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spk05: Hello, and welcome to the Next Tier Oilfield Solutions Third Quarter Earnings Webcast. All participants will be in listen-only mode. Should you need assistance, please signal a conference specialist for pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on your touch-tone phone. To withdraw your question, please press star, then two. Please note, today's event is being recorded. I now would like to turn the conference over to Michael Sabella, Vice President of Investor Relations. Mr. Sabella, please go ahead.
spk00: Thank you, operator. Good morning, everyone, and welcome to the Next Tier Oilfield Solutions Earnings Conference call to discuss our third quarter 2021 results. With me today are Robert Drummond, President and Chief Executive Officer, Kenny Pichu, Chief Financial Officer, and Kevin McDonald, Chief Administration Officer at General Counsel. Before we get started, I would like to direct your attention to the forward-looking statements disclaimer contained on 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, and 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 publicly update 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's 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 third quarter of 2021, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NextYear.
spk04: Thank you, Mike, and thanks to everyone for joining the call. Before we begin, I want to say how excited we are to have Mike join a team. Many of you already know Mike Sabella from his extensive background working with oil and gas investors in both equities and fixed income. Not only will Mike be a valuable addition to our investor base, but his input will also be key to our executive management team's decision-making process as we develop and execute our strategy. Mike, welcome aboard. This last quarter was very important for next year. We completed the strategic acquisition of Alamo Pressure Pumping making Next Tier one of, if not the, premier well completion service provider in the Permian Basin. Combining the Next Tier and Alamo fleets expands what we believe was already an industry leading supply of Tier 4 natural gas powered frac equipment, accelerating our low cost, low carbon strategy. We are excited about the future of the company and the Alamo team is already beating the lofty expectations we set for the transaction. In addition, our legacy next-year business performed very well with another quarter of above-market revenue growth helping to deliver significantly improved profitability. We believe we are in a prime position to capitalize on what looks to be a strengthening market for U.S. land activity heading into 2022 and beyond. Before getting more into the future of next-year, I'd like to review our third quarter and ongoing results. Industry-wide, well completion activity continued to trend upwards in the third quarter relative to the second quarter, adding to the strong activity gains we were achieved earlier this year. And for two quarters in a row, legacy next-year revenue outperformed the overall market growth rate as more of our legacy customers returned to work. As planned, At Legacy Next Year, we deployed the net equivalent of two additional fleets during the third quarter. After accounting for the formation of a Simulfrac fleet, we exited the quarter with 22 active fleets, and consistent with the plan at the time of the acquisition, Alamo deployed its ninth fleet by the end of the third quarter. The combined company exited the third quarter with 31 deployed fleets including 29 domestically, comfortably making Nextier a top three pressure pumper in the U.S. And importantly, we believe we are the largest provider of natural gas-powered, low-cost, low-carbon frack services in the market. Sequentially, total revenue grew 35% to $393 million. Legacy Nextier revenue was up 23%, with reported revenue also benefiting from the inclusion of one month of Alamo. In addition to frac, our wireline, cementing, and coal tubing product lines continue to see improved activity and overall financial performance. Our adjusted EBITDA was $28 million in the third quarter despite the impact from COVID and challenges around logistics and driver availability. I'm proud of the way the team managed through the quarter, especially in September, where we hit our exit run rate commitment of $18 to $20 million of adjusted EBITDA. We exited the third quarter with momentum and have only just started to show the earnings potential of this enterprise. With that as an overview, I'd like to share more about why we're so excited about our position in the market. We believe our integrated completion service package is a unique value proposition for like-minded customers that focus on lowering the total cost at the well site as well as lowering carbon emissions. Based on the deployed truck count, we retain our position as the largest wireline plug-and-perf business, which helps to drive efficiency in our integrated frack fleets. We are now looking to expand integrated wireline to Alamo where that makes sense. But critically, our integrated offering goes far deeper than simply pairing our pressure pumping fleets with our wireline trucks and pump down units. We are increasingly showing our customers the benefits of our next hub digital platform for innovative downhill technologies and most recently, our power solutions fueling business. Through the downturn, We have leveraged the AI-driven capability of our Next Hub to help grow our Last Mile prop-up delivery logistics business. Our Last Mile strategy is to offer customers fit-for-purpose solutions that focus on the lowest landed cost without putting our own capital at risk, and we don't invest in boxes or silos. Last Mile is not a one-size-fits-all service, as we believe it requires a flexible business model. For example, the rise in demand of Simulfrac fleets has created new challenges for last mile and logistics operations. We are routinely deploying options that deliver more product per load and offer more storage at the well site. And we've shown our customers that we can reliably deliver commodities at a competitive landed cost. Overall, we are pleased with the results we achieved in the third quarter. Even as we continue