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spk06: Good morning, and welcome to the Nextier Oilfield Solutions fourth quarter 2021 conference call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. For opening remarks and introductions, I would like to turn the call over to Mike Sabella, Vice President of Investor Relations for Nextier. Please go ahead.
spk03: Thank you, operator. Good morning, everyone, and welcome to the next year Oilfield Solutions Earnings Conference call to discuss our fourth quarter 2021 results. With me today are Robert Drummond, President and Chief Executive Officer, Kenny Pichu, Chief Financial Officer, and Kevin McDonald, Chief Administrative Officer and General Counsel. Before we get started, I would like to direct your attention to the forward-looking statement disclaimer contained in the news release that we issued yesterday afternoon. which is currently posted in the investor relations section of the company's website. Our call this morning includes statements that speak to the company's expectations, outlook, or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or update publicly any forward-looking statements, except as may be required under applicable securities laws. We refer you to the next year disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission filings. Additionally, our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our earnings release for the fourth quarter of 2021, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NextYear.
spk08: Well, thank you, Mike, and thanks to everyone for joining this call. The fourth quarter at NextYear saw the coming together of our strategic repositioning of the past two years. The completion of our counter-cyclical investment strategy appears to be coinciding perfectly with an acceleration in market recovery. Natural gas-powered frack fleets are in high demand in the U.S. land market and remain completely sold out. The pricing differential on natural gas-powered fleets continues to widen versus conventional diesel-powered frack equipment, and price is improving across all tiers. Demand for our services continue to gain momentum. with growing urgency, driven by what we believe is an undersupplied market. Materially correcting the supply-demand imbalance in FRAC is going to take some time, with lengthening supply chain lead times and capital constraints slowing the U.S. FRAC industry's ability to respond. At NextTier, the investments we made to integrate and automate the completion process provide us a competitive advantage as we navigate growing challenges caused by lengthening supply chain lead times, and labor shortages. Our strategy to both lower completion costs and emissions aligns us with our customers as Shell enters the next phase of development. As we gain confidence in the outlook, we decided to provide an operational update in early January. Our Q4 results demonstrate delivering on those commitments, and we see continued momentum as we enter 2022. Before getting into more detail on our view of the market, let's discuss our fourth quarter and full year results. Industry-wide, absent typical holiday seasonality, well completion activity continued to trend upwards in the fourth quarter relative to the third. And we saw solid growth across all business lines. Our U.S. frack revenue grew faster than the overall market growth rate for the third consecutive quarter. even after adjusting for a full quarter of Alamo versus just one month in the prior quarter. We saw modest sequential pricing improvements with the bulk of the gains coming from less calendar white space across the entire enterprise. We operated an average of 30 frac fleets during the quarter, consistent with our plan. Towards the end of the quarter, we activated another Tier 4 dual fuel fleet, exiting the fourth quarter with 31 deployed fleets. We extended our position of strength in the Permian Basin. And importantly, we continue to believe that we are the largest provider of natural gas powered frac services in US land. With the benefit of a full quarter of Alamo, total revenue grew 30% sequentially to $510 million. In addition to expansion across our entire frac business, our power solutions, wireline, cementing, and qualitative product lines continued to see improved activity and revenue growth. Adjusted EBITDA was $80 million, including $21 million in gains on asset sales as our margins caught up with the strong top-line growth we achieved throughout 2021. I'm proud of the way the team managed the impact of the holiday slowdown and navigated the growing supply chain labor market, and COVID-related challenges. For the full year 2021, our total revenue of $1.4 billion increased 18% from the prior year, while our full year 2021 adjusted EBITDA at $114 million grew from $79 million in 2020. our revenue and adjusted EBITDA margin run rates exiting the year were significantly higher than the 2021 average. With that as an overview, let's discuss why we're so excited with what we see in the market. As we first pointed out in our investor presentation published in early January, we believe the U.S. frack market has tightened significantly with utilization today at or near 90%. On the supply side, we are now dealing with a fallout caused by a severe underinvestment in frack equipment. Pricing concessions given over the past few years and through COVID impacted the frack industry's ability to generate capital, forcing the acceleration of attrition and major component cannibalization. At next year, current low prices are still forcing equipment rationalization even today. Through the sale of the fleet in the Middle East, as well as additions to our donor program, we are further reducing our nameplate capacity by 200,000 diesel horsepower, leaving us with a total of 2.1 million horsepower. Just a very small portion of our fleet is currently cold stacked. On the demand side, our customers are requiring even more horsepower per job. And we believe the average fleet size has significantly increased. Today, when the EMPs look to add demand, the fleets that are still available to recommission have not worked in several years and will require a capital investment as high as $20 million to return to work. And the return hurdle rate on this stacked equipment is high, considering it is diesel-powered. This equipment has an uncertain remaining useful life against the demand trend that is moving towards natural gas power. This is increasing customer urgency as they look to hit their own production