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spk03: Good morning, and welcome to the Nextier Oilfield Solutions first quarter 2022 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, sir.
spk04: Thank you, Operator. Good morning, everyone, and welcome to Nextier Oilfield Solutions earnings conference call to discuss our first quarter 2022 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 statements disclaimer contained in the news release that we issued yesterday afternoon which is currently posted in the investor relations section of the company's website. Our call this morning includes statements that speak to the company's expectations, outlook, or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control, which could cause our actual results to differ materially from those expressed in or implied by these statements. We undertake no obligation to revise or update publicly any forward-looking statements, except as may be required under applicable securities laws. We refer you to next year's disclosure 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 first quarter of 2022, which is posted on our website. With that, I'll turn the call over to Robert Drummond, Chief Executive Officer of NextEar.
spk01: Thank you, Mike, and thanks, everyone, for joining the call. The first quarter in our industry saw perhaps the largest structural shift in its long-term outlook since the birth of the U.S. shale oil and gas business model more than a decade ago. The fallout from years of underinvestment was compounded by a market recovering from the unprecedented shock of COVID-related pressures. Meanwhile, the downside from public policy initiatives, unfriendly to the domestic production of oil and natural gas, was further exposed by rising geopolitical tensions in Europe, adding a layer of complexity to balancing what was already an undersupplied global commodity market. While long-term, the energy transition remains a much-discussed social goal, near-term, we believe the world will need energy expansion, including higher production of oil and natural gas in order to satisfy global demand while taming inflation. Even before Russia invaded Ukraine, US Shell's growing importance in the global energy market was apparent. Now, the need for US Shell producers to play a key role in avoiding a global energy crisis is unmistakably clear. Domestically, energy security is a growing priority. There is a renewed appreciation that energy independence is critical for American national security, and shale oil and natural gas production growth is likely the most cost-effective way to address these concerns. We believe Nextier's position as a premier U.S. land well completion service company makes us a critical supplier for the producers. For Nextier, these structural shifts have helped to advance our strategy and our financial performance, while considerably strengthening our outlook since our previous update. We are confident we have the right strategy at the right time to fully capitalize on the improving backdrop. Next tier has the largest market share in the Permian Basin as measured by active fleets. Our integrated service model has proven that we can increase the efficiency of our operations, which is highly valued by our customers in the current capacity-constrained environment. Additionally, we're the largest supplier of natural gas-powered frac equipment in U.S. land. which at current commodity prices offers a significant fuel cost savings versus conventional diesel-powered equipment while also lowering emissions. Additionally, our own recovery has helped the economic recovery from COVID. At Next here today, we have nearly 4,000 high-quality employees. We're just a small part of the larger oil and gas industry in the U.S. where the sector provides a significant number of well-paying jobs supporting the economy. In short, we believe a healthy domestic oil and natural gas industry is critical to the American economy and our national security. Nextier is well-positioned to help our customers achieve their goals in this most capital-efficient and sustainable manner. Now to our first quarter results. Our results for the quarter clearly demonstrate that the momentum we experienced late in 2021 has accelerated further, even when considering seasonal factors and winter weather. For the fourth consecutive quarter, our revenue growth significantly outplaced the overall market. Customer demand was strong throughout the quarter, and our operations and support teams did an outstanding job answering the call. Our growth mostly resulted from price recovery initiatives, further integration efforts, and the previously discussed deployment of one additional fleet compared to Q4. As planned, these efforts culminated in a very strong exit to the quarter, and I'm very pleased with the trajectory and base of activity that Nextier has achieved. We operated on average of 33 frac fleets during the quarter. The additional fleet count relative to our Q1 guidance was the result of a reconfiguration of already deployed horsepower between Simulfrac and Zipperfrac fleets. And as planned, we