NexTier Oilfield Solutions Inc.

Good morning and welcome to the next year Oilfield Solutions fourth 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 introduction, I would like to turn the call over to Mike Sabella, Vice President of Investor Relations for NextTier. Please go ahead.

Thank you, Operator. Good morning, and welcome to the NextTier Oilfield Solutions Earnings Conference call to discuss our fourth 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 they may be required under applicable securities laws. We refer you to next year's disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission 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 2022, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NextYear.

Robert Drummond Thank you, Mike, and thanks to everyone for joining the call today. 2022 was a strong year for NextYear. While we will not rest on our past successes, I do want to take a moment to reflect. We started 2022 by asserting our view that the frack market was tight and that frack equipment would become harder to find, a view that was far from the consensus at the time. Indeed, frack quickly emerged as one of the main bottlenecks in the U.S. shale oil and gas market. Against this macro backdrop with strong demand and limited supply for our services, Our pricing outlook improved considerably as the year progressed. Importantly, we were able to deliver strong results for our investors while also delivering best-in-class service for our customers. To all our hardworking employees and their families that made last year possible, thank you for contributing to the success of our company. I could not be prouder of what we accomplished together. At NextYear, we are committed to sharing in the success and investing in our people as we strive to make this a destination for the hardworking men and women of our industry who are looking to build a long and prosperous career. During 2022, our success extended beyond just the core frack operation to each of our service lines with profitable growth in wireline, cement, power solutions, and last-mile logistics. But despite the progress we made last year, our business still has not returned to pre-COVID net pricing, and we are still looking to recoup prior investments we made to improve efficiency. Our prior investments must be combined with supportive fundamentals if our industry can be expected to drive the next leg of process improvement and fully reflect the value we can create for our customers. On the macro front, we believe the cycle has only just begun with a setup in 2023 that is as good as what we saw in 2022. We believe demand for frack fleets today exceeds supply by 20 to 25 fleets with as much as 10% of horsepower demand going unmet, which has allowed us to raise price this year already. We also have customers that are inquiring about 2024 work now. But fully satisfying demand of our customers has its challenges. Our supply chain remains stretched with a backlog for parts that is substantially higher than normal. We've seen little progress so far in correcting the situation, but while some argue that current economics will stall attrition, the reality is that supply chain challenges, capital discipline, and inflation are more likely to cause attrition to accelerate and new builds to delay further. In fact, delivery of our own electric fleet has been delayed in the Q2. At next year alone, we plan to decommission roughly 150,000 horsepower over the next 18 months, meaning within our capital budget framework of 8% to 9% of revenue, our capacity will remain relatively flat this year. We will continue to allocate capital to the highest return investment. And as we show on slide 11 of our updated investor presentation, investing in these older assets no longer meets our hurdle rate. It makes more sense for us to invest in new equipment than to continue to deploy capital into these older obsolete assets. We do not believe we are alone in this attrition narrative. Even with the new bills, we see a challenge path to increasing industry frack capacity, which should lengthen the cycle and solidify another round of price increases. At the same time, and as we show on slide 12, a bifurcated industry fleet with a steep equipment cost curve is allowing our natural gas-fueled assets to earn a premium return. These differentiated returns, supported by the fuel cost arbitrage, should last several years as the industry fully transitions to next generation equipment, a process that will likely take over seven years at the current new build cadence, with more than half of industry capacity still legacy diesel fleets. The demand side is supported by what we see as an underinvested oil and gas market that needs to increase production to avert a global energy supply crisis. U.S. shale's role will no doubt be critical in balancing global commodity markets, but our customers are restricted by their own capital discipline, as well as the availability of equipment like frac. We do not believe shale is prepared to quickly answer the global call, which should lengthen the demand cycle for our services as the world searches for more oil and gas. For our next tier, We believe we're on a path to additional profitability in 2023 and beyond. We entered this year still roughly 10% below pre-COVID net pricing for our frac services, and we will look to recapture that throughout the coming year, some of which we've already realized. We also see opportunities to grow our well site integration offerings and invest in high return projects that support efficiency in our core frac operations. Even as the strong macro environment plays out, we will continue to lead our industry in disciplined behavior and use our returns to reward our shareholders. We've established a track record of delivering strong free cash flow, high return on investment, and capital efficient growth. We will continue to focus on maximizing returns on capital and returning capital to shareholders. We believe this will be the winning strategy for our company and our investors. While our industry fundamentals remain strong, we would be remiss to ignore the growing dialogue around weakness in the near-term natural gas fundamentals. For next year, our largest natural gas exposure remains in the Marcellus. Takeaway capacity has constrained activity in that basin for some time now, and activity there has been relatively steady over the past couple of years compared to other gas basins. Coupled with the lower break-even well economics, we expect Marcellus activity to remain relatively steady despite the drop in natural gas prices. Because of this, we think that Haynesville will take the brunt of any activity decline. History suggests worst case is perhaps a 50% decline in Haynesville activity which would imply as many as 14 frac fleets could be released from that basin, a scenario that would result in a significant decline in basin production. But we want to be crystal clear. We fully believe the fundamental undersupplied nature of the frac market in the oil basins could easily absorb these fleets. Even in this scenario, when taking into consideration current unmet demand, modest demand growth in oil basins, and the planned frack fleet additions, we believe total utilization is likely to remain balanced. Even a small amount of attrition would keep the industry fully sold out through 2023, and we believe attrition is inevitable, as evidenced by our own actions. Our macro view has always taken a more conservative view on near-term recount additions due to our understanding that frack fleets