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spk01: And welcome to the next year Oilfield Solutions second quarter 2023 conference call. As a reminder, today's call is being recorded. At this time, all participants are in 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 Zabella Vice President of Investor Relations for NextTier. Please go ahead, sir.
spk06: Thank you, operator. Good morning, and welcome to the NextTier Oilfield Solutions Earnings Conference call to discuss our second 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, and 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 disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly reports on Form 10Q 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 second quarter of 2023, which is posted on our website. With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NextEar. Thank you, Mike.
spk08: And thanks to everyone for joining the call today. The second quarter was another strong quarter for next year. Consistent with our guidance, revenue was moderately higher sequentially, resulting in improved EBITDA and operating profits. And we delivered another quarter of strong free cash flow and a high return on capital. Our fleet activity levels remained resilient even as the broader completions market temporarily slowed. demonstrating the value of our well-side integration strategy to both next-tier and our customers. The performance is a testament to the strength of the team we've built at next-tier, and I could not be prouder of the way we continue to deliver through a challenging environment. Our commercial strategy aligned us with like-minded customers that strive for excellence and appreciate the value that we create. And our operations team delivered another efficient quarter. This combination will serve us well at all points in the cycle. From our customers' perspective, Nextier controls a critical path to maximizing their returns. Their trust in our team to deliver has helped us retain customers even as those same customers have slowed spending, with several key customers choosing a Nextier fleet over other service providers. In the second half, We believe we enjoy a strong competitive position relative to the peer group. The previously announced merger with Patterson UTI will allow us to apply our strategy across a larger asset base, including utilizing our power solutions to accelerate the transition to a more fuel efficient and emissions friendly fleet, while also enhancing our digital capabilities and growing our well site integration addressable market. For the fourth consecutive quarter, we generated an annualized return on invested capital of more than 35%, and free cash flow was very strong again. Adjusted net income was $158 million for the quarter, and our adjusted diluted earnings per share of 68 cents was up 3% from last quarter. Total revenue of $945 million was up 1% sequentially and was 12% higher than the same quarter last year. We delivered the highest top line in the company's history, and we once again saw growth on another modest increase in pricing relative to the first quarter, even as our active fleet count exited Q2 lower than where it started. Adjusted EBITDA of $234 million was 3% higher sequentially and up 41% from the second quarter of last year. We saw strong incremental margins and improved our adjusted EBITDA for the ninth consecutive quarter. And we again operated in a very capital efficient manner. We generated strong free cash flow of $128 million despite making the final Alamo earn-out payment during the quarter, which negatively impacted free cash flow by $37 million. Our CapEx budget was also weighted toward the first half, and we anticipate free cash flow will remain strong in Q3. During Q2, we repurchased more than 2 million shares of stock for around $18 million. In the first half, We purchased more than 8 million shares for roughly $71 million. We have $66 million remaining on our commitment to return $250 million to shareholders by the end of 2023. Given the pending merger with Patterson, we have suspended our share repurchase program, although the combined company remains committed to targeting a return of 50% of free cash flow to investors. consistent with the next-tier capital allocation strategy. Shifting to the macro, overall U.S. land completion activity slowed as Q2 progressed, following the decline in the U.S. rig count that started late last year. In natural gas basins, activity has so far played out as expected, and Marcellus has proven to be relatively resilient while the Haynesville is taking the brunt of the activity decline. Natural gas basin activity is already down almost 20 fleets from the peak, and we think natural gas activity is now approaching the trough. Already, the Henry Hub natural gas forward strip has started to reflect the reality that activity will need to move higher from here to ultimately fill the growing global call on U.S. natural gas. The Haynesville has already seen a large increase in drilled but uncompleted wells, which we believe indicates producers are preparing to add completion activity by next year. In oil basins, completion demand has softened, albeit only modestly so far, while in the near term there has been more noise than we previously expected in the oil basins. Our views over the long term remain largely unchanged. Despite near-term economic uncertainty, all signs point to higher global oil demand over the coming years, and accordingly, we believe U.S. land oil activity will need to move higher than current levels as production will need to increase. We see the availability of frack fleets once again as the bottleneck to