addition to our Next Hub equipment health management program, is demonstrating value. As year-to-date, we have been able to achieve FRAC maintenance capex spend below the $2.5 million target set for 2021. As we noted, 2021 is an investment year for Next Tier. As we continue to invest in our low-cost, low-carbon strategy, including Tier 4 dual-fill conversions and our power solutions business, Combined with the investments we made in 2020, we are positioning next year to harvest these investments in the coming years. These investments allow us to high-grade and standardize a significant portion of our equipment base, which is now more marketable and overall is expected to reduce costs and emissions for next year in our client base. With that, I'll hand it back to Robert for closing comments.
spk08: Thanks, Kenny. I would like to reiterate that the startup challenges and strategic investments that we faced in Q2 are transitory in nature and do not change our strategy or position as a leader in low-cost, low-carbon operations. We have great momentum going into H2 with returning customers that are adding to an already strong existing customer base. We are seeing success in our ability to integrate additional scope at the well site, and our customers are realizing the value created through integration. We are working closely with our partners to improve our commercial agreements to address the changing simulfrac environment which is expected to show up in our Q3 profitability. We believe macro fundamentals are setting up to be foundationally stronger and more supportive of a stable commodity price with global demand increasing and balanced long-term supply fundamentals. Our investments made in 2020 and 2021 on enhancing and standardizing our fleet combined with our acquisition of Alamo, accelerates our free cash flow and strategic plans to deliver higher efficiency, lower cost integrated completion operations, with a byproduct of reduced emissions for our customers. We believe that we are now positioned for the right part of the market at the right time. With that, operator, we'd like to open up the calls for Q&A. Thank you.
spk02: Yes, thank you. At this time, we will begin the question and answer session. To ask a question, you may press star then 1 on your touchtone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes from Chase Mulvihill with Bank of America.
spk06: Hey, good morning, everybody. Good morning, Chase. Hey, Chase. Hey, congrats on... Congrats on a nice deal here. Um, you know, obviously this, this accelerates, uh, you know, the enhancement of, of the next gen fleets. Um, you know, and you guys were probably going to be spending a little bit more on CapEx, uh, on some upgrades if you didn't do the deal. So maybe just kinda, if I can ask the question about, you know, the CapEx that you plan to spend on upgrades over the, over the medium term, um, following kind of the Alamo upgrades or deal. I mean, it looks like maybe after the deal, you probably have 13 to 14, you know, tier four fleets, and you're going to have 31 active at the end of the quarter. So I don't know if maybe you could just talk to, you know, plans for upgrading the fleets after the deal closes, you know, for the pro forma fleet, you don't necessarily have to speak to just Alamo. And then maybe the cost to upgrade, you know, some of these from tier two to tier four.
spk08: Thank you for the question, Jason. You're right. One of the strategic benefits of this deal for us was accelerating our already strategy focused on increasing the amount of our fleet that uses natural gas. When you're converting Tier 2 to Tier 4 DGB, we're taking Tier 2 horsepower out of the market. That's a relatively expensive conversion compared to simply taking Tier 4 pumps and making them Tier 4 DGB. about half the cost to do that. But it's complicated by the fact that the market is really looking for this kind of equipment right now. And if you were trying to do it organically, there's extreme limited inventory. You know, we mentioned having to replace a fleet last quarter. We basically scraped up the inventory that was around the U.S. of CAT Tier 4 DGB to do that. And you noticed Alamo had made an acquisition of some of the... other market horsepower that another competitor was getting rid of during the last quarter as well. So the point being is that the only way we could accelerate this strategy was through an acquisition like this, and we're very pleased that we were able to get that over the hump.
spk10: Yeah, Chase, I would just add, you know, we called out we're going to be adding two additional Tier 4 DGB fleets. This is on the next tier side, late Q3 and then the one in Q4. Those are Tier 2 to Tier 4 conversions. If you look on the Alamo side, they've been basically same strategy as us. They've been converting their fleet. They're in the process of converting another fleet right now. And then there's another fleet that would be converted likely by the end of Q1 of next year. So basically, we have at least four fleets that are in the conversion process as we speak that are all going to be Tier IV DGB.