activated another Tier 4 dual fuel fleet towards the end of the quarter, exiting the first quarter with 34 deployed fleets. Total revenue grew 25% sequentially to $635 million. Revenue growth outpaced our initial expectations as we were able to execute on our strategy of expansion of integration. And in March, our team delivered the best operational performance on record. We had minimal sand-related downtime on fleets where we provided commodities, further evidence of the technology strength of the next-year integrated services model supported by our Next Hub Digital Operations Center. We once again saw growth across our entire portfolio. Adjusted EBITDA was $83 million for the quarter. As expected, we exited the quarter with momentum, easily reaching our goal for double-digit annualized adjusted EBITDA per fleet deployed during the month of March. Importantly, for the second consecutive quarter, Next Year reported positive net income, Our first quarter performance marked another step in the right direction as we look to grow our economic returns over time with a dedication to consistently generate returns above our cost of capital. And while we're pleased with our Q1 performance, we are more excited about the accelerating momentum and its expected impact on our outlook. We started to see tangible benefits from our initiative to recover COVID-related pricing concessions in Q1. Net pricing recovery accelerated as the quarter progressed, with customers increasingly recognizing that FRAC fleets are in short supply. We now have increasing conviction that average net pricing will rise by as much as 15% by the end of 2022 relative to the 2021 exit. Importantly, the pricing recovery in line with the underlying commodity pricing is accelerating relative to previous expectations. Pricing recovery for well completion services continue to be a function of a very tight supply-demand balance for frac equipment with utilization over 90% today. And this view has become more accepted as 2022 has progressed. and it is now widely believed that essentially all of the remaining idle equipment is in need of significant capital investment in order to be recommissioned, while new builds expected to come into the market this year are insufficient to meet rising frack demand. And in many cases, the new builds are being used to upgrade currently utilized conventional frack equipment. Beyond capital disciplines, supply chain bottlenecks are impacting the industry's ability to even maintain existing equipment. Adding incremental capacity could further complicate an already tight maintenance supply chain. The leading-edge pricing premium for our fleet of natural gas-powered FREC equipment has widened relative to conventional diesel fleets, even as pricing on both tiers have risen. We believe the cost The fuel and frack fleet with diesel has risen significantly relative to 2021, as diesel prices have followed crude prices higher. But we believe the fuel cost inflation of our Tier 4 dual fuel fleets has risen only half as much as a conventional diesel fleet, even as natural gas prices have risen. At current commodity prices, by displacing diesel with natural gas as the primary fuel source, We believe we can lower fuel costs on each fleet by more than $10 million per year while also lowering emissions. Our power solutions business can supercharge the fuel cost arbitrage for our customers by displacing more diesel relative to other options in addition to offering proprietary field gas treatment technology that we believe enables the lowest overall fuel cost option in the market. Our power solution service is in high demand, and we expect to nearly triple the size of this business in 2022. In summary, we believe our counter-cyclical investments in natural gas powered equipment are in a very good position and are already generating free cash flow and strong returns early in this cycle. And while the macro backdrop for U.S. land frac services is stronger than it's been in years, Each cycle carries unique challenges, and this cycle is no different. High utilization, a constrained supply chain, and a tight labor market are challenging the production outlook for our customers, raising the premium placed on efficient and sustainable operations. As we demonstrated during our Virtual Investor Day in early March, next year is an integration machine. We've proven to our customers that our integrated suite of services can help improve the efficiency of the entire well completion operation. For those that have not had the opportunity to see our investor day, a full replay is available on our website. In March, we achieved a company record for pump hours per fleet, including record performance by an integrated fleet. There is a growing list of tangible examples that we can show our customers that prove that our integrated suite of services can help improve their capital efficiency in a constrained environment. Integrating more of the completion well site is also a win for next year's investors. The seamless communication between our integrated suite of services is supported by our Next Hub Digital