U.S. oil and natural gas production growth by as soon as 2024. In the near term, We think the US land recount will likely bottom this summer with industry frack activity potentially down further from current levels with a trough likely coming later this year. Importantly, we anticipate trough utilization will be significantly higher than the industry has traditionally experienced, a strong indication that the longer term uptrend for the industry is still intact. As we've said previously, our customers are looking through commodity volatility more than they have in the past, a positive for next year that should help reduce the historical volatility in our sector. The scenario in 2022, where frack fleets were in short supply, is still fresh on our customers' minds. Many are hesitant to give up high-performing crews given the positive early view for 2024 frack supply and demand. We believe the call on U.S. land, oil, and natural gas production in 2024 and beyond means industry demand could return to levels we saw earlier this year. Considering new-build frac equipment has likely been insufficient to fully replace fleet attrition, we see a scenario where demand for our services could once again exceed supply by next year. Against this positive long-term macro backdrop and consistent with what we've previously said, if demand softens in the near term, we will choose to stack or redistribute horsepower rather than work at pricing that results in subthreshold returns. During Q2, we idled two frac fleets and redistributed the horsepower to our remaining fleets with opportunities to optimize horsepower levels across all fleets given the high intensity required by the modern frac job. We could idle up to three additional fleets in Q3. We continue to run our business on returns and through cycle free cash flow and not market share or short-term EBITDA targets. Our balance sheet is healthy, with strong free cash flow expected again in Q3, and we will not accelerate the depreciation of our quality assets just to keep working in the near term. Instead, we will use any downtime as an opportunity to invest to fully maintain our fleet and prepare for what we see is a strong recovery in 2024. Our customers are expressing an appreciation for our efforts to strengthen the U.S. land oilfield services industry, which will help U.S. land maintain its position as a low-cost global producer. Our customers are choosing to remain with NextTier due to the value created by the fuel cost arbitrage from our integrated natural gas powered model, which is enhanced by our power solutions CNG fueling business. Our partnership matters, and given the strong setup into 2024, many customers see no reason to make a change today that could disrupt our extremely safe and efficient operations in a recovery. This is not to say that we do not expect to see an impact from the industry slowdown, but however, we have so far been more resilient than the industry average, and we expect that will remain the case. Just over a month ago, you know, we announced that we had agreed to merge with Patterson UTI, another leader in the U.S. land oilfield services market. The combination allows both companies to expand our product offerings and drive value for our customers with Patterson's premier U.S. land drilling franchise complementing the combined company's premier U.S. land completion service product portfolio. We believe the merger of these two great companies has the potential for significant value creation for our shareholders with enhanced scale and $200 million in expected synergies within 18 months after the merger closes. Applying our successful well-side integration strategy across a larger asset base should lift the performance of the entire enterprise. Standalone, each company was already operating a disciplined capital allocation strategy, and the increased scale of the combined company should allow us to tap into the larger universe of potential investors that we believe will appreciate our shared focus on free cash flow, and shareholder returns. And the data analytics capabilities of both companies should not be underestimated. Over time, we are confident that we can monetize the combined drilling and completion data to drive further value creation. The new company will be a leader across the US onshore market, positioning us to more effectively allocate capital and accelerate shareholder returns while also investing in next-generation technologies that should create a sustained competitive advantage through the cycle. Since we announced the merger, Patterson has also announced another acquisition that is highly complementary to their drilling business. Patterson's acquisition of Otero Drill Bits follows a very similar playbook to our integration strategy. In our view, Otero offers mission-critical products and processes around the core asset, in this case, the drilling rig, that can be leveraged with a fully integrated package to improve the process and create value for both the service provider and the customer. In addition, Ulterra's international exposure also offers another potential path for next-tier shareholders to benefit from an expanded geographic footprint. We believe the Ulterra acquisition will further strengthen the combined company and Next Tier shareholders will greatly benefit from this transaction. On our prior conference call, we introduced Next Tier's Chief Operating Officer, Matt Gillard. Matt has played a crucial role in the success of Next Tier since he's joined the company, and he will continue in his role as a leader of the combined completion franchise post-merger. So with that, I'm going to turn the call over to Matt.