targets. Like others, we monitor the new bill schedule at our competition in efforts to understand how this supply and demand dynamic could change over time. And while we see headlines for new additional horsepower from some of our peers, our assessment today is that the new capacity coming into the market is insufficient to cover incremental demand. In short, we just believe that supply and demand tightness could exist for several years. We believe our premium fleet, more than half of which can be powered by natural gas, is positioned to outperform. Our tier four dual fuel equipment remains sold out, and we are seeing a growing premium for this equipment. The cost to fuel a freight fleet with diesel has increased along with oil prices, making the prospect of natural gas substitution even more attractive. And tightness in the broader market is allowing us to capture a growing portion of the fuel cost arbitrage. We see a limited supply of equipment available in the market that can be used to replicate our strategy. And like the rest of the world, Supply chain issues have crept into the oilfield service capital equipment industry, meaning it will take time for supply to catch up with demand. We're going to showcase our leadership position in this transition to cleaner natural gas power at our Investor Day conference scheduled for March the 3rd. Now, commentary on our counter-cyclical investment strategy typically focuses on this conversion to natural gas-powered frac equipment. But equally as important to the next-tier story are the investments we've made to integrate critical processes along the well-completion value chain. And the value of our integrated completion services offering has never been greater than it is today. The increasingly challenging operating environment has raised the complexity of competing in today's digital oil field. EMP Capital Discipline has permanently changed the relationships between the oilfield services industry and our customers, elevating the value of our partnership model as our customers focus on optimizing their own capital efficiency. The tools have changed, and this dynamic aligns perfectly with our integrated strategy, where we have proven we can consistently lower NPT and cost, creating value for both our customers and next-tier. For example, Consider the well-known shortage of tractor trailers and truck drivers across the U.S. today. This creates unique challenges in the oil field, where more than 2,000 truckloads of sand and commodities are needed for the completion of a typical shell well pad. At Nextier, the investments we've made in our digitally integrated trucking business have been critical to maintaining the efficiency of our operation, where our scale, and technology allow us to use less drivers relative to competing options for the same job while maintaining flexibility where it matters most. Our size allows us to have priority relationships with many sand suppliers across the entire Permian Basin as optimizing sand mines and truck routes for each pad is critical to asset turns and lowest landing cost. This is particularly important considering the current shortage of truck drivers. Our own large internal driver pool gives us guaranteed access to drivers, while our company-owned and operated next mile tractor trailer maintenance facility minimizes asset downtime. We use a variety of last mile solutions to fit each customer's specific requirements, increasing our product offering while at the same time lowering our own capital deployed. Beyond what is seen on the ground, our Houston headquarter-based 24-7 Next Hub logistics control tower is the critical brain behind the operation. The optimized system results in almost a third less NPT when our customers use our logistics operation versus third-party solutions. Again, We're going to show you more about this on March the 3rd during our Investor Day virtual show. And further on the topic, we continue to be pleased with the rollout of our power solutions natural gas fueling business. Our proprietary technology is the first of its kind with the capability to blend field gas and CNG to fuel frack fleets. We went live in Q3, and by Q4, we were already fully utilized with great feedback from our customers. Power Solutions has managed to improve the diesel displacement by more than 40% versus prior results, translating to meaningful incremental fuel cost savings for our customers. Stand alone, the business is already contributing accretive margins for next year in its first full quarter of operation. Additionally, The implications for what the integrated frac plus fueling model means for the return profile across our broader frac fleet is very exciting. As we roll into 2022, the tightness in the market is allowing us to align with customers and partners that have similar core values, share the appreciation of our next generation equipment, and the value added from full integration of completion services like frac, wireline, last mile logistics, and power solutions. Overall, we're pleased with the results we achieved in the fourth quarter, which demonstrated significant growth in profitability improvements. There are several factors that helped us maintain momentum. First, the top line growth was the direct result of targeted investments we made to integrate and enhance our business during the downturn, allowing us to both fill calendar white space and start recouping prices during the quarter. And the first full quarter results with our latest acquisition, Alamo, has proven to be more impactful on earnings than we were anticipating. Building on our strong fourth quarter and the loaded Q1 frac schedule, we are excited about what we see for 2022 and beyond. But first quarter seasonality should not be underestimated. Restarting our operations after the holidays always carries unique challenges. During January this year, we managed through our highest monthly COVID caseload, while supply chain irregularities impacted service efficiency somewhat. Further, winter weather, as always, is impacting our operation during the quarter, where in early February, we had a multi-day shutdown across our southern operations, including the Permian, Eagle Ford, and Haynesville. But we're also confident that our integrated operating model will hold up better than most in these challenging times. Our current FRAC schedule for the year is evidence that these seasonal factors will give way to a very strong market. Consistent with what we said previously, from existing horsepower, we