NexTier Oilfield Solutions Inc.

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.

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.

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.