spk05: Thank you, Robert. Upon the anticipated closure of the merger of equals transaction with Paterson, I'm honored to have the opportunity to lead the combined Nextier and Universal completions teams, and I am thrilled to help unlock the potential that lies ahead. Just as we have done at Nextier, and as Universal has done under Paterson, we will continue to strive for operational excellence in the most capital efficient way possible. Winning the next cycle will require maximizing asset efficiency And we believe the combination of these two great companies will give us a strong advantage and allow us to help keep U.S. shale oil and gas producers in a strong position on the global cost curve. By now, our investors and customers understand our well site integration strategy. This strategy aims to lower the total cost to complete a well, reduce emissions, and raise the efficiency and safety of the completions process, all combined on our next hub digital platform. It has allowed us to earn superior results while offering our customers a superior product and has been important in our differentiated financial and operational performance this cycle. We continue to prove that integrating our natural gas-powered track fleets with our natural gas fueling service, our wireline, and our last-mile logistics business can enhance margins for us and for our clients. The data supports this, and we consistently see more pump hours per fleet relative to jobs where the customer hires third parties for these services. And those hours come at a very high return. The combination of the next tier fleet with the universal fleet will increase the addressable market for our integrated services. And there is a huge opportunity to apply this strategy across a larger footprint, much of which can be done with very little incremental capital. And most importantly, the website integration strategy also allows us to control more of the safety process. And protecting the hardworking men and women on our completion well sites is one of my highest priorities. As an example, we have been dealing with extreme temperatures this summer. In these conditions, it is important to us and our employees that we can ensure the pad is as safe as possible. I am very proud of the way that our team has protected each other through these difficult conditions. On the frac supply side, Headwinds continue to limit efficiency, as has been the case over the last 18 months. The maintenance cycle remains a challenge, and the number of pumps in the maintenance process today is still near the cycle high. While some major components, such as engines and transmissions, are becoming easier to source, other issues are arising that are interrupting our maintenance lines. The extreme summer heat is very hard on our equipment, and recently we have seen a spike in heat-related equipment issues. While the nature of the issues is minor, they are frequent and require us to take pumps out of service for repairs, which lowers our pumping efficiency. Along those same lines, protecting our employees from extreme heat is the highest priority, and we require all employees to move slower when the temperatures get to these extremes. In the Northeast, the Canadian wildfires impacted air quality on several occasions, forcing us to temporarily suspend operations when we felt it was unsafe for our employees to be outside. These anecdotes should serve as a reminder that frac efficiency is a function of many changing factors, some of which are outside our control. Successfully navigating and anticipating these challenges can differentiate us from our competitors. In addition to maximizing asset efficiency, we see technology as another path to differentiation. Our power solutions natural gas fueling business has been a huge success and has improved the marketability of our natural gas powered fleets. We are consistently displacing more diesel and helping lower the total cost to operate when our dual fuel fleets are paired with our power solutions offering. We expect our power solutions product line to create even more value and lower emissions if applied across a larger natural gas powered frac fleet. We also continue to make advances in rolling out our next generation frac fleets. We now have two fleets in the field with deployed electric horsepower. We intend to continue converting our fleet to 100% natural gas powered responsibly over time. The measured pace of our capital deployment has been the winning strategy so far, as technology is changing very rapidly. This has helped us maximize free cash flow and returns during the upgrade process. At next year, We have built what we believe is one of the most capital-efficient businesses in US land, with a focus on employee safety, operational excellence, and financial returns. Balancing these priorities should be a winning strategy. With the inclusion of Universal and the knowledge and experience we expect to receive from that team, we believe we are set up to add significant value for our shareholders over the next several years and beyond. With that, I'll turn it over to Kenny.
spk11: Thank you, Matt. Second quarter revenue totaled $945 million compared to $936 million in the first quarter, up 1% sequentially. We saw modestly higher net service pricing on average and an increase in sales from our well site integration services. Meanwhile, execution was strong despite the heat waves that we saw in June. This was somewhat offset by lower fleet count sequentially as frac activity exited the second quarter lower than where it started. Adjusted net income was $158 million for Q2, up 1% from the prior quarter, and totaled 17% of revenue. Our adjusted net income for diluted share was 68 cents. Total second quarter adjusted EBITDA was $234 million, an improvement from $228 million last quarter. Our adjusted EBITDA improved for the ninth consecutive quarter, even as activity slowed modestly as the quarter progressed. Profitability was up sequentially on several factors. First, we saw a slight increase in net pricing relative to Q1, driven by service pricing and higher well site integration revenue. Second, we continued to see efficiency improvements relative to the prior quarter, our decision to lower our fleet count and reinforce the remaining fleets had a positive impact on average pumping hours per fleet, which in turn improved fleet-level profitability. The final factor was costs. We have been very diligent with cost controls throughout the year, and we will continue to look for ways to optimize our cost structure. In short, we delivered a strong adjusted EBITDA incrementals of more than 65% sequentially, a function of our winning commercial strategy. and operational performance. In our completion services second quarter, revenue totaled $906 million, compared to $896 million in the first quarter, a sequential increase of approximately 1%. Completion services segment gross profit improved to $260 million on the increase in revenue, as well as a modest increase in margins. In our well construction and intervention services segment, second quarter revenue totaled $40 million, essentially flat compared to the first quarter. Gross profit totaled $9 million, down slightly on less