are deploying another converted Tier 4 dual fuel fleet in the first quarter, our 32nd deployed fleet. The fleet deployment was delayed to the end of the quarter due to continued supply chain constraints, especially on Tier IV DGB components. Demand and pricing continue to show signs of further improvement, and customer conversations remain constructive as they are recognizing that frac fleets are becoming more difficult to find. As we've said previously, our current scale puts us in an enviable position where we do not feel that we need to chase suboptimal profitability work. We continue to instead focus on aligning ourselves with customers looking for dedicated integrated completion programs in 2022 and beyond. The outlook on pricing continues to improve as we look to recover concessions made during COVID. The net pricing impact was only modest in Q4. but the agreements we made so far should result in improved net pricing and profitability throughout 2022. We continue to see a scenario where our integration strategy and expanding scope at the well site, as well as our structurally lowered cost base, will allow us to achieve prior cycle margins while still allowing our customers to maintain a deflated completion cost profile. Cost inflation is impacting our business, just as it's impacting almost every corner of the broader economy. We continue to work with our customers to pass along these increases as they come through. Currently, low pricing simply does not afford us room to absorb any cost inflation. Prudently, in most cases, the latest generation of agreements give us the ability to address cost inflation as it occurs. We are confident that tightening supply and demand dynamics in the frack market should support double-digit net pricing gains by Q4 of 2022 relative to Q4 of 2021. Our team continues to focus on deploying technologies that execute on our long-term strategy and vision. In Q4, we launched Kim Appraise, which provides our customers a product rating to further ESG goals by selecting downhole products that balance cost, performance, and sustainability. Additionally, we saw heightened interest in our IntelliSTEM Fract Optimization System, where we have secured work on multiple projects to provide feedback from the reservoir that allows us to optimize completion design in real time. We'll dive into these technologies at next week's investor day also. Next tier remains committed to generating strong free cash flow in 2022, and we plan to stay disciplined throughout the cycle. We enter 2022 with a high quality fleet of natural gas powered equipment, and our conversion program should largely be completed by the first half of this year. We will grow our power solutions business, but nonetheless, harvesting free cash flow is the priority. Our maintenance capex will increase year over year in support of activity gains and our commitment to service quality. Still, in sum, we expect total capex will be lower in 2022 than it was in 2021. Coinciding with rising cash flow from our operations, we see a path towards generating more than $100 million of free cash flow in 2022 with an acceleration and free cash flow as we move through the year. For 2022, we intend to use this free cash flow to bolster our liquidity and reduce net leverage. We will remain flexible with our capital allocation strategy thereafter. The improving oil and gas markets have us excited about our outlook, and our customers are increasingly acknowledging the value of a partnership with NextEar. Our strategic transition is nearly complete just as the cycle accelerates, setting us up to realize strong returns over the next several years. I'm gonna now pass the call over to Kenny to discuss the quarter results.
spk09: Thank you, Robert. Fourth quarter revenue totaled $510 million compared to $393 million in the third quarter. The sequential revenue increase of 30% included a full quarter of Alamo versus just one month in the third quarter. In the U.S. land market, our revenue once again outpaced rising market activity even before including the contribution from Alamo. Activity improved in both our completions and wealth construction and intervention services segments. For the full year, total revenue of $1.4 billion increased 18% year-over-year, with 2021 including four months of Alamo. Total fourth quarter adjusted EBITDA was $80 million, including a $21 million gain on the sale of assets. The gain on the sale of assets includes the sale of a frack fleet to international markets, continued sales of excess real estate and facilities, as well as further rationalization of spare equipment to fund fleet upgrades. This adjusted EBITDA result compares to $28 million in the third quarter and $6 million in the first half of 2021. The improvement in our core business can be attributed to the following. First, the fourth quarter holiday slowdown was slightly less impactful than expected, and demand throughout the rest of the quarter was strong, resulting in improved calendar efficiency across the deployed fleet. Second, the inclusion of Alamo for a full quarter benefited our results and improved our overall fixed cost absorption. And finally, our drive to recapture COVID pricing concessions started to show in our results, albeit only modestly, in the fourth quarter. In our completion services segment, fourth quarter revenue totaled $481 million compared to $366 million in the third quarter, a sequential increase of approximately 31%. Completion service segment adjusted gross profit totaled $84 million compared to $46 million in the third quarter. During the fourth quarter, we deployed an average of 30 completions fleets. We exited the fourth quarter with 31 deployed fleets. In our well construction and intervention services segment, fourth quarter revenue totaled $29 million, an increase of 6% compared to $27 million in the third quarter. Adjusted gross profit totaled $3 million. Even though for the fourth quarter it was $71 million, When excluding management net adjustments of $9 million, adjusted EBITDA for the fourth quarter was $80 million. Management adjustments include $7 million in stock comp with other items totaling $2 million. Approximately $4 million of total net management adjustments were cash related. EBITDA for the full year 2021 was $91 million. When excluding management net adjustments of $23 million, adjusted EBITDA for 2021 was $114 million. This is higher than the $79 million of adjusted EBITDA we reported in 2020. Our adjusted EBITDA margin improved from 6.6% in