to strive to find ways for further improvement, there are several factors that helped us to gather momentum through the quarter. First, for Legacy Next Tier, the strong top line growth was the result of targeted investments we made to convert and enhance our fleet during the downturn, leading to rapid fleet deployment during the recovery. Second, and as expected, We saw a strong returning customer base during the quarter as our legacy customers returned to work. And finally, the first month of results from our latest acquisition is already having an impact on earnings. We are poised for continued improvement as we enter what we think will be a strong market in 2022 and beyond. However, getting there was not without its challenges. We've increased our headcount by almost 40% this year at Legacy Next Year alone, a monumental undertaking for any organization. Our people stepped up when we needed them most, and we truly appreciate the effort the team has put forth this year. In addition to Mike, we've added Matt Gillard as Chief Operating Officer, and Joe McKee, previously Alamo's President, continues to run Alamo. Both will be key members of the operational teams going forward. We believe we've put together a winning team here at NextTier, and we're confident our strategy will unlock underlying value for all of the NextTier stakeholders through the coming cycle. Commodity price momentum has accelerated in the first part of the fourth quarter, and many experts are predicting that a multi-year recovery is underway. And while we're not planning our business, With these most bullish outlooks in mind, it behooves us to mention that the broader market sentiment today is more optimistic than it's been in many years. The supply side remains disciplined, led by both OPEC Plus and U.S. Shell. This discipline should lengthen the cycle and smooth volatility, making it easier for us to plan and run our business for the longer term. There's no doubt that the market is improving. but our customers do remain cautious. It will take time for sentiment to fully recover from the past 18 months. Nevertheless, it is obvious that the oil and gas industry needs to increase activity to satisfy growing global energy demand. Most believe that this means global EMP capital spending needs to increase significantly from the current levels. And while we acknowledge that the energy transition is well underway, We also think there is a renewed appreciation that the oil and gas industry will need to be part of the energy solution for years to come. Next tier stands ready to do our part. Our fleet of Tier IV DGB equipment is completely sold out. A consistent message that we hear across the industry. If there was a Tier IV DGB fleet available today, the fleet could likely be put to work tomorrow at a premium rate. Next year has been on the leading edge of this transition to clean natural gas power. Customers are increasingly recognizing the opportunity that dual fuel provides to both lower emissions and realize significant fuel cost savings, a powerful combination. As we roll into 2022, we plan to allocate our fresh fleet to like-minded customers that recognize the advantages of a fully integrated approach to lowering costs and emissions. And while we are industry leaders in dual fuel, our conventional diesel fleet play an important role in our tiered service package. Next tier is a better service provider if we can offer customers multiple levels of service value at price point that match their needs. from fully integrated gas-powered completion fleets to conventional frac fleets. We continue to have meaningful capacity of idle diesel equipment that we can use to add scale if the right opportunity presents itself. Our third quarter exit was strong, and October was better still, but the second half of the fourth quarter is notoriously hard to predict. The typical seasonal headwinds from holiday slowdowns and the potential for budget exhaustion will no doubt impact the frack industry just as it does every year. But commodity prices gives us confidence that the seasonal factors could be more subdued relative to previous years. Nonetheless, as always, there's a fair amount of uncertainty in the fourth quarter and into year end. we are prudently preparing for whatever our customers decide. Consistent with what we have said previously, we're making final preparations at Legacy Next Tier to deploy another Tier 4 dual fuel fleet in the U.S. late in the fourth quarter. We will also be deploying an upgraded Tier 4 dual fuel fleet via Alamo operations early in the first quarter. We remain committed to capital and pricing discipline and beyond this, we do not anticipate deploying additional fleets in the first half of 2022. Demand and pricing are showing signs of further improvement and customer conversations have been increasingly constructive. Our current scale puts us in an enviable position where we do not feel that we need to chase suboptimal profitability work and will instead focused on customers looking for dedicated integrated completion fleets in 2022. Many of our fleet additions over the past year have been in response to our traditional customer base returning to work. We will focus our efforts on deepening these existing relationships while also aligning with new like-minded customers as we continue finding ways to make our operations safer and more efficient. We are starting to see real progress on the pricing front, albeit from a very low base. We are encouraged by the conversations we are having with our customers. So far, the net gains have been small and have only had modest impact to our reported results. But broadly, we echo the positive pricing sentiments we have heard from our peers throughout the earnings season. With our efforts around integration, and expanding scope at the well site, as well as our structurally lowered cost base, we are building the company to be able to achieve prior cycle margins without having to recover all the previous pricing concessions that we've made since 2018. We expect to make significant progress on this as we move into 2022. Like the rest of the industry, We are dealing with our own inflationary cost pressures as prices on everything from steel, chemicals, sand, trucking, and labor are all moving