favorable job mix. Second quarter selling general and administrative expenses totaled $40 million, flat with the first quarter. Excluding management net adjustments of $9 million, adjusted SG&A expenses totaled $31 million. EBITDA for the second quarter was $221 million. When excluding management net adjustments of $13 million, adjusted EBITDA for the second quarter was $234 million. Management adjustments include $8 million in stock comp with other items totaling a net of $5 million, which are non-recurring in nature. Management adjustments include $5 million in acquisition, integration, and expansion costs, mostly associated with the merger with Patterson. Now on the balance sheet. We exited the second quarter with $310 million in cash. Total liquidity was $721 million, which included the cash as well as $411 million available on our undrawn asset-based loan. Total debt at the end of the second quarter was $355 million. Net of debt discounts and deferred financing costs and excluding finance lease obligations. We have no term loan maturities until 2025. Net debt at the end of the second quarter was approximately $44 million, down more than $95 million from the prior quarter. Cash flow from operating activities was $226 million. Profitability was very strong once again, with cash flow negatively impacted by $37 million associated with the final Alamo earn-out payment. This earn-out should serve as a reminder of the value that the acquisition created for next-year shareholders. We once again were very prudent in managing our working capital. Our cash used in investing activities was $98 million during the second quarter. CapEx totaled $102 million, mostly driven by normal maintenance, funding for the transition of our frack fleet to natural gas powered, as well as investments in our well site integration strategy, including growth capex for both power solutions and last mile logistics. We continue to make investments in high return, non-horsepower growth projects that are critical to the efficiency of our frac fleet. This resulted in free cash flow of $128 million, which would have been even greater without the $37 million associated with the Alamo earner. Given the pending merger with Patterson, we will not provide detailed financial guidance. On activity, we could see our deployed fleet count fall by as many as three fleets by the end of the third quarter, and we also expect to see increased white space with our average pumping hours per fleet also expected to decline slightly. For Q3, we anticipate CapEx of roughly $85 million, which is down from Q2. We expect to reduce CapEx further in Q4. Free cash flow should be strong again, and we expect that we will exceed our target of zero net debt by the end of Q3. In conclusion, the second quarter was simply more of the same for next year, and we could not be happier with the way the company has performed so far this year in a U.S. land oilfield services market that has seen demand soften as the year has progressed. Since the recovery started back in 2021, we have been one of the most consistent companies in the oil field. The entire time, our message has been the same. Build a foundation with a strong commercial strategy, operate as efficiently and effectively as possible for our customers, and remain good stewards of capital for our shareholders. This strategy has served our company and our investors well. What makes the penny merger with Patterson so exciting is that their management team shares these same principles. And the opportunity to replicate the complementary strategies across a larger asset base and capital structure should mean even greater value creation for all stakeholders. In my role as Chief Integration Officer of the combined company, it will be my focus to ensure that the best practices from each company survive. I cannot be more excited to take on this new responsibility and other roles in the combined company's future. I'll now turn it back to Robert for closing remarks.
spk08: Thank you, Matt and Kenny. Now let me close with a few key takeaways. First and next here, we're proving that our well site integration strategy is a winning strategy across all points in the cycle. We have generated above average returns during the period of fracked under supply over the past 18 months. And already, during the recent temporary slowdown, we are seeing steadier activity levels than the industry average. We believe we should continue to fare relatively well as activity levels bottom. Second, we expect to use any downtime on our equipment to upgrade and invest as we prepare for our expectation of a demand recovery. These investments include the continued transition of our fleet to next generation natural gas power. We do not plan to accelerate the depreciation of our equipment to hold work in the near term, and we will operate our business with a focus on through cycle, return on invested capital, just as we always have. Finally, our long-term macro view is unchanged. Both oil and natural gas activity will likely need to increase over the next 18 months to meet growing global demand. Considering there have been insufficient frac capacity additions to replace attrition, We still see a scenario where demand for our services exceeds supply again as soon as next year. We plan to keep our fleet fully maintained to be ready for the recovery. During my time as CEO, we've completed several transformative deals that have positively reshaped the company and the industry. Bringing Keen and C&J together in 2019 to form NextHear was hugely successful and was a big step for both industry consolidation and cost efficiency. The Alamo acquisition in 2021 was well-timed and allowed us to accelerate our transition to natural gas powered equipment and was the pinnacle of our successful countercyclical investment strategy. We believe the merger with Patterson is the next step to value creation for our shareholders, our industry, and our employees. I'm excited to help lead the new company in the vice chair role, where we will continue to pursue what has made NextTier and Patterson successful over the past several years. I've learned a significant amount from all the NextTier stakeholders, including our employees, our executive team, our board members, and our investors. I've enjoyed my time as CEO, and I will always appreciate being given such a unique opportunity. And with that, we'd now like to open the lines for Q&A.
spk01: We will now begin the question and answer session. If you ask a question, you may press star, then 1 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 2. At this time, we will pause for a moment to assemble our roster. Our first question today will come from Luke Lemoine of Piper Sandler. Please go ahead.
spk04: Hey, good morning. Good morning, Luke. Hey, morning. Thanks for the fleet outlook for the end of 3Q. Just wanted to see if you guys could maybe, you know, outline how you see 4Q activity shaping up. And then do you think 4Q will jumpstart 24? And then third part, If you could just step a bit further and expand on your outlook for 24, which you described as looking more like 1Q23, and maybe what level and type of conversations you're having with customers right now.