Center. Next Hub is the type of technology that we believe differentiates Nextier from our peers. The value of the efficiency gains from our integrated package grows considerably during times of tight frac supply. We continue to believe that frac is one of the primary bottlenecks as the U.S. shell industry strives to grow production. Our Next Hub Digital Center uses technology to give our fleets a competitive edge by raising the performance of our assets. Next Hub also gives us the ability to prove that the integrated platform is more efficient by allowing our customers to visualize real-time data, helping us in our strategy to integrate more of the completion services. We've been able to partner with like-minded customers that allow Next Hub to deploy multiple service lines and can benefit from sustainable, highly efficient operations. We're excited with the momentum we carried exiting Q1. and customer demand remains very robust. We were free cash flow positive in Q1, which was ahead of our plan. We enter our seasonally strong period in a great position. Our integrated operating model is adding to our success. Consistent with what we said previously, we deployed another converted Tier 4 dual fuel fleet at the end of Q1, our 34th deployed fleet. While our fleet count is higher than what we had previously said, we have done this by improving our own efficiency while also reallocating horsepower from simulfrac operations. We do not have plans to deploy any additional horsepower into the market at this time. Demand and pricing continue to improve, and the conversations we're having with our customers validate our belief that frac fleets are difficult to find. At this time, We believe we can better serve both our customers and our investors by looking for ways to improve our own efficiency versus adding additional older diesel equipment back into the market. While pricing has started to recover from pandemic lows, net frac service pricing remains considerably below pre-COVID levels. We believe restoring pricing from pandemic-related concessions would result in probabilities significantly above pre-COVID levels and generate returns above our cost of capital. This is the impact of our technology advancements and corresponding cost initiatives. Cost inflation continues to be a major challenge for our operations team, but we are working with our customers to pass through inflation, and the latest generation of agreements largely give us the ability to pass through this inflation as it occurs. Given the current backdrop that we see for the rest of 2022, coupled with the acceleration in our strategy and pricing, we expect to exceed the high end of the previously announced adjusted EBITDA range of $330 to $360 million that we provided at our investor day. Still, it's too soon to measure the magnitude of this year's Q4 holiday slowdown and potential customer budget exhaustion. And next year, Our investments in natural gas powered equipment are generating leading edge pricing that has likely risen to a level that will allow our return on invested capital to exceed our cost of capital. And this is a critical step towards repairing investor trust in our industry and the creation of economic value necessary for a healthy oil field services industry over the long term. Nevertheless, even as our returns improve, Sustainable free cash flow remains our top priority. The coming cycle for next year will be more about margins and returns versus prior cycles that focused on new builds and capacity additions. We continue to see upside potential to our profitability even without deploying any additional growth capital beyond what we're planning in the first half of this year. Our first half CapEx guidance is unchanged at $90 to $100 million. Our Tier IV dual-fuel conversion program should largely be completed by the first half of this year, delivering incremental margin accretion at leading-edge prices. We will continue to invest in our power solutions business, nearly tripling the size of this business by the end of the year, given the strong returns that we're seeing. We remain committed to service quality and will continue to invest in our existing fleet to ensure we can maintain elevated service performance for 2022 and beyond. The combination of rising cash flow from our operations and lower second half CapEx should result in accelerating free cash flow as the year progresses. We now believe that we're in position to generate free cash flow in excess of $150 million in 2022. For 2022, we continue to plan to use this free cash flow to bolster our liquidity and reduce net leverage. We will remain flexible with our capital allocation strategy thereafter with a priority towards building and maintaining a strong balance sheet that will afford us significant optionality through the cycle and give us opportunities to invest in the highest return projects. We continue to be excited by what we see in the market, We believe we have the right strategy at the right time, and we're highly focused on execution. I'm now going to pass the call to Kenny to discuss our first quarter results.