the prior year to 8% this year, with an acceleration in the back half of 2021. Fourth quarter selling, general, and administrative expense totaled $35 million compared to $37 million in the third quarter, excluding management net adjustments of $8 million, adjusted SG&A expense total of $28 million, compared to $23 million in the prior quarter. This increase reflects the inclusion of Alamo for the full quarter, as well as additional legal fees. Turning to the balance sheet, we exited the fourth quarter with $111 million in cash, down from $136 million at the end of the third quarter. Total debt at the end of the fourth quarter was $375 million, net of debt discounts and deferred financing costs, and excluding finance lease obligations. Net debt at the end of the fourth quarter was approximately $264 million, an increase from $237 million at the end of the third quarter as we continued to deploy CapEx to convert our fleet of Tier 4 frack equipment to dual fuel and grow our power solutions business. Further, we saw headwinds from working capital during the quarter driven by continued funding of our strong growth trajectory. We exited the fourth quarter with total available liquidity of approximately $317 million, an improvement from $290 million in the prior quarter. Our liquidity was comprised of cash of $111 million, and $206 million available on our asset-based credit facility, which remains undrawn. Cash flow used by operating activity was $31 million for the quarter, where improved profitability was offset by the need to fund working capital. As we have in the past, we expect to aggressively manage our working capital during the recovery, although given the magnitude of the growth we have experienced, with further growth expected in Q1, as well as normal Q1 payments, working capital is likely to remain a headwind through Q1 of this year. Our cash used in investing activities was $7 million during the fourth quarter. In line with our fourth quarter guide, capital expenditures were $52 million, mostly driven by Tier 4 dual fuel upgrades, maintenance capex, and investments in our power solutions business. This was mostly offset by proceeds from asset sales as we continue to execute on our strategy to divest diesel-powered horsepower to international markets and, by other means, to fund our fleet transformation to natural gas-powered horsepower. This resulted in overall free cash flow use of $39 million for the fourth quarter. Now on the outlook. Post-holiday startup inefficiencies as well as supply chain challenges were evident in the frack activity early in January, while winter weather slowed or even halted operations in early February, impacting our Q1 results. In addition, our high grading efforts created some white space as we upgraded and moved fleets between basins and customers to capture better fleet-level economics. As Robert mentioned, input cost inflation continues to drive costs up, which is another dynamic that will impact our incremental margins in Q1. However, despite these headwinds, we continue to see a very healthy demand backdrop and high calendar utilization with the market now almost fully utilized. In Q1, we expect to see further evidence of the net pricing gains we have negotiated with customers entering the year and pricing increases that we continue to pursue. With mid to late quarter activity improvements, the recapture of pricing concessions through Q1, along with fleet high grading, we continue to believe we will exit the first quarter with an adjusted EBITDA per deployed fleet run rate of double digits on an annualized basis. This exit run rate plus the additional fleet deployment at the end of Q1 should demonstrate a baseline for earnings potential for next year as we move forward throughout the year. This outlook assumes total revenue will increase in the low to mid-teens on a percentage basis sequentially, which would mark our fourth quarter of market-beating top-line growth. This foundation of activity and solid revenue base gives us optionality to place our fleets with customers that value our integration and partnership model to lower costs and emissions. We currently expect first half CapEx of between $90 and $100 million, comprised of maintenance CapEx of around $2.5 million per year for FRAC and approximately $4 to $5 million in H1 for non-FRAC product and service lines. We will also continue to fund strategic investments in additional Tier 4 diesel to Tier 4 dual fuel conversions in our new power solutions business. Our base case then sees a step down in CapEx in the second half upon completion of the Tier IV dual fuel conversion program. We continue to invest in our service quality and prioritize a well-maintained fleet, and maintenance CapEx will increase year over year. But in total, we expect to spend less on CapEx in 2022 than we spent in 2021. We will prioritize free cash flow through the coming cycle We expect to generate in excess of $100 million in free cash flow in 2022, with free cash flow accelerating as we progress throughout the year. This acceleration is driven by profitability improvements, the conclusion of our dual-fuel conversion program, and its current working capital headwinds subside. Our integration of Alamo continues to go very well and is largely complete, with Alamo fully transitioned onto next year's ERP, HR, and business systems. We are constantly sharing best practices across the company, and we have already learned a significant amount from our new teammates. Alamo's management team remains in place, continue to provide our customers the high standard of service that they are used to. We remain on target to achieve $15 million in annualized costs and CapEx synergies for the second quarter of 2022. We are thrilled to have the Alamo team on board and are excited about the future of the combined company. In this tight market, operational excellence has never been more important. And our integrated service platform should give us a sustainable competitive advantage given our ability to lower costs and emissions for our customers. We are excited by the company we have built during the downturn. We sold off non-core assets and used the proceeds to almost entirely fund our strategic investments and technologies. that we believed would be in high demand once the cycle turned. From what we can see today, those investments are set to earn strong returns for several years. We now plan to go into free cash flow harvest mode. With that, I'll turn it back to Robert for closing remarks.