spk08: Thanks for the question, Luke. You know, I think that what we're seeing in Q3, in my view, is the customers managing their budgets. You know, they're balancing production targets with their balance sheet. and their commitments to cash returns versus their outlook for what they think about oil and gas price. And I think it's a bit of a unique scenario. We're sitting here with oil, you know, at $79 and seeing the drilling rate count being down a little bit. So when you think about that playing into 2024, I believe that there's like two potential scenarios here. You know, one is that we have a traditional Q4 holiday impact that some people call budget exhaustion, you know, that kind of scenario where you see Q4 down a little bit from Q3. But there's another scenario in my view, and the more likely one in my view for this year, and that is that the customer base prepares to get a running start into 2024. You know, there's a number of reasons perhaps for that. One is that they're in good shape at this point this year with their production targets. And in 24, we've started to get a little more takeaway capacity in the gas markets and more even in 25 than that. And the outlook seems stronger and stronger on the oil price. So I feel like that. the most likely scenario is that you start to see people getting ready for 24, you know, in Q4. And, in fact, you know, Matt and I have been taking discussions with some of our customers about those kind of plans for ramping up in 2024. I guess you would probably get a variable answer depending on which company you talk to. But, you know, we do try to line up with like-minded customers that, have a long-term view about the market. So I think that we may be influenced by that a bit, but I believe that that probably describes the macro pretty well.
spk04: Got it.
spk07: That's perfect. Thanks, Robert. Thank you, Luke.
spk01: Our next question today will come from Arun Jayaram of JP Morgan. Please go ahead.
spk10: Yeah, good morning, gentlemen. I wanted to first start off with the plan integration activities with the team at Patterson. I wanted to see if you could talk about your plans to integrate the universal team within NEXT. What are your early observations on fleet quality and any upgrade work that needs to be done? And then maybe, Kenny, you can give us an update on the synergy capture from the deal I think you've outlined earlier. up to $200 million over an 18-month period.
spk08: Thanks for the question, Arun. One thing I'd say is that we are on the track that we said we'd be on related to that integration and that the concentration of talent has been very impressive from where I sit. Kenny, would you make some comments about where you are with beginning of the plan?
spk11: Yeah, good morning, Arun. So obviously, you know, with the old Terra deal in the background, we're kind of just getting started on our integration planning process, so I don't have a lot to report there. But what I can tell you, as Robert mentioned, is that it's very exciting. Our focus right now is going to be not disrupting the current very high-performing drilling and completion businesses, and we're developing our day one plans. On your point on the synergies, look, nothing really to report at this point. We put the $200 million out there. Everything we see so far, that's obviously still intact. So there'll be more news on that in the coming quarters.
spk05: Matt? Yeah, hey, good morning, everyone. I think just on the integration side, like Kenny said, it's pretty early and we're obviously operating independent. But I just think, you know, from my side on the fleet and equipment side, you know, NX is pretty happy with the progress that we've made, you know, upgrading our fleet to DGB and natural gas. And with the deployment of the E-Fleets, we're around 70% of the fleet are now able to operate on fuel-efficient natural gas. I think, you know, these fleets have been extremely easy to keep busy, as we've seen some movements in Q3 or Q2. I think as Paterson has publicly stated, you know, they've also made a large conversion over recent years to a good percentage of natural gas-capable fleets. So once the close is complete, one of the things we really look forward to is the synergies that we can see with applying our power solutions, you know, to further reduce the diesel consumption. So I think that's something that will be a work in progress, but we're looking forward to as the deal closes.
spk10: Great. My follow-up is maybe for you, Robert. Last quarter, you mentioned that given the bifurcation in equipment between premium equipment and call it more legacy equipment, that you didn't see the need to adjust your pricing strategy at that time. Fast forwarding, 90 days or so, you guys have talked about a couple of fleets in the quarter where you integrated the horsepower with the existing units, and you could lose three more fleets in terms of demand. And so I wanted to get your thoughts on your updated views on the pricing strategy in NEXT. And how do you think pricing will trend as we get into, quote-unquote, you know, the 2024 kind of buying season as things are reset based on, you know, 2024 budgets, et cetera.