spk06: Okay. All right. Perfect. And if I could follow up on the Samufrac commentary. You know, obviously, you guys are picking up a lot of Somnifrac fleet from some of your customers, and we hear a lot about it on the EMP conference calls. So maybe could you just speak to the profitability of those fleets, you know, maybe EBITDA per fleet? I think you said the horsepower requirements, you know, could be up to kind of 2X of a typical fleet. So are you getting kind of 2X the EBITDA per fleet for these Simon Frack fleets? If not, then, you know, what do you think needs to happen for you to be able to get to that? Is it kind of better supply chain maintenance? Is it better pricing? Like what do you think needs to happen to ensure that you get the adequate profitability on some of these Simon Fracks?
spk08: That's a good question, Chase. You know, the Simon Frack uptake in the market has been on the increase, particularly, you know, in the Permian area. Our customer base has been quick to do so. And I would say that it's been a process of continued increasing levels of intensity around that process up to the point, as I mentioned in our call, that as much as double the amount of horsepower on location. The issue there is during the startup process, you know, you got a lot of moving parts around, support around that, huge volumes, a lot of number of trucks, a lot of number of pumps. as you get your cadence working with the full supply chain, there's where we caught a lot of pressure during Q2. We were in the process of extreme rapid deployments, of which a couple of them were really big Simon Frack jobs. So I would say, in general, profitability is very good, and you have to build your commercial agreements around the volume of horsepower. But when you have a big process like that, you have to look at the white space that can be occurred with any kind of hiccup around the support structure. And when I mentioned in there that we're working with our customers to re-look at our commercial agreements, a part of that is around that area. You've got two wireline operations embedded in the middle. You have all the trucks doubled up in volume around the support of the thing. So I would say once you get your cadence going, the profitability is very good. But in the process of Q2, we were trying to build a cadence up around two or three of those deployments. So we got hundreds of wells of experience, and we feel good about where that is. But at the end of the day, starting straight up on a simulfrac, it takes a little bit of a dance. And we've had to tighten up some of our maintenance schedules around portions of the equipment supplying that simulfrac fleet. in order to reduce the risk associated with the increased volume. So bottom line is, that's when we talk about the we had in Q2 being transitory. We've just had to move up our maintenance process to tighter intervals. And the corresponding cost associated with that, we're working through our commercial agreements as we're working into Q3. So that's kind of an overlevel but the bottom line is I think the operators are trying to decide what level makes sense when you talk about rates and pressures on the same well.
spk06: All right, perfect.
spk08: Did I address it okay?
spk06: Yep, perfect. Thanks, Robert, and War Eagle.
spk02: Thank you. Thank you, and the next question comes from Stephen Gangaro with Stifel.
spk04: Thanks. Good morning, gentlemen, and congrats on the deal. Thanks, Stephen. Two things, if you don't mind. One, and just to follow up on Chase's question, as you work through these simultaneously, is there a risk you get more profitable per horsepower per fleet while operating and maybe that two times level for two times the horsepower, but then mobilization costs kind of eat into that and hurt you or do you think you can manage through that where these jobs will be sort of at least equally, if not more profitable as you sort of get that cadence going that you referenced?
spk08: Look, we fully expect it to be equal or greater profitability because the customers who are using Simon Frat are efficiency-minded customers, the kind of customers that work well with us and that we like to work with because the upside associated with it ever increasing, you know, pump times per fleet. But you do have to get the cadence working, and sometimes you don't come straight out of the box. And I remind everyone that we just came out of one of the most incredible downturns ever. And as we redeploy, we're working a few bugs out. I call it growing pains that we suffered in Q2 that we are, as we speak now, kind of got past. So I... I think that you'll see that that works. It's just that simulfracs are continuously pushing the envelope to determine what's the ideal for well treatment versus the amount of equipment on location, things like that. It's a process that gets tweaked with each customer as they gain experience.