higher. So far, our team has done a great job of working with customers to immediately pass on those increases as they come through. We are simply not in a position to absorb cost inflation at our current pricing levels. Prudently, As we make plans for our business over the next year, we must assume inflationary factors will continue to impact our cost structure well into 2022. Our customers understand that we need to see real pricing traction beyond cost inflation as we head into next year. We are confident that tightening supply and demand dynamics in the frack market should support strong net pricing gains as the cycle unfolds. Regarding our operations in Saudi Arabia, we recently came to terms with our partner, Nessar, to divest our unconventional freight fleet in the region. Over the past two years, the partnership has successfully worked together to increase the efficiency of multistage completion operations for the customer to a level that now rivals that of U.S. land. We think the outcome has been a resounding success for all parties involved. And our terms always contemplated an exit option that culminates with the sale of the unconventional equipment to NESR. And we're executing that option in the fourth quarter. We leave our partner and our customer in a good position to continue operating at the new efficiency level with an excellent training program and state-of-the-art workflows. For next year, we will redeploy our capital and people back to the U.S. land to help manage our growing operations here in the most capital-efficient manner possible. We still remain in the Middle East with Nassar through a consulting services agreement on a conventional frac fleet, and we stand ready to grow our presence in the region for work that meets our capital return threshold. Natural gas-capable equipment is a significant and growing portion of our fleet, and this equipment is at the heart of our low-cost, low-carbon strategy. Lowering emissions for our customers has never been more important. But equally as important to executing our tiered pricing strategy is that these fleets offer significant fuel cost savings, even at current commodity prices. Safe and reliable resources of natural gas are critical to maximizing the emissions and fuel savings benefits of a Tier 4 dual fuel fleet. And to that end, back in July, we successfully launched our power solutions fueling business in the Permian Basin. Our initial investment was sufficient to blend and deliver enough compressed natural gas, CNG, and field gas to power our integrated frac fleets, and we were sold out in the fourth quarter. The initial results are great, and our proprietary integrated solution is increasing gas substitution rates by 20% or more relative to prior results. This is a clear value proposition for both our natural gas-powered frac fleets and for this new and evolving business model. We invested counter-cyclically to upgrade our fleet without adding capacity to the overall market. Further, the Alamo acquisition accelerated that strategy, giving us a lengthy runway of Tier IV diesel equipment that can be upgraded much more efficiently compared to the cost to convert Tier 2 equipment to Tier 4 dual fuel. Lengthening supply chain delays and rising inflation could create issues for peers if they decide to undertake a similarly intensive process. Equipment quality is core to our execution, and the capital and acquisition decisions we've made over the past two years are the foundation for future profitable growth. We skated to where we thought the puck was going to be, and we were right. As part of our integrated approach, we are constantly looking for ways that we can use technology to add value to our partnership with customers. And to that end, during the third quarter, we successfully completed our first major project using the proprietary IntelliSTEM frac optimization system. As part of this innovative process, Nextier deploys Selexa's Carina system, which uses a fiber-equipped sensing wireline cable to monitor fracture performance in real time, allowing us and our customers to alter completion design and maximize well productivity. Nextier's dedicated wireline fleet and our NextHub Digital Center make us natural leaders for the deployment of this new technology. Next year remains committed to disciplined growth during the coming cycle, and we are extremely focused on generating strong free cash flow in 2022. We will enter next year with a high quality fleet of natural gas powered equipment, and our upgrade program should largely be completed by the end of 2021. We do see some attractive growth opportunities to expand our power solutions business, but nonetheless, free cash flow generation is a priority starting next year. Now, before I turn it over to Kenny, I wanted to give an update on the acquisition of Alamo, which we closed at the end of August. While it has only been just over two months, so far the combination is playing out better than we had hoped. The Alamo team is delivering at a high level and, as promised, continues to offer its exceptional pre-acquisition service model to our customers. Alamo's deep customer relationships were complementary to Legacy Next Tier. These relationships give us a sizable footprint in the Midland Basin, where we see further opportunity for growth. According to third-party sources, combined, we are now the largest completion company in the Permian Basin as measured by current active fleets. Critically, Alamo's equipment is highly compatible with our Next Hub digital solutions, which should help lift Alamo's already strong financial performance. In addition, we are already on track to surpass the $10 million of synergies we originally expected to achieve from the transaction with growing confidence that we can get up to $15 million run rate of annualized cost and capex energies by the second quarter of 2022. We are excited about the future and next year. The oil and gas markets are improving and confidence is growing amongst our customers. We've used the past 18 months to transform the company to be ready for what we knew was an inevitable recovery. And with the recovery upon us, We're ready to deliver on what we promised. I'll now pass the call over to Kenny to discuss the third quarter financial results.
