ProPetro Holding Corp.

Good morning and welcome to Petro Holding's first quarter 2022 conference call. All participants will be in listen-only mode. If you need assistance, please signal conference specialist by touching the star key followed by zero. After today's presentation, there will be opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Josh Jones, director of finance for Petro Holdings Corporation. Please go ahead.

Thank you and good morning. We appreciate your participation in today's call. With me today is Chief Executive Officer Sam Sledge, Chief Financial Officer David Shorlimer, and President and Chief Operating Officer Adam Munoz. Yesterday afternoon, we released our earnings announcement for the first quarter of 2022. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Also during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most direct comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question and answer session. With that, I would like to turn the call over to Sam.

Thanks, Josh, and good morning, everyone. Our first quarter operating and financial results reflect the culmination of strategic preparation that the ProPetro team completed in the months leading into 2022. Momentum around our returns-focused strategy was achieved in the quarter and our pursuit of margin over market share led to improved capital efficiency across our asset base. Though no additional fleets were marketed in the first quarter, our team experienced a 15% increase in revenues, and an 81% increase in adjusted EBITDA. These results not only provide proof that our capital discipline approach is paying off, but they also suggest that our team is focusing its efforts in the areas that maximize shareholder returns. Execution of our strategy in the first quarter was more difficult than the results may suggest. Weather and sand related issues negatively impacted our operations in February and March with downtime experienced by multiple fleets. These obstacles endured in the first quarter remind us of the volatility and operational risk we assume daily, both on location and in the geopolitical realm, such as the heartbreaking war in Ukraine. Moreover, they remind us that it's vital to target economic returns that account for the risk that we bear on behalf of our shareholders. If not for our team's willingness and our customers' desire to go the extra mile, To find ways to execute around logistical issues on a daily basis, our results would have certainly differed. That said, I would also like to thank all of the members of the ProPetro team for turning a very challenging quarter into one that reduced risk and limited downtime for our customers, while also generating strong financial results for ProPetro. As we look at how the geopolitical landscape has affected global crude oil markets in the first quarter, we see a tight energy market becoming tighter and a call on short cycle production growing louder. The continued rising drilling rig count in North America, coupled with high energy prices, suggest our initial estimates from earlier this year of 15 to 20 industry-wide fleet ads in North America into 2022 may prove to be too conservative. While also considering the equipment attrition rates in pressure pumping and continued supply chain issues, it's possible that demand will outpace effective horsepower supply well into next year. While we expect the backdrop to continue to be positive tailwind for an effectively sold-out North American pressure pumping market, failing to capture a proper return in a favorable macro environment is futile. We remain steadfast in our belief that focusing on margin expansion while simultaneously providing the highest level of service and efficiencies to our customers is the optimal approach in the early stages of the cycle. Over the most recent quarters, we have successfully repriced and repositioned a significant amount of our portfolio. As a result, we high graded our operations, resulting in a more efficient and dedicated service offering with more reliable profitability. In addition, As part of our fleet transition program to lower emissions natural gas burning equipment, we began taking delivery of our Tier 4 dual fuel units and accordingly transitioned one of our operating Tier 2 fleets to a Tier 4 dual fuel fleet. We now have two Tier 4 dual fuel fleets operating in the field today with a third fleet expected to be converted and in service by the end of the second quarter. As a reminder, those conversions support existing capacity. and do not add effective horsepower to our fleet. With that, I'll turn it over to David to discuss our first quarter financial performance and our capital resources.