spk04: Great. Thanks. As a follow-up, and this is maybe a two-parter, but You gave a lot of really good detail in your PowerPoint you posted on your website. And the two questions around it were, you're next to your adjusted legacy kind of EBITDA number. You use the consensus. And I'm curious, is that in any way you guys blessing that consensus? And maybe more importantly, the $80 million of Alamo incremental EBITDA data I think it suggests $9 or $10 million of EBITDA per fleet. Is that a reasonable expectation and sort of what needs to happen to pricing to get to those kind of numbers?
spk08: So, Stephen, a good question. And, you know, we were careful not to try to guide too far in the future of Q2. But I would say this. You know, we did point out kind of the exit of Q3 run rate of our new code with just one month of Alamo. And if you extrapolated that and took a look at that, you could see the answer to that question is that we are in that ballpark for sure. And I would also say that bringing Alamo on board, these guys are very good at what they do. And they were able to keep their self fully loaded through the 2020 downturn. And they're on a good solid run rate, and they're not in a process of really ramping up, although they are adding a couple of crews during this transition period. So I think that it requires very little difference from our current run rate for that demonstration on that slide to be accurate.
spk10: Yeah, I would just add, because you asked about the Alamo side, you know, we published that page to show the air and out would be indicative of attractive valuation just to kind of underpin that $80 million. And then we're confident with the synergy capture of $10. So that's why we put the $90 there. And one more follow-up. You mentioned pricing. There will have to be some pricing increase in 2022 to reach that $205 consensus that's put out there.
spk04: Okay, great. Now, thank you for the call, gentlemen.
spk10: Thanks, Steve.
spk02: Thank you. And once again, please press star, then 1 if you would like to ask a question. And the next question comes from Conor Linear with Morgan Stanley.
spk01: Yeah, thanks. I just wanted to stay on that pricing topic and reconcile some of the comments you guys have made around that front. So I think you'd said basically to reactivate additional fleets, the economics aren't really there. I just wanted to understand, so you are reactivating some fleets in the near term here. Is that because they're customers you know and you know the efficiency is going to be there that you don't need pricing and the next fleet is a little more uncertain? Was there pricing that you gained on those? Basically, if you could just help me understand the dynamics of that.
spk08: Thanks, Connor. Good question. So the added fleets are with customers that we have legacy customers. relationships with and that have been guiding towards deployments. We did get price with those deployments that are in tune with where we're trying to get to. But even though at the same time that we're getting price as we roll into Q3, it's also going against inflation somewhat. So I would just say is that We're in the first step of price move coming out of this downturn we just discussed, and we have to get more. And, you know, we've moved up all of the pricing that we deploy on any new opportunity for our work. So, I mean, we would expect, you know, either we lose it at that or we pick up work that is more accretive and includes net price increases. So I just don't know how fast that's going to occur. It depends on, I think, the supply and demand of the overall market and what some of the diesel providers do in the market. Because we do get a differential between gas-powered fleets and diesel-powered fleets. But diesel-powered fleets can define the low end of the market. So that's moving. I think if you look at moving into next year, and we have, say, 250 or 260 fleets deployed with a significant portion of those being simulfrac, more and more being the case, we're reaching a point where we're getting close to consuming the horsepower that's in the market. And I think that will provide the basis for recouping the price that we had yielded during the worst part of this COVID downturn.
spk01: Makes sense. It sort of seems like the consensus is moving towards there being some potential for pricing power as you move into work programs for 2022. I guess the big variables that could drive that, to your point, are higher tier equipment being sold out, demand just outright increasing, or just people pushing price as there's sort of natural renegotiation periods. I mean, which of Which of those three do you think is really most important? What's sort of your view on how significant industry pricing power is going to be as people negotiate for 2022?