spk08: Got it, Arun. Look, reflecting back on Q1, you know, we said that, you know, we were going to be looking at fleet configuration enhancements and driving, you know, trying to drive record level efficiencies out of that fleet, propping it up, making it stronger, focusing on integration and that we'd get pricing up a little bit, Q2 versus Q1, and that free cash flow would be high. I'm glad to say that from an accuracy standpoint, those things happened. And we continue to look at the commercial aspects that includes pricing on a profitability per metric, profitability per fleet, or more likely for us, it's profitability per hydraulic horsepower deployed and what that means really is besides the net pricing aspects the contract terms and the scheduling you know do you have likelihood of white space the operating efficiency for the combined operations between us and our customer base you know how many pumping hours do we get per month for example how much is integration uptake been there and then I also the cost structure that we deal with in the commodities? How do we put all of that into a commercial aspect to optimize it for both us and our customers? And we've got a history of working with the same customers for a long time, and that's because we can demonstrate flexibility with them. And we have all those different knobs to turn in order to do it. So when we said that we weren't going to be focusing on price because, you know, we weren't going to do that, We haven't had to do that. And we've operated in a market that allowed that to be the case because of the relationship we have with our long-term customers. But when I go back to my comments earlier about some of our customers and some of the EMPs in general managing their budgets in the middle of the year instead of at the end of the year, I think that puts some fleets on the market that would ordinarily be a dedicated fleet. So when that happens, you get into a very volatile scenario, and maybe there's a number of fleets chasing, you know, a bunch of smaller opportunities that are one-off wells or one-off pads, and that's a different environment. So we proactively made some decisions like that to take those fleets out. I mean, Matt, you want to comment on that a little bit? I know we got a lot of catch-up that we needed to do on the fleet maintenance-wise.
spk05: Yeah, and I think so. We talk a little bit about short-term softness in Q3, but I think if you remember, I think we've all talked about this before, we probably worked the fleet too hard in Q1 and Q2. And one of the reasons we thought to redeploy our horsepower was to deploy those extra couple of pumps on the fleet to increase our efficiency. It also increases our gas substitution, right? So again, just by working those fleets a little bit less hard, we're able to offer more fuel savings. And I think as we go forwards into Q3, Again, there's some upgrades that we wanted to do to the fleet in the prior quarters, and we weren't able to pull them from operations. So actually to have a little bit of a breather in Q3 and continue to upgrade and improve the fleet is actually a good thing for us.
spk08: When you ask about the trend as we start to go into next year, you know, the way we look at it is we've spent a lot of time trying to understand the macro supply and demand in frack. And, you know, as we made comments in our prepare remarks a bit that, We see that 2024 could be another case where, you know, frack is a bottleneck again. In other words, there's more demand than there are fleets, particularly in the upper tier of the equipment base that uses natural gas. So we see huge, strong demand there still. And I would argue that, you know, that's a very supportive environment in 2024 for that. everything prefaced on what oil price does. I mean, I think we've got probably more visibility on natural gas prices over the next couple of years than we do oil. But I think everybody's got their view about oil price. I'm not here to try to predict that. It's just that we see it set up pretty good for 2024.
spk10: Great. Thanks for the wholesome answers.
spk07: Thank you, sir.
spk01: Our next question will come from Derek Potivar of Barclays. Please go ahead.
spk00: Hey, good morning, guys. I just wanted to keep going on Arun's comment around pricing. I think the bear case out there and what investors are worried about is that we're going to get this wholesale reset on pricing going into RFP season. So maybe can you help us dismiss those concerns? I mean, is it something to be said that your fleet mix is much more improved to start 2024 compared to 2023? Just maybe some things to help investors not be too concerned about a wholesale pricing reset as we enter next year.
spk08: Yeah, I mean, I think the cycles themselves, you know, are becoming shallower. I mean, it means that, you know, you don't have to be worried about necessarily a real long period of time. I think that, as Matt described, having an opportunity to catch your breath a little bit and get your maintenance cycle really revamped up. is some of what's happening that's taking capacity off the market right now. I think in the spot market, people sometimes want to make a judgment about what's going on in the overall market based upon what's happening in a situation where people are just trying to decide, do I keep a fleet going for a little while at really sub-market pricing versus doing what we do and some of our other competitors that said that they were doing So, I mean, I would just say, Derek, that is one factor, and another factor is the fact that the fleet's evolved a lot. You know, now, when you're talking about using a fleet that uses diesel versus one that's using natural gas, there's a big difference in the total cost profile for that fleet for the operator. And he has the ability to continue working with the providers who can bring that fuel arbitrage to the tables. And then the other part of it is when you have the workflows that are really, really running really well for you, and you have a number of services integrated around it and it's clicking, and you measure that by pumping hours per fleet. We mentioned it a little bit in our comments in the preparing remarks, but we had an unbelievable Q2. And people don't want to mess with that too much. And I would just say that that's supported by the fuel arbitrage for gas-powered vehicles. is a lot of reasons why. And I think that there's always going to be people who sometimes make short-term decisions that, you know, or it might be best for them in certain circumstances. But I think in large part, we agree with some of our previous competitors' comments about how the market is acting.
spk11: The last thing I'll just throw in there, Derek, is the fact that we've spent, you know, hundreds of millions of dollars on upgrading the fleet, and that has to have a return. And so I think that's what's booing a lot of the pricing discussions for the high-tiered fleets is that we have to generate that return on investment. All right. Yeah, no, that makes a lot of sense.