David. Thanks, Sam, and good morning, everyone. During the first quarter, we generated $283 million of revenue, a 15% increase from the $246 million of revenue generated in the fourth quarter of last year. The increase was largely due to improved pricing and higher activity levels, including a company record 600 pumping hours for a simulfrac fleet in the month of March. Effective fleet utilization was above our prior guidance of 12 to 13 fleets, coming in at 13.7 fleets, which increased 9.6% from the 12.5 fleets during the prior quarter. and as Sam noted, this was achieved without deploying additional fleets. We effectively scaled our business without adding operations overhead and the investments we made in force ranking projects and fleet repositioning during the fourth quarter and year to date continue to compress white space and improve our price deck and fleet profitability. This requires discipline and our team delivered in a big way. Our guidance for second quarter average effective fleet utilization is a range of 13.5 to 14.5 fleets, which assumes no additional fleet deployments and accounts for impacts related to the continued repositioning of our currently operated fleets. Cost of services excluding depreciation and amortization for the first quarter was $197 million versus $187 million in the fourth quarter, with the increase driven by higher activity levels and inflationary impacts including sand and logistics costs. First quarter general and administrative expense was $32 million compared to $24 million in the fourth quarter. Adjusted G&A was within our prior guidance at $19 million and excludes $13 million relating to non-recurring and non-cash items, namely stock-based compensation of $11 million. Depreciation was $32 million in the first quarter. The company posted net income of $12 million or 11 cents of income per diluted share compared to a fourth quarter net loss of $20 million and a 20 cent loss per diluted share. Included in those figures is a net benefit of $6 million from a non-recurring state tax refund of approximately $11 million offset by a one-time $5 million expense of non-cash stock compensation. Finally, as we described in our prior call, adjusted EBITDA margins expanded significantly with adjusted EBITDA coming in at $67 million or 24% of revenues for the first quarter, which increased 81% sequentially compared to $37 million for the fourth quarter. The sequential increase was primarily attributable to improved pricing, increased activity, and additional cost recovery on jobs while also being partially offset by weather and sand-related issues. adjusted EBITDA margins improved almost 900 basis points sequentially and we experienced 82% sequential incremental margins. We achieved these more normalized margins well ahead of plan due to careful planning by the team late last year with strategic investments and through our disciplined fleet deployment strategy. I would like to congratulate the ProPetro team for its accomplishments in expanding margins in the pursuit of full cycle cash-on-cash returns across our operating footprint. The improvements provide our company with momentum as we move into a strengthening upcycle. That said, it will not get any easier from this point forward. Our challenge will be to continue to stay ahead of supply chain constraints, inflation, and other issues that pose risks to our ability to further expand our margins and provide premium service to our customers. We expect these areas of our business to remain extremely volatile given the lagging impacts from the war on Ukraine and the continuing effects of the COVID-19 pandemic, particularly in China. We will not put further strain on our business by marketing any additional horsepower unless we believe we can achieve returns that compensate for these risks, particularly at this point in the cycle. During the quarter, we incurred $72 million of capital expenditures. Of that amount, $28 million was related to Tier 4 dual-fuel conversions, with the remaining balance being predominantly related to other routine maintenance capex. We continue to redirect capital to support the transitioning of our fleet to lower emissions and natural gas burning alternatives that not only further our ESG goals and the goals of our customers, but also generate improved profitability. Actual cash used in investing activities as shown on the statement of cash flows for capital expenditures in the first quarter was 64 million with negative cash flow of 39 million. This figure differs from our incurred CapEx due to differences in timing of receipts and disbursements. Based on our current plan and projected activity levels, our outlook for full year CapEx spending remains unchanged with a current bias toward the upper end of the range given the pace of market improvement and compression of white space from our calendar. However, as you are aware, market conditions remain dynamic and our full year capital spending will ultimately depend on a number of factors including changes from our projected activity levels, the worsening of inflation or supply chain impacts, or if we identify new opportunities to invest in next generation equipment in a manner that meets our financial objectives. Notably, we have been investing in Tier 4 dual-fuel conversions to support the strong demand and higher relative pricing from our customers. As of March 31, 2022, total cash was $71 million, and the company remained debt-free. Total liquidity at the end of the first quarter of 2022 was $127 million, including cash and $56 million of available capacity under the company's revolving credit facility. While our cash position decreased $41 million during the quarter, which is consistent with our prior guidance, this decrease was offset by a $43 million increase in net working capital through an increase in our accounts receivables balances. We believe our AR balance and net working capital will normalize in the coming quarters. And as noted in our recent press release, we extended the term of our ABL facility into 2027 and improve certain terms and pricing, which enhances availability. As of April 30th, 2022, our liquidity was 145 million. As Sam alluded to in his opening comments, the commitment to capital discipline is critical to our success, and we are firmly committed to ensuring we maintain a solid financial position that provides maximum financial and operating flexibility. Pricing and fleet deployment discipline will also be critical in enhancing our earnings power going forward as we continue to deliver top-tier pressure pumping services to the marketplace. With that, I'll turn the call back to Sam.