spk08: Well, one of the reasons we did this deal was because in that upper tier of tier four emission-friendly equipment, it also burns natural gas. That part of the market is sold out now and will continue to be sold out. And obviously, in that environment, we need to be improving our returns to recoup our investments. So that's one thing. But I also say, as we roll into next year, most of the desperation, I think, that occurred in the market, maybe on the low end around some of the diesel-powered fleets, has been relaxed a bit. And people can competitively begin to move their price up. So I think it's kind of like a number of factors. But the big one being supply and demand and consumption of horsepower. And the increase in demand around it, I think supply-demand is coming together. So fundamentally, the market is getting healthier. So that provides a platform for everybody to take advantage of. Makes sense. I'll turn it back. Thank you. Thank you, sir.
spk02: Thank you. And the next question comes from Derek Podhiser with Barclays.
spk05: Hey, good morning. Just a question on the deal. Just curious your thoughts on the best practices that you can use pull from Alamo and adopt under legacy next year. And then what you can bring over to the Alamo team to help make their operations better. Just want to know just your high level thoughts on what you bring to the table and what Alamo brings to the table on a combined company basis.
spk08: I appreciate that question because it's a lot to do with what we've made, what reason we made decision. You know, when we looked at the whole market out there and do kind of a funnel assessment of who would be a good partner for us, we've done that twice with the CNJ deal. It was a rich opportunity around synergies. And then in this past, we looked at whose strategy overlaid with us and fit perfectly. And we were able to get lined up with a company like Alamo that has been doing the same thing we're doing, deploying Tier 4 and making it gas-powered. So they also have a very strong position in the Midland Basin You know, the Permian Basin being divided in, you know, loosely between Midland Basin and the Delaware Basin. And we have a bigger position in the Delaware. They have a bigger position of their fleets in the Midland Basin. And the customer base they have there is very efficient, and they do an excellent job. So it's not like we're doing a deal here to teach Alamo anything about what they do. However, when you look at the opportunities around revenue synergies where we have the biggest wireline fleet in the U.S. and it's deployed on about 75% of our frag fleets where our efficiency levels are much better when we work as a team like that. Opportunities to do the same with Alamo are there. We do the last mile logistics and sand delivery on you know, the majority of our fleets and they currently do not. So the opportunity to use the scale we've built around our digital tools for, for logistics is an easy fit. And then the next hub digital things that we called out about bringing visualization to the fleets, not changing the way they operate, but it's given more visibility to the customer has been something that customer base has been very attracted to. And then lastly, I didn't mention it, but a little bit in our earnings call because we've got so much information going on. But we went commercial with our power solutions business recently, and it's come out of the box working very well, supplying compressed natural gas to our own fleet while also facilitating the use of customers' own field gas to a mixture of the two. So these things are very easy to bring to the combined company And it doesn't interfere with any of the excellent technique that Alamo already has in FRAC. And bottom line is, when you look at maintenance practices between the two of us, there's going to be upside all around that, we think. How do you get maximum benefit out of your fluid ends? And how do you get maximum benefits out of your power ends? Things like that. So it's just rich with opportunity. But we're not compelled to do this deal around cost synergy. There's going to be some easy ones around you know, supply chain and some of the things to deploy with their fleets. We have in stock in our organization that can make that easy. We'll do the back office, right, payroll and some of the comp and bend things that are easy. But this is not the same kind of integration that we had to do with C&J. So we're excited about it being easy to integrate, and I'm glad you asked that question.
spk05: Great. That was very helpful. I appreciate the color. And then maybe a question for Kenny on getting a little more color on the CapEx. Could you provide us where you see it falling for the second half of the year? And then just thinking about 2022, you talk about harvesting some of the investments that you made. Just thinking about a more normalized environment post the conversions that you already laid out. Maybe help us around kind of where you see maintenance CapEx being given now you have the increased CapEx per fleet. Thinking about simulfrac versus non-simulfrac. Just a little bit more color and if you could provide any more concrete details around that would be helpful.