are the bottleneck to production growth. So while we are watching the natural gas fundamentals just like everyone else, we view the potential disruption as a relatively minor threat, given our view that the overall U.S. land frack market is still undersupplied and likely will be throughout 2023. It is important to note that we only have a small exposure to the Haynesville with just two fleets operating in that basin today. Additionally, we're not hearing any commentary from our natural gas customers about slowing the pace of completions. Further, low gas prices increase the cost advantage of our natural gas fuel fleets, which could solidify demand for those premium assets and raise the value of our power solutions business. Nevertheless, even as we see the cycle continuing, we are nimble, and can respond quickly to unforeseen changes. We have a sticky customer relationships and we will always prioritize a strong balance sheet with substantial liquidity. Now to our results. We saw improved profitability and returns sequentially, even in a counter seasonal period. Net income of $133 million improved 27% from the prior quarter and was 15% of revenue. Our net income per diluted share was 52 cents. Total revenue of $871 million was down 3% sequentially, but was 71% higher than the same quarter last year. Our adjusted EBITDA was $213 million, was up 9% from Q3. We effectively managed our decremental margins on a sequential basis and we managed to shift to higher margin work with better returns. We also continued to generate very strong free cash flow, generating $93 million in Q4, even as we funded an Alamo earn-out payment. During Q4, we repurchased 11.5 million shares for $113 million under our $250 million shareholder return program, funded entirely with free cash flow and cash on hand. For the full year 2022, we more than doubled our revenue, with adjusted EBITDA nearly six times greater. Most importantly, we achieved this strong growth while staying very disciplined with our capital allocation and generating $295 million in free cash flow. Since the very start of the recovery, we saw that winning this cycle was going to require a different approach compared to prior cycles. We've been steadfast in our message that our goal is to balance future growth needs demanded by our customers with returns and free cash flow needs demanded by our investors. We're happy to see this strategy being repeated by many of our peers across the industry. Capital discipline has become a common theme in the industry. which should lengthen the duration of the cycle. We're proud of our success in balancing these two strategies, and we have high conviction that this is the best path forward for our company and our investors. As you see on slide 15, we've achieved our growth in a very capital-efficient manner. On slide 16, we show that we achieved our growth over the past year while deploying significantly less capital relative to our peers. For 2022, our 30% return on invested capital has improved significantly over the past year. In the fourth quarter, we delivered an annualized ROIC of 46%. ROIC is one of our highest priorities we consider whenever we make an investment decision. Maximizing returns requires smart and opportunistic capital allocation. We invested countercyclically, which allowed us to create additional value during the early parts of the cycle, and we continued to rationalize our asset base. We sold $50 million of non-core assets last year and redirected the funds to areas where we could create better value for our shareholders. We believe our return should improve significantly again in 2023, and have the potential to stay high for multiple years. We expect strong demand will continue, and on the supply side, the market remains undersupplied and consolidated. Additionally, growing capital discipline in our industry and equipment and parts availability are restricting our ability to add and maintain equipment. Finally, bifurcation and equipment quality is elevating in returns as the industry undergoes a lengthy conversion to natural gas. During 2022, we reported earnings per diluted share of $1.26. Our share price today is just seven times our 2022 earnings per share, and considering we expect EPS growth again in 2023, we believe our forward-looking price-to-earnings ratio is even lower We generated $295 million of free cash flow in 2022, and our expectation is that we will increase our cash flow to at least $500 million in 2023. We see free cash flow conversion over 50% this year, and we still see a path to growing our adjusted EBITDA 40 to 50% relative to 2022. Ultimately, The goal of this strategy is to maximize value creation for our shareholders. Last quarter, we presented a detailed capital allocation strategy that rests on two foundational pillars. We will prioritize a net debt zero capital structure to ensure our business remains nimble through the cycle. And we will look to invest 8% to 9% of our revenue in CapEx annually which we believe is sufficient for us to maintain service quality and market share in our core product business while slowly transitioning the rest of the fleet to natural gas powered and funding growth in our well site integration strategy. On top of this foundation sits what we believe is a durable free cash flow profile. We will return at least half of this free cash flow to shareholders through a process that we started and 2022. Through February the 14th and including the amount we used in Q4, we've repurchased 14.4 million shares for $139 million, bringing the total to nearly 6% of the shares that were outstanding prior to the buyback. After funding our shareholder return commitment and reaching our capital structure goal, We believe that we have optionality on roughly $200 million in cash through the end of this year. We remain interested in M&A, including both for further consolidation of the frac market, as well as other avenues to grow our successful well site integration platform. We have a very strong M&A track record as been demonstrated by our recent acquisitions of Alamo and CIG Logistics, both of which easily outperformed initial expectations and have become core to our company. But we will continue to be prudent and we'll act on transactions that make sense for our shareholders. If no attractive deals are found, we can pivot to use the cash to further strengthen our balance sheet or expand the shareholder return program. We remain committed to maximizing the value of every dollar of capital in all phases of market cycles, guided by our sustainable capital allocation program. We believe the significant use of cash to repurchase shares should demonstrate our dedication to our strategy, as well as our conviction in the long-term outlook for our business and the belief that our equity is significantly undervalued. The prior cycle OFS playbook, which was guided almost solely by EBITDA growth and relied on indefinitely capitalizing one-year returns in new-build economics, while ignoring industry supply and demand fundamentals did not work. We believe our balanced strategy better served the company and our shareholders and we will continue to chart this new course. We have strong conviction that capital discipline and a focus on sustained returns and capital efficient growth will be the winning formula in this cycle. We are bullish that the cycle is in its early stage We are prepared to deliver strong value creation and return capital to our shareholders the entire time. I'll now pass the call over to Kenny to discuss the fourth quarter results in more detail.