Thank you, David. As David mentioned, capital discipline and a focus on returns are pillars of our business strategy today and moving forward. Our team spent significant time in the down cycle working to understand what variables will support the creation of a through cycle return in pressure pumping during this cycle and in future cycles given the high intensity manufacturing environment in which we now operate. We believe we are measuring our business properly and as a result of that endeavor and our strong profitability this quarter validates our work. One of the most important changes noted by our team coming out of the pandemic was how the evolving needs of our customers were creating a wide range of equipment profiles on location, both in the form of capabilities and fleet configurations. This rapid change suggested that we could no longer simply look at EBITDA per fleet to determine if we were being profitable through cycle. As a result, we began focusing on the replacement cost of all the assets required to support customers' well site and the cost to maintain a high level of efficiencies our fleets create. We not only evaluated assets in frac services, but also in our ancillary services such as pump down, cementing and other asset heavy operations. The rationale here is that those business units have their own respective replacement costs that need to be accounted for with their own returns profiles. It's simply not reasonable to allow those services to subsidize the EBITDA of our working frac fleets. We also considered this for our cold stacked equipment. Historically, decisions to activate and redeploy equipment have typically been based on the marginal investment to reactivate rather than the full replacement cost of that equipment. Additionally, our sharpened focus on through cycle returns requires us to address the realities that our equipment does not last forever and energy cycles always come and go. We began accounting for the new attrition rates and volatility impacts to determine the level of profitability required to operate in this business. So, as we combine those factors and move forward into the early days of this returns-focused strategy, we've had to accept that our approach will at times result in missed opportunities with certain customers as it already has. Although passing on work when the expected return profiles do not meet our threshold has tested our mettle, particularly as we saw peers deploy equipment more rapidly, the results we see in the first quarter only strengthen our resolve that we are on the right path, a path that ultimately has driven a transformation of our asset base that has not only become more capital efficient and supportive of higher margins but one that seemingly has runway to continue to improve. While our team is excited about the road ahead, we are not yet satisfied with our current profitability levels, particularly given that the pressure pumping markets are working at effectively sold out levels. We applaud the rate of change in our company's financial performance, but the bar ProPetro measures itself against will not be set comparative to prior cycles or pandemic lows. We believe that it's not only acceptable but required for Wilfield Service Companies to produce sustainable returns, particularly for those reducing risk and increasing uptime and efficiencies for our EMP customers. With that in mind, I'd like to once again thank all of my ProPetro teammates and our customers for another fantastic quarter with best-in-class safety and operational performance. We'd now like to open it up for questions and answers. Operator?

Thank you. We'll now begin the question and answer session. To ask a question, you may press star then 1 on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then 2. This time we'll pause momentarily to assemble a roster. First question comes from Steven of People. Please go ahead, sir.

Thanks, and good morning, everybody. Two things for me, if you don't mind. Maybe I'll start with, you know, from a pricing perspective, you talked about the impact of positive pricing in the first quarter. Can you give us a sense for, you know, kind of where your fleet stands relative to leading edge prices and how we should think about that and the impact on profitability over the next couple of quarters?

Steven, this is Sam. Good morning. I'll take a shot at that. David might want to chime in as well. It's a range right now, and I think that's why you hear us continue to talk about analyzing where our fleet is and how it's priced. So I think we do have a number of fleets that we would qualify as on the leading edge from a pricing and profitability standpoint. We have a number of fleets that are maybe lagging what our current goals are. So near term, our objective is to kind of bring up the bottom end of our portfolio, whether it be through pricing or repositioning or better cost controls internally. And these are things that we've been doing here over the last number of months. So we'll just take a continued effort to get kind of into the through cycle pricing and closer to leading edge with more and more of our fleet.