spk06: Thank you, Robert. Third quarter revenue totaled $393 million compared to $292 million in the second quarter. The sequential revenue increase of 35% included one month of Alamo, while legacy next year revenue was up 23% quarter on quarter. Activity improved in both our completions and well construction and intervention services segments. Total third quarter adjusted EBITDA was $28 million compared to $5 million in the second quarter and $1 million in the first quarter. The improvement was driven by a number of factors. First, we saw a significant increase in activity on the legacy next-tier side as our traditional customer base returned to work during the third quarter. This led to improved efficiencies across the entire fleet and less calendar white space relative to the second quarter. Second, we saw a drop in one-time startup costs that were associated with the sharp increase in activity we experienced earlier this year. And finally, the inclusion of Alamo late in the quarter improved our overall relative performance to better fixed cost absorption. The momentum we've gathered through a combination of these factors allow us to build through the quarter to achieve our goal to exit the third quarter at a monthly run rate of $18 to $20 million of adjusted EBITDA. In our completion services segment, third quarter revenue totaled $366 million compared to $269 million in the second quarter, a sequential increase of approximately 36%. Completion services segment adjusted gross profit totaled $46 million compared to $20 million in the second quarter. During the third quarter, we deployed an average of 25 completions fleets. We exited the third quarter with 31 deployed fleets. In our well construction and intervention services segment, third quarter revenue totaled $27 million, an increase of 16% compared to $23 million in the second quarter. Adjusted gross profit totaled $3 million. There was a slight improvement in results in both our cement and cold tubing business lines as a result of returning customer activity. EBITDA for the third quarter was $8 million. When excluding management net adjustments of $20 million, adjusted EBITDA for the third quarter was $28 million. Management adjustments include $7 million in stock comp. One-time items include a $6 million contingent liability resulting from the basic energy services bankruptcy filing. This is due to the inability of basic to satisfy obligations assumed when the company acquired a wealth support services segment. It is important to mention that the cash proceeds received from the transaction are not impacted by the bankruptcy. Further, there is $5 million in transaction and integration costs associated with the Alamo transaction. Please note, we don't anticipate any further meaningful transaction or integration costs for Alamo going forward. Approximately $9 million of total net management adjustments were cash-related. Third quarter, selling, general, and administrative expense totaled $37 million compared to $21 million in the second quarter. Excluding management net adjustments of $50 million, adjusted SG&A expenses totaled $23 million compared to $20 million in the prior quarter. This increase reflects the inclusion of Alamo at less than $1 million per month, as well as legal fees. Turning to the balance sheet, we exited the third quarter with $136 million in cash down from $250 million at the end of the second quarter with $100 million in cash used for the acquisition of Alamo. Global debt at the end of the third quarter was $373 million net of debt discounts and deferred financing costs and excluding finance lease obligations. During this quarter, We secured $39 million in attractive OEM financing to pay for a portion of our Tier 4 dual fuel upgrades. Net debt at the end of the third quarter was approximately $237 million, an increase from $84 million at the end of the second quarter, largely on the cash used for the Alamo acquisition, as well as the investments we made to advance our low-cost, low-carbon strategy. We exited the third quarter with total available liquidity of approximately $290 million, comprised of cash of $136 million, and $154 million available under our asset-based credit facility. Cash flow used in operating activity was $11 million for the quarter, mainly from funding working capital on our strong overall growth in the quarter. Including the cash payment to fund the acquisition of Alamo, our cash used in investing activities was $42 million during the third quarter. Our investment activities were driven by Tier 4 dual fuel upgrades, maintenance CapEx, and investments in our power solutions business. This was partially offset by proceeds from insurance related to the Q2 fire incident and from the sale of excess equipment. This resulted in overall free cash flow use of $53 million for the third quarter. Now on the outlook. Absent normal seasonal factors during the fourth quarter, we continue to see a healthy demand outlook for our services. This should continue to translate into higher profitability as we head into 2022. First, a significant portion of our fleet startup costs and inefficiencies are behind us. We're operating as efficiently as we have all year, and we believe we have the right strategy in place just as demand could pick up again in 2022. Second, the inclusion of Alamo grows a strong operational performance into our own company resulting in significant