spk10: Yeah, so look on CapEx we called out that H2 is going to be greater than H1 as it relates to the next tier fleet. We're continuing to make strategic investments in dual fuel. I just called out two additional ads in addition to the one that we made in July. We're rounding out our power solutions investment and then we're taking on Alamo. If you look at our maintenance capex per fleet, we've been able, year to date, and we expect the same in H2 to be below our $2.5 million per fleet hurdle that we set. A lot of that has to do with health monitoring, and even in the fact that we've been doing more simulfrac work, and that's on a per fleet basis. If you look at Alamo's fleet, it's a younger fleet. They operate primarily in the Midland Basin, which has less intensity on the equipment. The maintenance CapEx per fleet for them is substantially lower than that 2.5. So whenever you look at next year, most of the strategic investments that we made in 2020 and 2021 will be wound down. There will be some fleet enhancements that we do on the Alamo fleet that I mentioned earlier. Those will be just converting Tier 4 to Tier 4 DGB, so less CapEx. So we see next year as being significantly less CapEx as it relates to the strategic side. I think on the blended side, we'll have reduced maintenance CapEx per fleet, and we plan to just harvest the cash flow and put the cash back on the balance sheet that we're paying for Alamo.
spk05: Very helpful. And then just one more if I can sneak it in. Any updates around your EFRAC offering, some of the field trials that you've been announcing? Any update there? And then I know you're also doing a direct drive solution that you've been investing in, just any color around that, just kind of where that is versus the EFRAC side?
spk08: So, good question. You know, we're still out there and doing some selective field testing of our E-Fleet pump. Right now, as we speak today on a high-line power test, you know, the solution around EFRAC is always going to be around what is the best, most commercially effective power source turbines versus our gensets that burn gas with, you know, caterpillar-type engines, or high-line power. All the customers are looking at all three of these simultaneously, and, you know, each has a little opportunity set. So we're still in the process, technically, of proving all that out. We're in good shape. We like the way technically everything's sorting out. Now it is a commercial solution around getting line of sight to return on investment. I think that's sort of the story in EFRAC in general. Our direct drive pump system was also used in a field test most recently, but we do not have a contract for either of those two at the moment, but we are in discussions for many different opportunities around it for 2022 type applications.
spk05: Okay, great. Thank you very much.
spk08: Thank you.
spk02: Thank you. And the next question comes from John Daniel with Daniel Energy Partners.
spk03: Hey, guys. Good job on the deal. Robert, just one question. It's more of a sort of a real big picture, but there are those who say that the Tier 4 dual fuel is just simply the bridge to electric and direct drive solutions. Do you sense that as the view of some of your customers?
spk08: Look, I think that everybody's still trying to decide. what the ultimate destination looks like, largely about the discussion I was just having around the power solution. But I would say, no matter what the aspirations are around EFRAC, for example, if you've got 250 fleets in the market, I think you know the count of EFLEETs today. It's a very small portion of that we had highlighted in that investor deck. But if we were to go to, if the market wanted to go to electric immediately, it would be billions of dollars required to deploy those fleets. So I think commercially, the market has to change a lot. And I would argue that there's still some testing going on that actually measuring the emission rates around all the different type next gen solutions. And one thing we believe is that for sure, Tier 4 dual fuel is in the sweet spot of all of those factors. And how long will that be? I would say I think it will be for a long time. I think what happens, the fleet attrition is going to come out of diesel on the low end. And, you know, you fast forward a number of years and we get into a point where the fleet attrits on Tier 2 diesel, maybe then the investment around electric would be more prevalent. That's my view on it, John.
spk03: Fair enough. And then the last one, you know, you guys have done a good job of jumping ahead of the peer group in terms of the proportion of a fleet that's Tier 4 DGB. I'm just curious if you could tell us today if you decided to go to Fleet 22 and wanted to do a conversion, what's that lead time to get the Tier 4 DGB engines right now?
spk08: Well, I think that, you know, we can only convert what's in the market, but If you had to go, I think, and try to go buy Tier 4 engines, I mean, there's not an inventory right now. I think it's like in the neighborhood of, say, half a year, four, six months before. If you try to make a big order, I think before you can get to engines, then you have to begin the process of building out the assembly.