spk08: Thanks, Kenny. In closing, I want to leave you with a few key takeaways. First, the strengthening supply demand in U.S. onshore completion services couldn't come at a better time for next year We're finishing up our conversion program just as utilization moves past 90% for the industry as a whole. This puts us in an advantageous position to benefit from the developing cycle. Second, the recovery in commodity prices has accelerated over the past quarter, and the markets are acknowledging that the world would need more than just growth and renewables to fill growing global energy demand. U.S. Shell is in a great position to help satisfy this growth creating a strong long-term outlook for our services. And finally, our integrated service platform is elevating the role of next tier to our customers and closely aligning our goals with theirs. We're excited to showcase the value created by our integrated suite of completion products at our investor day on March the 3rd. With that, we'd now like to open up the lines for Q&A.
spk06: We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. 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 our roster. Our first question comes from Chase Mulvihill with Bank of America. Please go ahead.
spk05: Hey, good morning, everybody. Hey, good morning, Chase. Hey, good morning, Robert. I guess the first question is just kind of obviously oil prices are pretty elevated here and really nice natural gas price as well. So, you know, if commodity prices hold here, we actually think that the horizontal rig count could approach, you know, 700 horizontal rigs by the end of this year. So that's basically about 100, you know, rig increase. And, you know, that probably drives something in the range of, I don't know, call it 40 frac crews, incremental frac crew demand. So I guess if you see, you know, I guess a few questions on that. I guess number one, if you were to see, you know, 40 incremental frac crews added into the market, what would that actually mean for pricing? And then number two is, could you actually add, do you think you could add 40 frac crews into the market, you know, given the supply chain friction, tightness in frac sand, just all the things that you kind of talked about during the earnings call?
spk08: Thank you for the question, Chase. Look, I'll start in the back end of that question and say that You know, we've been trying to point out with our most recent release in January and again today and again probably on March the 3rd is that we don't believe there's that many frack fleets to be deployed. I mean, I think the fact that the drilling rig count is increasing is very good for creating well inventory that we can use to keep the white space out of our calendars, which is important to probability as much so as price. But we believe that there's about 250 fleets, say, deployed in U.S. land today, and that the amount of horsepower per fleet has been on a pretty steady increase, a little bit in tune with the way simulfrac has grown and also with just the fact that supporting these high-efficiency fleets, you're approaching 24 pumps on a typical frac job. So when you think what the total horsepower available is in the markets, You know, we kind of think it kind of maxes out at around 265 deployed fleets. You know, how you measure those fleets varies a bit. You know, John Daniels talks about it a lot. But when we say there's 235, we mean 235 fully utilized. Like a fleet that only operates two weeks in a month would only be counted as a half, for example. So when we look at it and we take it into account, you know, we're not perfect on it, but we spend a lot of time at it. Even the new builds that we see coming into market, both in the electric arena and in the tier four arena, we don't see that it can get much above 265 fleets deployed. So call it another 15 or so. So that's, you know, to your original question about the pricing, that's a very healthy pricing environment. It's also very healthy for filling your frack schedule. And, you know, when you fill your frack schedule, your efficiency can get better. So when you see us talking about repositioning our fleets around the U.S. and with customers that are focused on, you know, the same things we are around efficiency and having an inventory, I mean, I think that's the macro situation. The bottleneck for the response on U.S. land production is going to be frat fleets. Not a lot of people appreciate that yet, but that's our strong opinion.
spk05: Okay, and when you say the bottleneck, I mean, do you think that you could put, or not you, the industry could put more kind of Tier 2 traditional fleets out there if they had to? I know that the demand is obviously higher for Tier 4 DGB, and you'd prefer to have one if you had a choice, but do you think that there's the ability to kind of push outside of that, you know, 265 if you were to look and say, okay, well, let me just, I'll just take a Tier 2, you know, fleet that's on the sidelines and, you know, somebody will have to spend a little bit extra money to kind of bring it online, or do you think that 265 takes that into account?
spk08: Chase, I'm trying to say that it takes that into account, that even if we go into the depths of the remnant coal stack fleet that exists, and you've got the capex to spend as much as $20 million to activate a fleet, that we can't get no more than $265. I mean, that's a little bit, I mean, plus or minus just a little bit. That's what I really believe.