fixed cost absorption and the opportunity for both companies to improve best practices. And finally, pricing. While the impact of pricing has so far been minimal in our reported earnings, with growth pricing mostly going to cover cost inflation, we see real traction with respect to net pricing improvements starting in 2022, especially in the natural gas portion of the fleet. While the second half of the fourth quarter remains typically hard to predict, we believe current commodity prices will smooth the seasonality relative to prior years. Taken together, we currently expect to have an average of 30 deployed fleets for the fourth quarter. This accounts for a reduced footprint on a single conventional frac fleet operating under a technical services and consulting agreement in the Middle East. Based on additional deployed fleets and a full quarter of Alamo, we see significantly improved results in the fourth quarter relative to the third quarter, commensurate with the increase in active fleet count on a quarter-over-quarter basis, plus the additional benefit of significant further fixed cost absorption and some modest price increases. But visibility is still not fully known, given the typical fourth quarter seasonal factors. We currently expect fourth quarter CapEx of approximately $50 million, comprising maintenance CapEx across our product and service lines of less than $2.5 million per fleet per year for FRAC, strategic investments and additional dual fuel conversions, and the continued deployment of capital for our new power solutions business. Since the Keene and C&J merger, our cash CapEx has been significantly offset by proceeds from the sale of excess equipment. You can see that for 2020, we harvested $33 million from asset sales and in 2021, we are on track to harvest more than $40 million. Inclusive of the sale of our unconventional FRAC fleet in Saudi, we expect to see significant cash inflow from asset sales in the fourth quarter. Regarding our capital plans for 2022, it's too early to give guidance on our plan for CapEx next year. Nonetheless, our Tier IV DGB upgrade CapEx will reduce significantly in 2022, as the majority of the investment required to convert a large portion of the fleet was already funded in 2020 and 2021. We do anticipate some growth CapEx will be needed to capture opportunities in our power solutions business. We remain firmly committed to capital discipline, and putting next year on course for sustained positive free cash flow beginning next year is a top priority. We invested strategically near the bottom of the cycle in both our low cost, low carbon strategy, as well as an opportunistic acquisition of a like-minded pressure pumper in Alamo. Next year, our strategy will shift towards free cash flow generation. We continue to be encouraged by what we see in the market as we head into 2022. This includes a supportive commodity price environment and continued tightness in the market for natural gas powered fleets. We have built a platform with significant earnings power with meaningful earnings upside across all tiers of our service offering. We see a path to an improved installed base of activity and better utilization with less white space. Net pricing would be an addition to this better utilization. Our fleet of Tier 4 dual-fuel equipment should stay fully utilized next year, and we expect the enterprise will enter 2022 approaching double-digit adjusted EBITDA per active fleet, the benefit of both utilization and pricing. We're finding customers increasingly willing to accept dedicated fleet agreements as they recognize this cost advantage equipment is in short supply. We are pleased with where we are as a company today. With that, I'll turn it back to Robert for closing remarks.
spk04: Thanks, Kenny. In closing, I wanted to leave you with a few key takeaways. As we planned, 2021 has proven to be a transition year for next year as the industry recovers from a historic downturn. Nevertheless, the strategic actions we've taken over the past 18 months have prepared us for success in what we think will be a strengthening market in 2022 and beyond. We've positioned ourselves as leaders in the low-cost, low-carbon future of the industry where the market should remain tight. We have great momentum heading into 2022 and are only just starting to see the reward for all the hard work that we've done. Second, the macro win finally seems to be at our back. The challenges we face as the world embarks on the energy transition are great, and this will require an all-of-the-above solution. It's increasingly clear that oil and gas will need to be a part of the solution, and we stand ready to do our part in the energy transition. And finally, we are differentiating ourselves through the technology even beyond our industry-leading fleet of natural gas-powered frac equipment. Next Hub, power solutions, wireline, and logistics makes Next here far more than just a pressure pumper. We're planning to showcase our integrated completion offering at a virtual analyst day that we have scheduled for March 2nd. And with that, we'd now like to open up the lines for Q&A. Thank you.
spk05: Yes, thank you. We will now 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 try your question, please press star, then 2. At this time, we will pause momentarily to assemble the roster. And the first question comes to Chase Mulvihill with Bank of America.