spk10: And, John, I would just add, you know, we're going to be receiving, you know, pro forma equipment. a significant amount of Tier 4 pumps. So for us, really, it's just about getting the kits to convert those Tier 4 to Tier 4 DGB. So we also have some acceleration there on the ability to get ahead of anything that comes out in the market. Okay. I appreciate it. Thank you very much. Thanks.
spk02: Thank you. And the next question comes from Wakash Saeed with Alta Corp Capital.
spk09: Thank you. This is Wakash Saeed from ATB Capital Markets. Just a quick question. You know, in your numbers reported in the back of the press release, you mentioned that there was a loss on equity security investment of $1.3 million. Could you maybe elaborate what stocks were you owning and what's the strategy around owning public company equities?
spk10: Yeah, look, Wakit, I appreciate the question. So, look, during the COVID downturn, we had a unique opportunity to trade some aged and potentially bad debt receivables for stock. And we did that. And that investment just moves with the market. So we fully recovered the value of those receivables, and we still have on the balance sheet some of the remaining.
spk09: Okay, great. That answers my question. Thank you very much.
spk04: You're welcome.
spk02: Thank you. And the next question so far from Stephen Gargaro with Stifel.
spk04: Thanks for taking a couple follow-ups. Just quickly, Kenny, do you have a sense for incremental EBITDA per quarter or per year from the Alamo assets?
spk10: Well, we called it out in the presentation. Stephen, I don't know if you've seen it, but if you just take the earn out, which we believe is indicative of of the future earnings potential for Alamo. The earner out starts at 80. No, no, I'm sorry.
spk04: I meant to ask for the depreciation, just DNA.
spk10: Oh, depreciation. Yeah, look, a lot of that will shake out with the purchase accounting, but today their DNA is somewhere around 48 as provided by their company financials. But obviously there will be some purchase accounting as we roll that in, but that's where they're at today.
spk04: Sorry, I thought you said... And one other quick one on the pricing side... You know, we've heard from a couple of your competitors already, and it just has sounded like pricing's been kind of slow to develop. And you had mentioned, you know, how sold out and how high the demand is for some of the higher end assets. Do you think, is any of this related to sort of the timing of the public EMPs, maybe rampant spending next year or the urgency that they have? Because it feels like the high-end assets should be seeing better pricing momentum, but I keep hearing it hasn't quite materialized. I'm just curious your take on sort of the dynamics there and how you think it evolves.
spk08: Well, I think if you look at what has occurred from the bottom of the COVID response to the big freeze period, I think it's a process that's playing out. The price begins to move, and our customers' balance sheets are being healed up a lot. They're generating a lot of cash, and I think they can understand the situation that we're dealing with around inflation as well as the underperformance of our sector in general on FRAC and the need for price. So I think that we're seeing it, but we've got to have more. And I think that I'm pretty sure that I can speak for companies on that, and I hope to see that that happens. But I think that our customer base was more back half centric on their plans to return. You know, it's been pretty well known in the market that the privates moved quicker in the first half of this year with rig count and frack deployment versus the more publics. And that's playing into our favor in the back half of the year. So as we get reestablished, I think the opportunity to begin to change price on the reopeners that you have with many of your agreements is on the increase.
spk04: Great. Thank you.
spk08: Thank you.
spk02: Thank you. And that concludes the question and answer session. I would like to refer to Mr. Robert Drummond for any closing comments.
spk08: Thank you, Keith. And, look, I just want to end up, I think, to say thank you to all our next-year employees and for the dedication to our customers and our company and to their collective safety as we've been ramping up in activity. And I also want to publicly welcome the Alamo people to our team. We're very excited to have Joe and their management team join in our group. These guys are very good. We're going to make a great team together. So thanks very much for participating in today's call.
spk02: Thank you. The conference has now concluded. Thank you for attending today's presentation.
spk08: You may now disconnect your lines.
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