Yeah, I think, Steven, this is David. Just to add to Sam's comments, I think when we look at pricing, we also are looking at customer efficiency, which can impact that. So what I would say is that we've probably got 30% of our pricing at headline leading edge numbers. Customer efficiency is not always the same. We've got maybe half of our fleets that are at improved pricing with high customer efficiency. So it's really a combination of factors when we think about ultimate profitability per fleet. But the goal, as we've mentioned in our commentary, is to try to increase the levels of profitability across our fleets regardless necessarily of pricing.

Okay, great. Now, thank you for the color. And then just the second thing I wanted to ask about was when you're thinking about, you know, CapEx and how your fleet profile evolves, do you have a sort of – the money that you've sort of earmarked for this year, I think it's $250 to $300. By year end, where do you think your fleet profile stands?

Yeah, I think the goal is to be pushing towards or be in excess of $400. Dual Fuel Fleets, with the remainder being just the conventional Tier 2 fleets. And we look to continue to push into the dual fuel arenas we've seen, continue to see, and have seen differentiated pricing for those assets, but I'd say at least four dual fuel fleets by the end of the year.

Okay, great. Thank you for the call, gentlemen.

Thank you. The next question comes from Tyler's Archer, Tudor Pickering, and Holt. Please go ahead.

Hi, Sam and team. Thanks for taking my question. My first one's on the strategy not to market any additional horsepower in Q2. Sam, I think you said it's testing your mettle a little bit and having to pass on some customer opportunities, but at the same time, a really strong margin improvement in Q1. What I'm just curious on is how much incremental demand you see out there in the Permian You know, maybe over a six-month time horizon. What's the sort of magnitude of opportunities you're having to pass up on, and where could we see demand in the Permian shake out in the quarters ahead?

Yeah, Taylor, great question. I think, you know, maybe to give a little bit more context to the comment that it's kind of tested our mettle or tested our resolve is that in prior cycles like this, when you see demand increasing and, you know, you know capacity in the in the Permian frac sector being virtually sold out. ProPetro and other companies like us have traditionally grown fleet capacity into that environment and you know for many reasons in prior cycles it was probably a bit easier to do that. As we look at the circumstances that exist today, one we're having to take into account What it takes to achieve what we're calling a through cycle cash on cash return and couple those opportunities with the right customers and the right timelines. So we are pretty confident that demand here pretty soon, if it hasn't already, is going to outstrip just overall frack supply, especially in the Permian market. And I think we're looking at that as an opportunity to continue to high grade our portfolio as it exists today. without pushing any more risk into ProPetro's system and really continuing to hang our hat on that operational execution that we feel like we've been known for and that we feel like is a competitive advantage of ours. So really it is just a laser focus on maximizing returns through coupling our teams and our assets with the right people, the right customers, at the right pricing, and generating a return that is probably more incrementally influential to our profile than just adding fleets.

Taylor, this is David, and Adam may want to add to this, but some of the anecdotes from the market that we're getting are things like, look, maybe this isn't a blank check, but just tell us what you need to come frack our well. or, you know, things like, can you at least send over a bad crew? We'll take anything. So, you know, Adam may want to mention some of that, but in terms of just customer sensitivity and urgency, it continues to escalate, and I think that's consistent with what we're hearing from other folks in the market.

Yeah, I would just add, you know, an echo of what David and Sam both said. I mean, just to make a comment on some of those customer requests. In the past, we probably would have jumped at opportunities like that, but as Sam said, we're really watching those more closely now, and if it's going to put risk in our business and what we're trying to do as far as creating value in a return, then we're just having to say no to those opportunities.

Yeah, understood and good to hear. Thanks to all three of you for that. Follow up just on margins. Last call, you pointed to a really strong start to January and then obviously you dealt with some winter weather and supply chain constraints over the back half of really the final two months of Q1. I'm curious, are we back to the sort of profitability levels here in April or maybe exiting March on a run rate basis that you saw in January or Are you still having to fight through some of these supply chain challenges and not quite all the way back there yet?