spk01: Hey, good morning, everybody. I guess first, just congrats to Mike on the transition. Mike, you're in a much better spot than where you were before. Thanks, Jason. So I guess first... Thank you, Jerry. Yeah, of course. He's missed over here for sure. So the first question is really, you know, September you noted, you know, you hit the range of 18 to 20 million of EBITDA. And you said October was better. You know, my math, and Mike's not over here to do math anymore for me, but, you know, on my math, I get kind of double-digit gross profit per fleet. So I guess two questions. Number one, is my math right? And, Robert, if it's wrong, I blame it on my Auburn education. And then number two is kind of knowing – that October's gross profit per fleet was double digit. How should we think about kind of 4Q average profitability per fleet, considering all the seasonality that you might see in the back half of the quarter?
spk04: Thanks for the question, Chase. Look, when we look at Q4, I wanted to make sure in our prepared remarks that we called out that we made the run rate we were trying to achieve in September and that October was yet better than that a bit. But we still really don't have excellent visibility on the Christmas and the Thanksgiving holidays from our customers. You know, history would tell you that we better prepare for some unexpected breaks in activity that creates a little bit of white space. But all I'd say is that because of the solid October we got in the bank and the run rate we got going right now in November, all indications are, like you say, it's pretty much on track. I think it would behoove us to be ready, though, to be able to react to a slowdown here and there with some fleets around the holidays. But the bottom line is we spent a lot of time in Q3 getting to where we are now. And while we did have a slight miss versus expectations in Q3, that was front end of the quarter loaded and occurred mostly in August when we had some 220 people being impacted by COVID or contract tracing associated with COVID. So I don't want to emphasize that negative too much, but the bottom line, we like where we are right now, as we not only go into Q4, but as we're approaching going into 2022. Okay.
spk01: All right. That's helpful. Um, my follow up question is really around pricing. Um, you know, it sounds, you know, a little bit more positive than kind of what we've been hearing from others. Obviously, you know, you've reported a couple of weeks after we've heard from some other people. So I don't know if you could maybe, you know, take a moment and just add some color around pricing, you know, especially maybe over the last few weeks. Have conversations kind of started to get more accommodated for net pricing increases? And maybe speak to kind of, you know, are you starting to see the uplift on Tier 2 pricing at all and maybe some color around those fleets that you're putting back in 4Q and 1Q on the pricing side?
spk04: So good question, Chase. I think you're right by pointing out that the longer time passed, the smarter we can get. The later we go and the more information we have. But one thing for sure is I think everybody's realizing that the macro is more supportive every day when we have oil in the 80s. So our customers, I would say, are engaging earlier than they typically have been. for 2022, which means that they're worried about gaining access to the fleets they want to work with. And, you know, I'm expecting net pricing gains in 2022 at double-digit percentage as we get through the year. I mean, we got to be pretty accurate in our inflation estimations, and that's going to be a bit of a moving target, I think, in 2022. But I think how fast that occurs will be The net pricing aspect will be determined a bit by how well we do at predicting what inflation looks like. But one thing that we really like, as we've built a company around having gas-powered fleets and an integrated service model, is that we're able to do some focusing now on like-minded customers and have a little more say about who we end up hooking up with, customers that are focused on efficiency and consistent loading for the fleets. So choosing the right customer is very important, I think, for how pricing works out for each individual company. And when you ask about the base, the conventional frack, the diesel fleets, I think it's driven by the macro of supply and demand and fracking. We've been doing a bit of work on that lately, and you think there's 230 fleets working in the market in U.S. land today, but more and more of that is around And in many cases, some of these highly efficient crews are using more frac pumps per fleet perhaps than has been in the past, or perhaps it's even in some of the modeling. So I believe that's about 13 million of horsepower deployed at 230 fleets. And most people's projections for 2022 is probably in the neighborhood of 260, so up 30 from where we are today. And running similar math that we use our own deployed horsepower to help us make assumptions on puts that at about 14.5 million deployed horsepower. And arguably, I think that's about all of it, all of it that's deployable. So I think utilization for what's available in the market is high, north of 80%. And that, you know, we mentioned in our prepare marks, we got a little bit more tier two diesel equipment that we can put to work. But it costs significant amount to reactivate some of those fleets when you get back toward the end of the list. And I think that's probably true, you know, for most of the market. So, okay, all of that being very supportive.