spk00: Robert, maybe on that cycle being shallower comment, just thinking about how the decrementals should look in the back half of the year, how will it differ from this cycle versus past cycles? I mean, should we expect them to be more controlled? than what we've historically seen, just trying to gauge where profitability could bottom out by the end of the year before we start up 2024?
spk08: I think that's a good question. Matt alluded a little bit to our supply chain, which has been struggling up until lately as far as making deliveries and on driving costs into our system. I think that we're on a campaign to try to back some of that out. And through not just pricing, but through how those services or equipment are utilized within our workflows. So I think that'll have a lot to do with the ultimate decrementals. I'd point out that the incrementals in our last quarter were very good. And I think one thing that we've been able to do is be pretty proactive because we are pretty good at assessing the macro and deciding where things are going to be and then start planning and getting ahead of that. For example, you know, we actually put a merit raise in place for our employee base at the beginning of this quarter, and our attrition rates are down. That's actually a net positive for, you know, for the company, and I would say that We have not had to have a reduction in force because Matt was proactive in balancing, you know, our hiring in tune with the expectations of how that would flow through the system. So all I'd say is, you know, decrementals are a function of all of those things. And because our customers are so efficiency focused and, Our workflows are so married together now. I think we can manage these decrements very well through this downturn. In fact, I mean, Kenny, you got any comments you want to make on that?
spk11: Yeah. I would just add that, you know, we can't really give any specific margin guidance there. But what I would like to say is that, you know, we expect our margins to remain higher than what they were at similar revenue streams in the past. So everything that Robert said, we have a lot of factors that we have that can limit our decrements as we go forward.
spk00: Great. That's helpful. And if I could squeeze just one more. I know last call you guys mentioned the LOI. Just an update on that. Is that still valid or just given the merger with Patterson is just no longer in place?
spk08: The value proposition for that kind of deal for us is still intact and arguably better with the increased scale that we have around, you know, the completion business in the new code. So, I think that it requires a little bit of patience from everybody involved because we, you know, we do have a lot on the table and we are very diligent about wanting to make the already announced mergers, you know, never miss a beat. So, I would say is, Derek, yes, I think, I can't speak for the new company. I'm just speaking on behalf of us right now is that we still see value in that kind of deal. So I would say stay tuned.
spk00: Perfect. Awesome. All right, guys. We'll turn it back. Thank you very much. Thank you.
spk01: Next question today will come from Stephen Gingaro of Stiefel. Please go ahead.
spk03: Thanks, and good morning, everybody. One of the things I wanted to ask you about just from your perspective, and I've asked others this as well, the consolidation we've seen in the industry has clearly helped industry dynamics in it. As we think about the frack market and frack pricing, I know there's been spot market pressure, especially amongst some small operators. But are you seeing, can you point to things that support that the dynamics are better and that pricing's holding up better or you're getting anecdotes from conversations. I'm just trying to get sort of validation that that sort of theory is playing out.
spk08: Well, it's hard for me to be able, uh, Steve to comment on that right now. I would just say that, you know, in general, the, uh, the, uh, supply and demand balance of, uh, of the thing is still there. And I, uh, I don't really have any particular data points I could bring up or anything about that.
spk05: Maybe I'll say something, Robert. I think one thing is size and scale. And we talked about this a little bit in our investor day. But having that size and scale and integration together allows us to offer value savings and cost savings to the client. And so I think we've had a lot of great discussions recently with clients asking how we can improve the total system completion cost. We're able to take additional services like sand or chemicals or power solutions. I think we're able to have a win-win situation where we provide savings to the client. And maybe in the past, we don't have to go so deep on the service pricing that we've had to.
spk08: I think our customers appreciate any measures taken. We've got this certain amount of fixed cost in the industry, and if we spread it out broader across the fleet, that's good for everybody. I think the customers appreciate that aspect of it.
spk03: Thanks. That's helpful. And I appreciate you guys not wanting to give a whole lot of guidance. When I think about your – I'm just going to use Liberty as an example just because they're probably the biggest other press member that has already reported – the consensus seems to be around, you know, the second half of 23 being 20-ish, 25% below the first half. Do you think that's in the ballpark based on what you see? I'm not talking about revenue. I'm just talking as a general view based on activity and pricing that you're seeing right now, that EBITDA in the second half is 20% to 25% below the first half?
