NexTier Oilfield Solutions Inc.

Good morning, and welcome to the Next Tier Oil Field Solutions first quarter 2023 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 Next Tier. Please go ahead, sir.

Thank you, Operator. Good morning, and welcome to the Next Tier Oilfield Solutions Earnings Conference Call to discuss our first quarter 2023 results. With me today are Robert Drummond, President and Chief Executive Officer, Kenny Pichu, Chief Financial Officer, Matt Gillard, Chief Operating 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 publicly update any forward-looking statements except as 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 of the most directly comparable GAAP financial measures are included in our earnings release for the first quarter of 2023, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NextYear.

Thank you, Mike, and thanks to everyone for joining the call. As anticipated, the first quarter for NextYear was very strong. we delivered another quarter of improved operational and financial performance, demonstrating both the resiliency and consistency of our strategy. We saw sequential growth and adjusted net income for the 10th consecutive quarter and had another quarter of strong free cash flow. We continue to prioritize a sustained and strong return on capital, and we remain very disciplined while operating our capital allocation strategy. Despite recent commodity volatility, our 2023 outlook is essentially unchanged from the prior update. Considering our outlook, we continue to believe our share price is significantly undervalued. We will always invest our capital dollars in the highest return opportunity that we believe will create the most long-term value for our shareholders, including through our sizable shareholder return program. First, for the first quarter, we saw strong operating results even as the quarter was disrupted by winter weather. Adjusted net income of $156 million improved 7% for the prior quarter and was 17% of revenue. Our adjusted net income per diluted share was 66 cents. Total revenue of $936 million was up 7% sequentially and was 47% higher than the same quarter last year. The top line growth was a combination of an increase in pumping hours as well as higher sequential pricing. Adjusted EBITDA of $228 million was 7% higher sequentially and improved for the eighth consecutive quarter. We saw a full quarter of benefit from the strategic customer repositioning we undertook during the prior quarter resulting in strong profitability growth. We also generated strong free cash flow of $76 million, even as we saw a large working capital headwind and a front half loaded CapEx budget. We anticipate free cash flow will gather momentum as the year progresses, and we will still expect to generate approximately $500 million in 2023, which is a free cash flow yield of over 20% based on current market capitalization. During Q1, we repurchased almost 6 million shares for $53 million under our $250 million shareholder return program funded entirely with free cash flow. And our adjusted annualized return on invested capital, excluding one-time tax items, was 50% for the quarter. We continue to generate returns well ahead of our peer group. Industry utilization remains very high and we expect to remain sold out. Oil basin activity is supported by a commodity price that is more than sufficient for our customers to generate strong returns. Unlike past cycles, our customers are looking through near-term commodity noise towards a long-term outlook that remains unchanged from our prior update. Their consistency throughout this period of oil price volatility demonstrates the discipline that is enabled by a positive global oil supply and demand macro. We expect our sector's demonstrated maturity and discipline to continue and for U.S. land frack activity to remain strong in 2023 and beyond. Considering our stable customer base combined with the current oil price outlook, we still do not anticipate we will need to change our pricing strategy. Natural gas basin demand did soften as expected as the quarter progressed with industry activity in the primary gas basins down roughly six fleets since the start of the year. Consistent with our prior expectations linked to historic responses to natural gas cycles, We believe there are likely another eight fleets that could be released in natural gas basins as the commodity seeks balance. The fleets that are most vulnerable are those that are underperforming and those that are working in the spot market. We have very little exposure to the spot market in oil or natural gas basins, and our operational performance has been very strong. As such, we should remain relatively insulated from the temporary shuffle of competitive frac fleets resulting from lower near-term natural gas prices. At next tier, we've yet to see any of our dedicated fleets released by our customers in either oil or natural gas basins. This speaks volumes about our service quality as well as the quality of our customers and the partnerships we've built together. The value created by our well site integration strategy has never been more important. And all that is to say, we've seen very little change in our business since our previous update, and we continue to be encouraged by our outlook as we see the overall frat market operating at near capacity into 2024. By and large, the recent noise and spot market activity appears to be a function of the expected relocation of some fleets into oil basins from natural gas basins. Our view is that the supply and demand balance in U.S. frack will allow these relocated fleets to find new spot work with multiple partners. Over the long term, we still believe global oil production will need to increase materially to meet demand