spk05: Yep, yep. All right, makes sense. One quick follow-up question is just kind of looking at one cue, and I don't know if Kenny wants to answer this, but I'm going to try. But if we look at, you know, I don't know if you want to comment on margins or incrementals. I mean, obviously you gave us a top line, you know, low to mid-teens. But when we think about all the things we can talk about with weather, supply chain, but higher pricing, and I don't know, Kenny, if you'd want to kind of comment on margin progression or incrementals, just, you know, something in – a plausible range when we look at one Q versus kind of four Q. Yeah, thank you, Chase.
spk09: So maybe let me just go back to Q1. So, you know, excluding our asset gain, adjusting even the margins were nearly 12%. So, you know, we made about a 480 basis point move from Q3 to Q4. We believe Q1 margins will be flattish. You know, we're seeing an increase in pricing. We're expecting a strong exit performance. But, you know, as Robert mentioned in his prepared remarks, January restart issues and February weather are impacting kind of the start of the quarter. But again, I want to reiterate that quarter exit. It's going to be strong. The margins will be higher. And we expect to get double-digit EBITDA for fleet. And we see margin expansion again going into Q3 and then again going into Q4. So, you know, I think that Q1 margins would have been higher except for the startup issues and the weather. But overall, we see margin expansion as we go through the year.
spk08: And Chase, I'd add one point just to say is that even though we are deploying our last fleet kind of at the end of this quarter, we think for this year, we expect to grow every quarter, except perhaps in Q4, depending on what kind of holiday impact you have. So I just wanted to emphasize the fact that that sort of supports the previous question a bit. We're going to grow via improved efficiency pricing and calendar management. post this 32nd fleet deployment.
spk05: Okay. All right. Perfect. All makes sense. Appreciate the color. War Eagle, Robert. Yes, sir.
spk06: The next question is from Ian McPherson with Piper Sandler. Please go ahead.
spk00: Hey. Thanks. Good morning, Robert. Kenny.
spk08: Good morning to you.
spk00: Robert, the bullish setup that you've described would typically imply that Customers are now beginning to scramble to lock in pricing over longer-term arrangements, and service contractors might be inclined to resist term a little bit longer. Can you speak to sort of the true or false?
spk08: Yes. Yes, Ian, you cut out just a little bit there, but I think you're asking about is it true or false around the customer's ability and want to – extend contract terms or lock-in pricing. Look, I would just say that, yes, it is a tight market, and I'm not talking just about the gas-powered portion either. We always needed the diesel market to tighten up a bit because even gas-powered fleets are anchored a bit pricing-wise to what's happening in the diesel market. So we're resisting ourselves from any kind of long-term price agreement right now because We first, I think as a sector, need to recoup the concessions made during COVID. Oil prices in the negatives for a little while. And many of us had to yield some price there. And I think that once we kind of recover that, we can kind of get on some sort of inflation indexed kind of pricing scheme. I think our customers understand that and we're moving in that direction. So I would say that the reality of the cap on frack fleets is just now sort of really becoming absorbed in the market. But it is a market that we feel pretty good about being able to do just that. We recoup pricing that occurred decline-wise during COVID. But from our customers' perspective, I still want to point out that they're still in a deflationary environment over a number of years where we've had the frack fleet or the FLAC pricing has been able to be reduced unit-wise and been offset previously by improving efficiencies. So I think it's a win-win. It's good for us and our customers, but it is a good market for deciding where and who you want to work for right now from a FLAC perspective.
spk00: Great. Loud and clear. Thanks, Robert. Another question I wanted to ask was just how it's going with your trialing on the ideal fleet and whether that's something that's being pulled forward given the surge in tightness if we might expect next year to pull the trigger on an electric new build sometime at this point this year.
spk08: Yeah, thanks, Dean. Look, we're comfortable with the whole de-risking of the technology when it comes to EFRAC in general. You know, that EFRAC pump that we've been to Field testing is a workhorse for us. We're using it now. It's beyond field testing. We've just kind of been using it. But we're not in a hurry, really, to deploy an electric fleet just for the sake of doing it. We feel like the biggest driver for it is really the fuel arbitrage that you get. And I think that our Tier 4 vehicles, conversion process is more capital efficient and delivers a large portion of that gas savings that's associated with switching from diesel to gas. So we anticipate that we will be in the, and we expect to be in the EFRAC market deployed full fleet in 2023. But in 2022, we're focused on free cash flow getting our balance sheet back to where it was pre-ALIMO acquisition. And we feel like we got arrangements with some of our customers who are in tune with that. And while we wait, the power solution for electric will be more resolved. I mean, we think that the market's kind of moving away from, you know, turbine-powered electric fleets. and moving in a direction where they would like to be on the grid, which allows, you know, to be much more capital efficient with the deployment of electric fleet. So, you know, we, you know, and in between there, there's other gen set type power solutions that we would prefer. So having said all that is that we're still moving at a measured pace. We like where we stand in the market. I think our customer partners understand that we're there for them in this arena. But the supply chain challenge is going to limit even the deployments of E-Fleets in 2022 for the whole market. I mean, some people who are ahead of it a bit have already guided, you know, where they are with it. But, you know, I think you should consider us a 2023 deploying, you know, early in 2023. That's great.