spk08: All I'd say is that Q3 pretty well kind of baked in a little bit when you look at what's happened with the drilling recount already. And I go back to my comments about that two-phase potential scenario for Q4. One being that traditional holiday relaxation that occurs in many cases versus a run and start on 2-20-24. I'm leaning toward the second one more likely than the first, simply because it's uncommon for customers at this current oil price levels to be managing their budget in the middle of the year, like you're seeing with this drilling rig count reduction. One of those competitors that reported, you mentioned, said that there was a lag in frack activity a quarter behind oil. behind drilling rig activity. I think that's, you know, we don't disagree with that 60 to 90 day kind of lag. So, I think we have to watch that and to make that prediction, I think, would be a coin toss on what happens, you know, in Q4.
spk03: Okay. No, that's fair. I appreciate the color. Thank you, gentlemen.
spk07: Thank you. Thank you.
spk01: Our next question is from Shawn Mitchell of Daniel Energy Partners. Please go ahead.
spk09: Hey, guys. Good morning. Just wanted to ask you, the noise you referred to, Robert, in the oil basins, you referred to noise in the kind of oily basins earlier in the call. And maybe just take a minute. Is that more a function of fracked fleets moving into those oil basins from gas basins? Because we've recently heard a couple of anecdotes around some of the gas basins. frac fleets are just now moving, which seems a little surprised to me, but I guess the lag you guys just talked about, maybe that's part of that. Are you seeing more assets move into the oil basins from the gas basins on the frac side today, which might be driving some of what you're seeing in Q3?
spk08: Look, I think that it's all linked to that comment about the customers managing their budget too. I mean, in the middle of the year, kind of dropping a little bit of activity. because they're already on their production targets. It also has to do with what you're referring to. And I'd say that, you know, maybe people are prospecting there before they actually move to see if they can find something. But, I mean, at the end of the day, go back to the beginning of all that, I'd say it was, you know, it was a bit undersupplied in the oil basin. So that's a dynamic that is rebalancing And I'd also say the whole dynamic about what kind of fleet are you talking about? Are you talking about one that's pure diesel, or are you talking about some sort of gas-powered fleet? And the dynamics around those are different than, you know, just an idled-up Tier 2 diesel looking for whatever it could get. So, yeah, I think that's a fair assessment on your part in both cases.
spk09: And then maybe one to follow up on labor. I mean, it sounds like you guys aren't having – to lay people off yet, but on the labor side, are you guys seeing other people kind of let people go and are they coming to you saying, Hey, I'm looking for work?
spk08: Well, you know, I'd better let other people just, uh, disclose what they got going on. We have our view about that, but I would say that we do see a little bit of anecdotal evidence when, you know, applications show up. Right. Uh, Yeah, I mean, I think it depends on where you are and, you know, who you've been working for and what status your equipment's in and everything else like that. We've just been kind of trying to stay ahead of it on the planning phase and balancing hiring with what the expectations are. Because, you know, oil field services has got a mountain, a churn in the business when it comes to field staffing.
spk07: Got it. Thanks, guys. We'll take it back. Thanks, y'all.
spk01: Again, it is star and then one to ask a question. Our next question is from Connor Jensen of Capital Markets. Please go ahead.
spk02: Hey, this is Connor Jensen for Jim Rawlinson with Raymond James. Thanks for taking my call today. Thank you, Connor. Just a couple of quick questions for me. Given you're not giving guidance for the third quarter, do you expect the merger could close sooner than anticipated, or am I reading too far into that?
spk08: Well, you know, for us, all I would say is that, you know, we haven't changed any of our messaging around the timing. Everything from a filing perspective is, you know, kind of going on track, and I would just say stand by. I think that That's pretty much out of our control, you know, at this stage.
spk02: Got it. And then you mentioned the three fleets you may drop in Q3. Any insight on whether those may skew early or late in the quarter?
spk05: Yes, this is Matt. I'll take that one. You know, again, I think we've stopped talking about absolute fleet count for a while because, you know, we constantly reconfigure that fleet. either based on the needs of our client on the pads or to optimize the returns. But I think it's probably helpful to answer your question. You know, Kenny and Robert mentioned that we may take out to three fleets in Q3. But if I had a little color to that, I can probably say that we'll start Q3 with two less fleets than we ran for most of Q2. But I will say we're keeping our options open on that third fleet drop. You know, as we see it today, July pumping activity is very strong. And I think Robert mentioned we're seeing some requests already for, you know, possible additional activity in Q3 and Q4. So I think we're just going to watch the quarter closely before we make that decision on the third fleet.
spk07: Great. Thanks for the answers. I'll turn it back over. Thank you, Conor.
spk01: 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.
spk08: Thank you, Allison. Look, I just want to end by saying next year had a great first half of the year, and I'm so proud of the people. We're very well positioned as we're going into this merger. We're going to take a very healthy cash balance, a high-performing group of employees and a fleet that's a very efficient equipment into the new company. I can't thank the next year employees enough for the high level of performance, especially in the field where we're dealing with extreme weather conditions. You guys are an amazing group.
spk07: Thank you very much.
spk01: The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect your lines.
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