forecasts and the call on U.S. shale to grow production will only grow louder. On the natural gas side, LNG capacity additions through 2025 have the potential to create significant demand for incremental frack fleets. We still see U.S. shale struggling to meet both of these calls in tandem, given constraints around equipment and capital, with the availability of frack equipment likely remaining a bottleneck. We have been very transparent in our view that the supply chains will continue to impact working capacity, and we do not see the situation fully correcting itself until at least mid-2024. This is true for both maintenance and new builds. We continue to be flexible with our fleet configuration and are committed to converting our fleet to natural gas powered in the most responsible manner over time. In terms of fleet configuration, we are always pursuing avenues to deploy our horsepower to the best unit level economics, and maximizing the returns on our available horsepower is our priority. In response to recent market volatility and fluctuations in the spot market, we've already chosen to redistribute one fleet worth of pumps to supplement our best customers in other basins rather than lower our returns. and we see further opportunities to replicate this strategy. In addition, as we stated in our last earnings call, we still expect to retire at least 150,000 horsepower from the start of 2023 through the middle of 2024, rather than invest in maintenance on low return diesel fueled pumps. We have already started this process, and our deployed capacity today has fallen by 20,000 horsepower relative to the start of the year as we remove our highest cost assets. We believe these responsible actions by us and others indicate sector maturity. On the transition front, we are always looking for the most capital efficient ways to make progress on our electric fleet and natural gas transition strategy. Our CapEx guidance of 8% to 9% of revenue always budgeted for a second E-Fleet in addition to the one we had previously announced. And to that end, we recently saw an opportunity to purchase around 20,000 horsepower of electric pumps as replacement for some recently retired diesel equipment. This readily available equipment was from the inventory of a known OEM with proven technology that we have been field testing since 2021. These assets will allow us to earn a strong return while we accelerate the transition of one of our existing customers to eFRAC technology without increasing our overall FRAC capacity. We now expect to have two customers utilizing eFRAC technology by Q3 as we continue to act on our transition plan while remaining in our capital allocation framework. For clarity, One fleet was previously announced but delayed from January due to supply chain delays. And we're now expecting to take delivery of this fleet by the third quarter. The newly acquired horsepower is replacement for recently retired equipment. We have a high conviction that our steady capital deployment strategy will be the most efficient path to maximizing long-term returns. Even after the delivery of all these electric new-built pumps, our horsepower by mid-year will be flat with where we started the year. Considering supply chain and capital constraints, winning this cycle will require service quality differentiation. Our pioneering power solutions natural gas fueling business is nearing its two-year commercial anniversary and remains one of our most valuable assets. and we are encouraged by recent third-party transaction valuations. We have a big head start with respect to value capture potential from this offering. Since inception, Power Solutions has already displaced over 33 million gallons of diesel and created as much as $100 million in fuel cost savings. Our recent substitution rates have been 25% higher versus fleets using third-party CMG providers, increasing the fuel cost savings of our customers, and thereby elevating the value of both our power solutions business and our dual fuel frac fleets. The entire business is managed on our centralized Next Hub Digital Center, improving visibility to us and our customers. We have organically scaled power solutions in the Permian Basin to over 45 million cubic feet per day of compression capacity with a sold-out CNG fleet capacity to fuel 11 to 12 natural gas-powered freight fleets. This scale will increase by more than 50% by year end. Our proprietary technology addresses both the equipment reliability issues plaguing others in the industry while also delivering a patent-pending approach that significantly reduces hurdles to using filled gas. Our platform is far more than just a CNG transportation business. Our success has been so apparent that we recently started gas deliveries to our first third-party frac well site in early Q1. A large electric frac fleet where gas reliability is critical and where demand exceeds most, if not all, other gas-consuming fleets on the market. The E&P customer had experience with power solutions and several other fuel providers and only trusted this challenging operation to next year. We will continue to evolve and build on these prior successes and maintain our position as a leader in oilfield natural gas services. We believe our product offering is best in class and difficult to replicate which should give us a sustained advantage in the coming years and increase our capability to capture a greater portion of the growing fuel cost arbitrage. So new to next year conference calls, let me introduce our Chief Operating Officer, Matt Gillard. Matt joined the Nextier team in the summer of 2021 and has been critical to making Nextier a top-tier service provider and one that our customers know they can rely on to help maximize their returns. Matt, to you.