spk02: Thanks, Robert. First quarter revenue totaled $635 million compared to $510 million in the fourth quarter. The sequential revenue increase of 25% was a result of higher net and gross pricing and higher product sales relative to Q4. while we also deployed additional capacity in line with previous guidance. Our revenues significantly outpaced the market for the fourth consecutive quarter. Revenue improved in both our completions and well construction and intervention services segments. Total first quarter adjusted EBITDA was $83 million. This adjusted EBITDA result compares to $80 million in Q4. Recall, however, Q4 adjusted EBITDA included $21 million in gains on the sale of assets versus just $1 million in the current quarter. The improvement in the profitability of our core business can be attributed to the following. First, the net pricing initiatives we put in place this year started to show up in our operating results. Second, we continue to see the benefit of fixed cost absorption as a result of strong growth, particularly late in Q1 as we move further from holiday startup disruptions supply chain related challenges, and winter weather. And finally, our drive to integrate more services around our frac fleets is positively impacting our results. In our completion services segment, first quarter revenue totaled $603 million compared to $481 million in the fourth quarter, a sequential increase of approximately 25%. Completion services segment adjusted gross profit totaled $106 million compared to $84 million in the fourth quarter. During the first quarter, we deployed an average 33 completions fleets. We exited the first quarter with 34 deployed fleets. In our well construction and intervention services segment, first quarter revenue totaled $32 million, an increase of 13% compared to $29 million in the fourth quarter. Adjusted gross profit totaled $4 million. EBITDA for the first quarter was $71 million. When excluding management net adjustments of $12 million, adjusted EBITDA for the first quarter was $83 million. Management adjustments include $8 million in stock comp, with other items totaling a net of $4 million. In the quarter, we had two non-recurring adjustments that were material. First, with the improved market backdrop and enhanced financial performance of Alamo, we increased the reserve for the remainder of the 2022 earn out by approximately $9 million. Substantially offsetting the increase in the earn out reserve was the monetization and gain on an equity investment that we acquired during the depths of COVID. Approximately $9 million of total net management adjustments were cash related. First quarter selling, general, and administrative expense totaled $36 million compared to $35 million in the fourth quarter. Excluding management net adjustments of $8 million, adjusted SG&A expense totaled $27 million compared to $28 million in the prior quarter. Turning to the balance sheet, we exited the first quarter with $100 million in cash down from $111 million at the end of the fourth quarter. We exited the first quarter with total available liquidity of approximately $349 million, an improvement from $316 million in the prior quarter. All liquidity was comprised of cash of $100 million and $249 million available on our asset-based credit facility, which remains undrawn. We were free cash flow positive in Q1 and expect to have accelerating free cash flow throughout the remainder of the year, and we have no near-term debt maturities. Total debt at the end of the first quarter was $372 million, net of debt discounts and deferred financing costs and excluding finance lease obligations. Net debt at the end of the first quarter was approximately $272 million, an increase from $264 million at the end of the fourth quarter. Cash flow from operating activity was $29 million for the quarter, where improved profitability was partially offset by the need to fund working capital. Working capital continued to be a headwind during the quarter, and we used $39 million in cash, a function of strong top line growth, which accelerated late in the quarter, as well as the funding of normal seasonal Q1 payments. We anticipate these working capital headwinds will slow in Q2. Our cash used in investing activities was $27 million during the first quarter, mostly driven by Tier IV dual-fuel upgrades maintenance capex, and investments in our power solutions business. This resulted in overall positive free cash flow of $2 million for the first quarter. Now on the outlook. We are pleased with the trajectory of the strong Q1 exit, which carries over into Q2. We successfully worked through the industry restart and early quarter supply chain constraints. In addition, we created some Q1 calendar white space as we upgraded and moved fleets between basins and customers to capture better fleet-level economics. In Q2, we will see less impact from these transitory issues. With our continued efforts on integration and quarterly pricing resets on our agreements, we expect to be able to achieve annualized adjusted EBITDA per fleet deployed of at least $15 million in Q2. We assume an average of 34 deployed fleets. in Q2. This outlook assumes total revenue will increase at least 20% sequentially, which would mark our fifth straight quarter of market-beating top-line growth, coupled with significant margin expansion, resulting in expected Q2 adjusted EBITDA of at least $130 million. We will continue to use our solid market position in our integrated service model to partner with customers that align with similar goals to improve efficiency. We continue to anticipate first half capex of between $90 and $100 million, comprised of maintenance capex of $2.5 million per fleet per year for frac, and approximately $4 to $5 million in total NH1 for non-frac product and service lines. This first half capex will fund the conclusion of our strategic investments to convert our Tier IV diesel fleet to Tier IV dual fuel. It will also fund the completion of the next phase of our power solutions business, doubling our capacity by the end of Q2. As Robert mentioned earlier, we will nearly triple the size of this business by year end relative to current levels. We continue to anticipate our CapEx will then step down in the second half. Although maintenance costs are rising in FRAC, just as they are in the broader economy, service quality and equipment sustainability remains a top priority and we will continue to invest to ensure we are operating a well-maintained fleet, and total maintenance capex for 2022 will increase year over year. Free cash flow remains a priority through the coming cycle, and we now expect to generate in excess of $150 million in free cash flow in 2022, with free cash flow accelerating as we progress through the year. This acceleration is driven by profitability improvements, the conclusion of our dual-fuel conversion program, and as current working capital headwinds subside. Operational sustainability and efficiency has risen to the top of our customers' priority list, particularly at current commodity prices and as frac availability tightens. We continue to demonstrate the value of a partnership with NextYear to our customers. Given the tight supply and demand dynamics, as well as the elevated commodity prices, we believe our partnership has never been more important than it is today. We are excited with our positioning at the start of what appears to be a multi-year recovery in U.S. land oil fuel services. And I'll turn it back to Robert for closing remarks.