spk00: Thanks a bunch, Robert.
spk06: Yes, sir. Thanks, Ian. The next question is from Scott Gruber with Citigroup. Please go ahead.
spk04: Yes, good morning. I've just been thinking about the macro backdrop here and I'm just struggling to understand, the market's tight, it's getting tighter, crude's over 90, your customers are making a ton of money right now. Why does it take all year to get 10% net pricing? What's the kind of disconnect in terms of the economics kind of flowing down to you guys faster?
spk08: I like that question. Look, I would just say is that there's a couple things going on. You know, you've got pricing reopeners that were set previously during COVID that were, you know, at best quarterly. That's evolving now that we're kind of getting in a pass-through mode, you know, as it happens. That's one thing. and we're also fighting against an inflation trend. It's been unpredictable, you know, both on the labor side as well as on the equipment side. So, you know, as you're moving up, you have to capture that, uh, that inflation as well as, you know, whatever market, uh, net gains you're going to get. So I think that's the, you know, those are all the, the move, the moving parts around making that kind of capture. But, uh, And, you know, at the same time, I think that we could probably be more aggressive. But we have, you know, long-term relationships with our customers. We don't want to break those. And we want to do right like they do with us, you know. But those are the dynamics. And I think that, you know, that process, we get a better handle on inflation as you get it through 2022. But I think the same thing for us. We've got a huge upside in growth in 23 when it comes to just pure net pricing capture. But we've been back to numerous customers now, you know, as many as three times, you know, in the last three or four months just because of that inflation versus net pricing capture dynamic. So that gives you a little bit of color, I hope.
spk04: No, it does. I'd point out to your customers their cash margins as we look at them today are are like 65%. And as we look at the service companies, the cash margins are kind of sub-15%. So I think I'd have to look, but I think that disconnect is maybe as wide as we've ever seen. So maybe a point to make to the customer base. What's the kind of rough, kind of gross pricing increase that you're pushing through versus the second half of last year, just to give us a sense of... the underlying inflation trend that you have to pass through as well?
spk08: Yeah, look, that's probably not something I'd rather comment on from a competitive perspective. But you know what inflation looks like. I would just say is that for us, I think what we're probably pressing on our customers may be less than maybe some others when it comes to recapturing the amount of inflation because We started preparing for inflation and the rebound back in early 21. We made some strategic buys for major components. We acquired a company, you know, a little all-power logistics trucking resource that gives us, you know, we've got 1,800 trucks internal today, so we've got a little bit less inflation perhaps than the general market does. You know, we've got a facility called Next Mile where we do – maintenance in the Permian region for all of our fleets. We don't have to get mixed up with third parties doing that kind of work. And our next hub, Control Tower, is kind of getting a lot more efficiency. We need less drivers to do maybe what the normal competitive scenario looks like for moving the volumes of sand around. So I don't think our customers had to take as much of a move for us to get a net price as maybe the general market does. If that helps any.
spk04: No, it does. It does. And I appreciate all the color. Keep pushing them. Thanks.
spk06: Thanks, Scott. Again, if you have a question, please press star then 1. The next question is from Dan Cutts with Morgan Stanley. Please go ahead.
spk01: Hey, thanks. Good morning.
spk06: Good morning, Dan.
spk01: Good morning, Dan. So I just wanted to see if we could get a little bit more color on the power solutions business. You know, obviously some of the comments would kind of indicate that reception has been strong and progress has been strong there, but just wondering if you could expand a little bit on how the deployment of those assets and services has been going recently.
spk08: Yes, and look, I would point out that we're going to go into some depth on that at our investor day on the 3rd, but we are really excited about Power Solutions. You know, when we look at the balance of our free cash flow and free cash flow conversion objectives we have, the biggest balance that we have to weigh that against is the opportunities we got to invest further in this business. You know, we mentioned that we went profitable very quick, and we're in the process of evaluating, you know, a further expansion, but I would just say it's quickly becoming our second largest segment. The margins for for it very accretive to the overall company, and that we have essentially the market to put it into with our own gas-powered fleets. So our ability to double, triple, maybe approach quadruple that business and still be only operating with our own fleets is a clear path. But we're going to be measured with it and try to be real smart. The returns on this investment capital are very good. We don't want to be coming off this downturn. We're going to demonstrate that going into this year. And the opportunities for increasing it is enormous. The demand from our customers is very loud. So we're just trying to be smart about it and move as prudently as we can while sticking to our plan to be less capex in 22 versus 21 while it's still growing, you know, hugely.