spk01: Yeah, awesome. Yeah, hopefully, We continue to see, you know, the discipline side on the new builds. I mean, I know you guys aren't building, but, you know, we've heard of some new builds on the electric fleet side, so hopefully everybody gets good paybacks on those contracts, and we'd like to see kind of that move towards take or pay like the land drillers. I know it's a difficult, you know, push on the contracting side, but anyway, I'll turn it over. Thanks, Robert, and War Eagle. Thanks, Chase.
spk05: Thank you. And the next question comes from Stephen Gingaro with Stifel.
spk03: Thanks. Good morning, gentlemen. Two things for me. One, to follow up on Chase's questions. What are you seeing as far as the price differential between the gas-powered fleets and the traditional diesel? And are you seeing that widen or narrow as utilization in general gets higher?
spk04: I'm glad you didn't ask me for absolutes because I probably wouldn't be able to say it. But I would say that it's definitely not narrowing. I think that more and more inquiries when you're responding to tenders are asking for gas-powered, either in the form of electric or dual fuel in one shape or form. So I don't think that it's giantly broadening. It's already been pretty differentiated. as I mentioned with Chase's question, around diesel is moving up, which allows us to move the gas-powered part of it in concert with that.
spk06: Steve, and I'd just add, this is Kenny, I would add that the value proposition of DGB, part of that is the fuel savings by displacing diesel with natural gas. And with the landed cost of diesel today, especially in the Permian, that value proposition is very strong because the cost to actually fuel the fleets is going up considerably, even with the natural gas prices going up. So the value proposition is still very strong today with fuel.
spk03: And just as a follow-up to that, Kenny, do you think that there's any increased pull because of that value proposition around diesel that could even be inflating the desire? I mean, our customers... truly wanting DGB because of environmental reasons and etc., or do you think some of it may just be because the economics are even better with the diesel cost?
spk04: I think that's a good question, and I would say, if you can put me on it, 60-40 economics.
spk03: Okay. And then my real follow-up question was going to be before that was when you, you know, based on your prepared remarks and kind of how you responded to some of Chase's questions, when we think about 2022, I mean, given the run rates you've talked about, given the kind of pricing you're seeing, I mean, the $300 million EBITDA number for the year seems to be a reasonable starting point. Would you comment on that?
spk04: Look, I think that's close to the 2022 consensus that's out there. And I would say when you think about October as we've kind of guided it and you do that on a run rate and you sprinkle in a couple of fleets that we've guided to plus net pricing, that certainly, you know, that map begins to look pretty accurate.
spk03: Great. Thank you, guys.
spk04: Thank you, Steve.
spk05: Thank you. And the next question comes from a Carolina with Morgan Stanley.
spk07: Yeah. Thanks. Um, just wanted to stay on the, uh, inflation and supply chain question. Um, so just, you know, I think, I think I understand you probably don't want to give specifics around pricing, but, but could you maybe help us understand your cost structure? What, what you're seeing in terms of big cost components, be it labor sand, I think you called out specifically, you know, how much, I guess a way of asking this is how much pricing do we need to see in an industry level to offset what you think is happening in the cost structured business?
spk04: Well, that kind of is a great question. I think it's probably somewhat, you know, competitor specific, you know, us versus other people, how you've prepared your supply chain, how you put the cadence of purchasing for major components and things. We've tried to be pretty proactive in predicting that we expected inflation to be more than was being guided in a macro economy. And I think that's probably true. On the labor side, certainly we've been adding a lot of people. 40% employee headcount growth over the last six months or so. And I would say is that we're going to have some more inflation in that arena as we roll into 2022. So we're factoring those kind of things in. We have, I think, done a good job of mitigating some of the inflation with our major components. By the way, we got ahead of it. But it's still going to be a big number, I think. And, I mean, I don't really want to try to quantify it because I'm sure I'm going to be wrong. But the bottom line is we'll be going to our customers to get corrected whenever we, if we underestimate inflation, whether it be on the commodity portions or the major components. Kenny, would you like to add a little more color to that?
spk06: Yeah, look, I mean, if you look at the cost structure, as you asked, labor is going to be a major component of that. We've seen some inflation on labor already. The market's getting competitive. Prop is going to move likely in Q1 again. And then if you look at chemicals, chemicals has moved in line with the gas price, which has been substantial. And we continue to see that into next year. So pretty much all the cost lines, you're going to see some level of inflation, steel being one on major components. And it's going to be a significant cost. And what we can't do is become just a pass-through entity on inflation where we have to get our own net pricing.