spk01: Thanks, Kenny. I want to close with a few key takeaways. We see U.S. shale oil and natural gas growing in importance with respect to global supply over the next several years. Geopolitical risk and domestic energy security, with public policy focusing on energy expansion and not just energy transition, should help make U.S. shale a cyclical winner. As one of the top three completion companies in U.S. land and the largest completion company by deployed fleet count in the Permian, We are very well positioned to play a key role in this new global reality. Second, our integrated service platform is offering our customers a differentiated solution to help improve their own capital efficiency. Considering the tightness in supply chains, labor, and equipment, it has never been more important to demonstrate operational excellence. And at NextTier, we believe our model does just that. We've doubled our revenue over the past year at legacy next year alone and nearly tripled our revenue, including the Alamo acquisition. We laid out the strategy in our March investor day, which can be viewed on demand from our website. And finally, we continue to see substantial free cash flow through the cycle. While we see returns improving to a level above our cost of capital, We fully expect to continue to generate substantial free cash flow over the next several years. We intend to responsibly balance returns and free cash flow while maintaining a strong balance sheet. With that, we'd now like to open up the lines for Q&A. Thank you.
spk03: We will now begin the question and answer session. To ask a question, you may press star then one 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 two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Steven Gengaro with Stiefel. Please go ahead.
spk00: Thanks, and good morning, everybody. Good morning. Two things for me. The first is when we just think about the profitability per fleet, one of the things you highlighted in your analyst day was sort of the benefits of the integration of power solutions and wireline, et cetera. And I think you mentioned in the analyst day that that could add over time about $5 million to of incremental EBITDA per fleet through those offerings. Last mile logistics, I think, is included in that. How should we think about how much of that has been materializing in the first half of this year relative to just activity and pricing as we think about your progression of profitability per fleet?
spk01: Yeah, I appreciate that question, Stephen. Look, I would say that in that call, we said it could be as much as $7 million per fleet. And if you noted in some of our comments, we said we've been moving fleets around the US a bit and around from customer to customer over the last quarter or so. And part of that dynamic there is that we're looking for opportunities where we can use the full integrated solution that we have, including power solutions, wireline, and providing last mile logistics and sand around the frack operation. So I'd say that we're moving up that curve nicely. as time passes, but it's going to be a constant moving target, I think. You know, we focus primarily first on keeping the frack fleet sufficient, and we have some customers who supply their own sand logistics, and sand, for example, do a really good job of it, and we don't want to mess with that necessarily. But in other cases where we see we can do more for both of us by having the full integrated package, those customers are becoming more prevalent all the time. And, you know, one of the things holding us back a little bit on getting to that $7 million is that the capacity constraints that we have in power solutions. We mentioned that we're going to triple the business before the end of the year and double it by the end of Q2. That's happening now. So as we roll out capacity for power solutions, they go straight to one of our dual-fuel fleets and add a big part of that component. And obviously... The wireline and last mile logistics aspects of it, we're on a day-to-day process of growing that.