spk01: Got it. Thanks for the color there. And maybe just sticking with the kind of capital allocation topic, but expanding a little bit more broadly. So appreciate that kind of a near-term priority is harvesting free cash flow and then, you know, maybe thinking beyond that. Realized you guys telegraphed the deployment of the E-PRAC fleet might be a capital priority next year, but just wanted to ask how you kind of think about shareholder returns versus organic growth investments versus inorganic growth investments, you know, as we look more to like the medium to longer term, you know, appreciating that it might be a little bit early to ask that question, but just any color there would be great.
spk08: Yeah, I can appreciate your comment. It maybe perhaps is a little bit early, but we have been beginning discussions with our board about that because we got, and it's going to be a real high class fund problem to deal with, particularly as we get into 23. But we do like to get our leverage turned below one. We aim to get that done, you know, by the end of the year. And then, you know, we kind of got a liquidity position and a leveraged position, and it's very healthy, all the way back to kind of pre-atomo acquisition. And then we'll spend more time about how we do that. I think this power solutions business is real. I don't think 23 is going to be a potential to spend as much money as people would want to, even if they wanted to convert to electric, because I think the supply chain there is still pretty tight. and it would be leaking in maybe at roughly the same pace that capacity is leaking into the general market in 2022. Kenny, would you like to provide some further color around that?
spk09: Yeah, Dan, I'd just add, you know, with the balance sheet position where we need it to be, which is our focus this year, we'll be weighing other means of allocation. Like Robert said, it's probably a little bit too early, but just know that we understand that we can't let the cycle go by without some return to our shareholders. And that's our commitment. It's just 2022, we have our priorities on free cash flow and strengthening the balance sheet.
spk01: Great. Thanks a lot. I'll turn it back. Thank you.
spk06: The next question is from Derek Podhazer with Barclays. Please go ahead.
spk02: Hey, good morning. I just want to piggyback off of Scott's question earlier. Can you expand on maybe the pricing levers or the mechanisms and the inflation pass-throughs throughout the year to drive that profitability that you're talking about? And I ask just in the context of some of the EMPs out there talking about locking in service costs in their budget. It just seems a bit contrary to each other. Just maybe hoping you can expand on that as we work through the year.
spk08: Yeah, look, I think that any comments made by anybody is a little bit specific to the companies, perhaps. You know, it depends on what your particular objectives are. You know, once you understand the supply and demand from the frack side position, I think it's premature to even consider locking in anything that's, you know, kind of long term. And when you weigh the profitability metrics around what drives profitability for a frack company, you know, calendar management, lining up with customers who have an inventory and a history of being able to deliver the supply chain around supporting a frack fleet or allowing us to do it, which is what we prefer, is a huge profit driver. And then pumping hours per day or frack stages per day, another huge lever. And then pricing. And then when you can go back, like we can in this sector, and point back for a number of years where pricing has been declining, we need to, as an industry, recoup that because the fact that I pointed out that I think frack is the bottleneck for U.S. land production response, that's a problem for our customers, I think. And part of the reason we're in that position is because the FRAC P&Ls have not been that healthy. The whole financial scenario has just not been that healthy for a number of years. So this is good for all of us, for us to be able to regain EPS. We come back to positive earnings in Q4. It's been a few quarters since that's been the case. And we expect it to continue. So I think that that's a driver for saying that locking it in may not be such a great idea. But I could also see a case where if I got a strategic customer who's excellent at efficiency and calendar management and protects the frack company's downside in the case of weather, then I might lock in price. for a period of time if the profitability road and the terms for passing through inflation existed. So I think that's kind of the dynamic. But, you know, we just feel like there's a long ways away from healing up on price.
spk02: Got it. That makes sense. Just my next question. Would you be willing to put out a target on reaching that mid-teens, even upper fleet level? Obviously one of your peers pushed that out to 2023. Just curious where you are in the path towards that. You talked about the double-digit net pricing increases year over year. Just wanted to know how that translates into the profitability metric.
spk09: So, Derek, we're going to give you guys a taste of that on our March 3rd investor day. But, look, what I would say is assuming everything goes as planned, as I mentioned earlier, you know, margin expansion on EBITDA margins and EBITDA per fleet. We see that we could see this leaking up to about 13 or even 14 million of analyzed adjusted EBITDA per fleet as we exit the year. Obviously, absent any Q4 budget exhaustion or Q4 downtime. So maybe not hitting that hurdle just yet. But again, you know, expansion upon profitability per fleet as we go through the year. Got it. Thanks, Kenny.
spk02: Look forward to next week. Thanks, guys.
spk06: Thank you. This concludes our question and answer session. I would like to turn the conference back over to Robert Drummond for any closing remarks.
spk08: So, thank you. In conclusion, I just want to thank all the next-tier employees for their continued dedication and hard work. We're very excited about our position in the market right now, and we're looking forward to this coming cycle. Thank all of you very much for participating in today's call, and we're looking forward to seeing you on March the 3rd, we hope. The conference is now concluded.
spk06: Thank you for attending today's presentation. You may now disconnect.
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