spk07: Yeah, understood. So it's sort of similar vein, but thinking about how bidding has been thus far, you know, this sort of end of year season here. Obviously, there's been a fair bit of industry consolidation. There's obviously more underway. But I'm curious, would you say that you feel there's been a change in the way some companies are bidding? Do you feel that there's more rationality in how people are pricing work for 2022? Just any qualitative comments around that would be appreciated.
spk04: So, Connor, I think that from our view, and this is ongoing as we speak, But I see discipline in the competitive landscape more than I've seen before. And I think it's simply because of that math that I was trying to make a point of during Chase's question where most of the horsepower I think now is getting utilized. I think we've got to do a little bit better job as an industry of rationalizing where that total number stands. I still think there's some legacy carrying of numbers that are probably not real. that many of us are trying to work around in the macro assessment. But I think that that's the driving force for people being a little more disciplined in the pricing. I mean, I would say we're very close to firming up our whole 2022 fleet. I mean, across the whole fleet that we're going to probably deploy during the year. So I think that that's unusual, I think, even for kind of mid-November.
spk02: All right, that's appreciated. I'll turn it back.
spk05: Thank you. And the next question comes from Arun Jayaraman with JPMorgan Chase.
spk08: Good morning, gentlemen. I wanted to see if you could give us some thoughts on 2022 CapEx. I assume you haven't finished your capital budget, but I wanted to get some thoughts on how you think about the mix between sustaining CapEx, which you highlighted could be 2.5%,
spk06: million per fleet versus some of the growth capex that you you mentioned yeah absolutely so next year will be focused on on free cash flow generation as we mentioned it's a primary focus on strengthening the balance sheet part of that is going to be on our capital plan for next year we will be investing significantly less in our tier 4 and tier 2 dual fuel conversions that conversion cycle as you know, went through 2020 and 2021, and now we have a significant portion of our fleet already converted. The conversions we will do next year will be a lot more capital efficient due to the fact that we're converting Tier 4 pumps on the Alamo side to Tier 4 DGB. So we see a significant reduction there. We will continue to invest capital into our power solutions business, and then we will have roughly around 200, sorry, 2.5 million per fleet for FRAC annualized next year. We continue to see progress on our equipment health monitoring, our Next Hub, so we're able to keep that maintenance capex per fleet down to around $2.5 million. If you look at our other PSLs, we'll probably spend around $10 million. So that's the visibility that we have today. And again, we're going to be focused on generating free cash flow.
spk08: Would it be possible to just provide us a ballpark, just given all of those items that you just mentioned, or a range? No, we're not prepared to do that at this time. Yeah, fair enough, fair enough. And my follow-up is I wanted to get maybe some more color on how the reception has been to the launch of Nextdoor Power Solutions and how you're thinking about participating in the EFRAC market.
spk04: That's a good question. I appreciate that. With our Power Solutions business, originally, strategically, The most important thing was to put it with our own dual fuel frac fleets because the benefit not only is the financial benefits within the power solutions P and L, but also the fact that when you're blending field gas with C and G, you can get it optimized to get maximum displacement with these tier four dual fuel engines. And we've been moved, I mentioned in a prepared remarks, we moved it by 20% on the first fleet that we deployed it on. But I will say that there's a lot of pull for it. And part of that pull is everything around the oil field, from drilling rigs to other people's electric fleet even. And I would say as we get further into our capacity growth with power solutions, that we would venture more into doing things around other people's fleets. It's not just our own, perhaps. So I would just say at this point, we're trying to be disciplined and stick with the targeted customers where we get the most upside, not only from the power solutions business itself, but from the benefit that applies to the frack fleet. And then after that, we will take on other opportunities. But certainly being in a position, it's early days and we're new in the market, so we're being tested, but we're sold out now. And I've been patient about deploying it to try to stay in that strategic groove I referred to. But now, you know, it'll be more about just getting returns, I think. And we're really excited about it. Bottom line is our capacity, the investments we've already made will probably double our capacity by the time we get into the middle of Q1. And then after that, we've got to decide how much more we want to feed it. Great. Thanks a lot.
spk05: Thank you.
spk04: Thank you for the questions.
spk05: Thank you, and this concludes the question and answer session. I now would like to return the floor to Robert Drummond for any closing remarks.
spk04: Thank you very much for your attention, ladies and gentlemen, for the questions. In conclusion, I just want to thank all the next year employees for their continued dedication and hard work through one of the most trying periods any of us has really ever seen. And to the Alamo team, welcome aboard, and we're looking forward to bringing out the best in each of these organizations as we move forward together. Thank you very much for participating in today's call.
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