spk00: Great. Thank you. That's helpful, Collar. And as we think about just the pricing conversations you're having with customers, I think in light of sort of obviously very tight industry dynamics, you mentioned, I think, a quarterly reset on pricing or quarterly discussions. Is that across the fleet, or how does that process work as far as how we should think about you know, the timing of some of the assets in the field getting repriced?
spk01: Yeah, when you think about coming out of the depths of the COVID downturn, one of the first things that, you know, we addressed was kind of terms and conditions around our contracts, not just the price. Some of the things that had leaked out over time during the period of time when capacity was unbalanced between supply and demand. And I think that that enabled us to put those terms in place so that we didn't have to guess at what was going to happen in the market or with what was going to happen with inflation. So our customers, it benefits both of us. And I would say a large majority, I mean, a significantly large majority of our contracts are that way. And I think it really behooves us, both customer and service company, for it to be that way. Okay, great. Thank you.
spk03: Excuse me, the next question is from Arun Jeram with JP Morgan. Please go ahead.
spk07: Yeah, good morning. I wanted to get a little bit more details on the deployed fleet. You did 30 in the fourth quarter, 33 in one queue, and you mentioned how the fleet count was increased You added a Tier 4 dual-fuel fleet, as well as the reconfiguration of your horsepower between sum of fracking and zipper fracking. Can you give us a little bit more details there? I'd love to get a number on kind of the average amount of horsepower you have per fleet in the field.
spk01: Yeah, I'm going to ask Kenny to take that. But first, I wanted to say, if you remember our investor day, we talked about the fleet horsepower ratio. had gone up a lot over the last number of quarters, as much as 56,000 horsepower per fleet. And then we pointed out in this call that we had reconfigured our fleet a little bit, maybe a little bit less dedicated to simulfracking. We were able to put additional fleets in the market. So I think that that's a dynamic that we will constantly be balancing as we look at profitability per horsepower, not necessarily just per fleet. So that makes us and our customers become more efficient. Kenny, would you add a little color to that, please?
spk02: Yeah, good morning. So if you remember in Q2 and H2 of last year, we formed a pretty sizable number of fleets and increased our simulfrac activity. So what you're seeing now in Q1 is just a reconfiguration of going from some simulfrac fleets down to zipper, and then we also had some efficiencies in our maintenance process. And as Robert mentioned earlier, You know, you might see more or less fleets from us just depending on how we go through simulfrac or how we go through zipper operations.
spk01: And to the last part of your question, we're pretty much fully deployed now, and anything that we really have that is in need of recommissioning, we're using it a lot to support our fleet, which is working very hard, as we pointed out in March, where we had kind of efficiency and hourly records for our company.
spk07: Great, great. Robert, I'd love to hear a little bit about kind of the efficiency trends that you're seeing. Any broader thoughts on how pumping hours per fleet has trended? I know you guys had a good month in March. Maybe earlier in the quarter, the industry faced some sand logistics. But if we think about a fleet operating called, you know, a good fleet, maybe 360 pumping hours per month. I just wanted to give us a sense of how you see efficiency trending. And obviously I assume that is part of the improvement in the profitability. You're thinking about an annualized number of EBITDA per fleet called pushing 15 million in two Q versus 10 in one Q.
spk01: Yeah, you're right about this being a very key metric for how you run the frag beds or how we do. Both our divisions have been extremely focused on making that happen, and the upper end of the performance of our fleets is knocking it out of the park. I mean, we've got a couple of fleet records that happened way north of 500 hours in a month. But to make the whole thing work, you've got to have your whole portfolio, And it's not just about how efficient you are at the location, which is a focus every day that the crews work towards, but it's also about your scheduling and how fast you move and does the customer have a full portfolio of ducks to go and frack into. So all of those things about how you schedule and then what is your workflow at the well site, Are you integrated so every part of the completion services are all aligned to do exactly the same thing, which is a big deal for us, we think. So I would say that, you know, the upside from where we are today is not improving necessarily on the best performing fleets. It's getting your whole portfolio performing at that level. And then the other thing is just getting your schedule coordinated properly. And we're doing a lot of that now. There's a lot more demand than there is supply out there today. If a customer doesn't have a large number of pads ready to go, he's looking for somebody to be able to pop in and do a single pad. That's difficult for a frack company to do and keep a schedule without white space. So we're balancing all those things to drive efficiency up. But there's a bit more to be done in frack, but it's not giant amounts.
