NexTier Oilfield Solutions Inc.

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.

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.

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.