spk07: Great. Loved your quote in the Wall Street Journal. Thanks a lot. Bye. Thank you.
spk03: The next question is from Derek Podhazer with Barclays. Please go ahead.
spk05: Hey, good morning, guys. Good morning. So you talked about the net pricing increase 15% to 2021 to 2022. Getting back to the analyst, I want to take that 7.5 million number for our 10% of net pricing increase that you laid out. Assuming we exited last year on that $9 million, it implies reaching the $20 million to leave it up our fleet by the end of this year. I just wanted your thoughts around that, Matt, and does that sound fair to you guys?
spk02: Hey, good morning. So, look, I would just say we built the company and converted the fleet to be able to generate better fleet-level economics and overall better returns. And you're starting to see that show up in our results. And, you know, if you try to – look at leading edge fleets or you try to look at kind of a mid-cycle comparison, which I think is what you're alluding to. You know, the fact is, comparatively, we have a different fleet now. And we tried to show that in our investor day. And we've made investments in that fleet that should generate better fleet-level economics. So what we're thinking is, you know, if you look at a mid-cycle return or even if you look at it on a per-fleet basis or on a margin basis, that we're going to surpass, you know, the life cycle that we went through because of those things. You know, we have a much enhanced fleet. We have improved integration. And we're also creating value with fuel savings in our dual-fuel arbitrage.
spk05: Yeah, okay, that makes sense. Going back to how you were able to unlock two fleets with reconfiguring your silo frac to zipper frac, can you maybe talk about that in the context of the market as a whole? What do you see out there for other companies peers to potentially do that, to unlock certain fleets that are currently already deployed or anything that is warm stack. Just would love to get your high-level thoughts on where the current fleet count is, how many do you expect to be added, just to assuage some investors' concerns around capacity entering the market, because it seems like anything that comes in is going to be absorbed rather quickly. So just love some color on that.
spk01: Yeah, I think that's a good question. And what I would say is that You know, we were a little bit on the leading edge, I think, size-wise of adapting simulfrac in the beginning. And the numbers that we were showing on average was our, you know, in our investor day, it was 56,000 per frac fleet, was to make a point that every fleet's pretty different. A simulfrac fleet can be double an old fleet and down to 1.5 on average or something like that. But also during the downturn, Many of our competitors, and us in some cases, deployed more horsepower on location than we had to do the job. And the reason you would do that during a downturn is it could help you to spend less cash during that part of the operating cycle. But it's not what you want to do to maximize profitability. So as we get back to designing the jobs fit for purpose for the actual frack design, we then it frees up horsepower. And I think that's probably happening across the market. I'm almost sure that that's the case. And I think that that will create a little bit more capacity, but, I mean, fleet count. But we took that into account when we made our projections that we think that the maximum that could be put in the market before the end of this year and maybe even well into next year is about 265 fleets from a measurement of something like mid-250s right now. So there's not much more capacity. I don't think it'll happen no matter what. And when you think about the supply chain challenges that are going on, if someone were trying to order a new fleet, it could be done. It's going to take a bit of time. But the supply chain is struggling just to supply maintenance CapEx needs. And I would say that if you get a new fleet and put it in the market, somebody's going to be suffering from being able to keep their fleet running at the current level. So I think that's the reason we've been so adamant about saying that 2022 is already sort of baked and a lot of 2023 as well when it comes to supply and demand and frack. I hope that was sort of the question.
spk05: No, I appreciate the color. Thank you.
spk01: Thank you, Derek.
spk03: Again, if you have a question, please press star then one. The next question is from Dan Cutts with Morgan Stanley. Please go ahead.
spk06: Hey, thanks. Good morning. So I just wanted to ask, given you guys kind of broad footprint across the country and, you know, kind of all the major basins, just wondering if you're seeing any kind of notable shifts in activity trends, or are you seeing, you know, kind of outside strength in the gas basins in addition to the Permian? Just wondering if you could highlight any trends that you're seeing there, and I guess also if you've been shifting any of your assets in response to any... That's a good question.
spk01: Look, I would just say looking backwards into last quarter, I would say we went through a well-publicized challenge in the sand market. And in the middle of the Permian, I think some of our competitors had gotten to the point where they couldn't necessarily keep sand on all of their fleets and moved them preferentially out of the Permian to other basins where the sand situation was more in balance. That created some turmoil in the first part of Q1. And I think that a lot of people, a lot of competitors in the macro of frack are, like we are, looking to place their fleets where the fleet economics are the best. And that means moving around basins pretty dynamically. And I'd say up to 20% of our fleet has been mobile like that during Q1. One of the reasons that we like Q2 being strong is because most of that we've already kind of established for the next bit of run rate. So I think that that dynamic continues, but when you look at gas, and gas prices obviously are very, very good right now, but this goes back to some of the things we were talking about in the front end around regulatory environment where the Marcellus is kind of fixed to the point where its takeaway is not going up that fast, and it kind of limits the amount of activity that operators need to do to keep their ability to get the gas out of the basin. But yes, the dynamics vary widely, and I'd say that that will probably continue, and that it's not just the Permian, although the Permian is a great spot and we love it. It's that there's other basins in the U.S. now coming alive as oil price outlook gets good, and to break even in some of those basins that don't compete perfectly with a Permian can still do very well for their company. So, yes, it's a dynamic scenario.
spk06: Understood. That's helpful. And then I guess, so, you know, Robert and Kenny, you guys have been consistent in saying that prioritizing balance sheet strength is a big capital allocation priority, you know, so that through cycle, you guys are solid on that front. But I, you know, On that notion, it seems like things are really tight. It seems like 2022 is shaping up to be a great year, but what are your biggest concerns in terms of what could be a risk to the strong momentum that we're seeing in confusions markets?
spk01: Well, I think, for me, the only risk I could see in the short term would be on the demand side for the product globally. supply and demand, you know, almost every model, even taking, you know, pretty negative assumptions imply that we don't have enough global supply to deal with the most likely demand scenarios. And that's the reason we've got $100 oil plus. And it's even with releasing all the SPR and everything else you can do. It's just, that's the way it is. But outside of that, I don't think there's a chance for us to oversupply the market on the frack side because of supply chain issues and the commitment that we mostly all have related to being capital disciplined, just like the operators have demonstrated for the last year or so. So for us, I would just say that we took a little bit of risk and invested aggressively during the downturn, counter-cyclically, and set ourselves up to be in a harvest mode early in the cycle, which is what is materializing, and that once our return on capital gets substantially above kind of our cost of capital, and we get our net debt, you know, sub-zero, then we're going to be in a position to invest in internal projects that have a creative ROI. And Power Solutions is right at the top of that list. But also, so is EFRAC for the future. And I would say that, you know, we have been slow on or measured on our EFRAC investment because it's evolving. Technically, it's evolving. And financially, around the power, electrical power for the EFRACs is evolving. And the returns on tier four dual fuel, which is the same drivers that are driven by EFRAC adoption, that you get a fuel savings around natural gas and you get lower emissions, you get the lion's share of that with Tier 4 dual fuel with much better return profile when you're converting equipment that you already had in the market. So the bottom line for us, that's kind of the walk of the way we think how we're going to deal with the flush cash flow that we got coming over the next couple years. And I think that it's a really good spot to be in.
spk06: Great. That's all really helpful. Thanks a lot, guys. I'll turn it back. Thank you.
spk03: Ladies and gentlemen, we have reached the end of the question and answer session. I would like to turn the call back to Mr. Robert Drummond for closing remarks.
spk01: Hey, thank you, Gary. And looking at the conclusion, I just want to thank the Next Tier team for their commitment to excellence. We're very excited about the company we've built right now, and I'm very proud to lead this team into the coming cycle. We very much appreciate all of you participating in our call today and your interest in next year. Thank you. The conference is now concluded. Thank you for attending today's presentation.
spk03: You may now disconnect.
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