Yeah, first of all, I just want to, you know, I think it's more than fair to talk a little bit about some of the headwinds we faced specifically in February. I can't say enough about how our team navigated through that internally here and how many of our customers navigated through that as well. This is, you know, being... A really quality executor on location is a dance. It's not just what we do, it's what our customers do as well. So working together with our customers through a month like February and part of March is just really impressive. And I'd just like to congratulate our team, our operations and logistics team, and our customers for what I think is working through that maybe in a very differentiated way. That said, yes, you're right. We called out the January EBITDA margin and numbers on our Q4 call on purpose because we thought that that could be a sustainable level of profitability and something that we could actually build on. So I'd say yes, here in April going into May, we're back in that zip code if not exceeding it.

Yeah, Taylor, this is David. Just to give you a little bit of color During the quarter, we actually saw EBITDA performance drop off about 40% month over month before recovering. So that just kind of gives you a sense at how strong the overall pace of what was going on on a normalized basis, excluding the weather impacts and some of the logistics impacts. So we're seeing good market activity and beginning to see some normalizing activity. of supply chain activity as well. So, you know, we're hopeful that we see that play out through the rest of the quarter and the rest of the year.

Awesome. Thanks for the answers.

Thanks, Taylor.

Thank you. The next question will be from John Daniel Simmons. Please go ahead.

Hey, guys. Good morning. Impressive quarter. Sam or Adam, with the engine lead times, continuing to extend, can you say when you would place the next order for Tier 4 DGB engines? And assuming you placed it today, if you haven't already placed it, when would you realistically be able to have that fifth fleet deployed?

Yeah, John, I mean, quantitatively, that's, as you could appreciate, a bit of competitive information because... Sure. Part of competing and supplying quality service and getting our customers the right products and services is our ability and our competitors' ability to access supply chains in a timely and cost-effectively manner. We started this DGB conversion program basically this time last year. And we did a really thorough analysis to ensure that we were working with the right partners and the right suppliers to help us execute on that conversion program. And we've been, although there's been challenges, we've been quite pleased with our ability and our supply chain partners' ability to execute in that arena. Without quantifying specific numbers, we really like our position in the supply chain right now and our ability to make good on some of these conversions that we promised our customers. and to continue to provide the products and services that our customers are asking of us here in the near future. Going into beyond, say, the four to five fleets of dual fuel conversions that we spoke about earlier, hard to say if there's more beyond that right now. We can say that lead times are not getting any shorter for things like DGB Engines. So the competitive advantages of companies like us and others that do have good access to the supply chains will only become greater because of those lead times extending.

Would you say that your customers are asking for it more frequently today than three to four months ago? No doubt about it. Okay.

Yeah. John, I would just add to that. Like Sam said, you know, we deliver to Thank you for joining us. We'll be right back. of our diesel burning equipment to more gas burning.

And just to clarify what Adam said right there, all of that horsepower he's talking about is dual fuel, Tier 4 dual fuel horsepower that is conversion, no net addition to our fleet capacity.

Fair enough. And I guess the last one for me, I think in the prepared remarks you mentioned that a view that frack crew activity would rise 15 to 20 crews over the course of the year, that would be, I'm assuming, across the U.S., not just the Permian. Let's assume that plays out. If you wanted to reactivate your 15th fleet, whether it's two or four, I don't really care what it is, but just how long would it take you to bring that back to market?

That's a good question, John. I don't know if I'm ready to answer that here. I would just probably point back to what our focus and our strategy is right now, and that's to get all of our fleets above what we would call, you know, amid cycle or through cycle cash on cash return. We're not there yet. I think in my prepared remarks, I noted that we're not yet satisfied with how we're positioned from a profitability standpoint. That said, we do have some leaders in the pack from a fleet basis that are performing significantly. So that is something that we continue to analyze. I don't have a timeframe for you right now. It's a little bit down the priority list in terms of what our focus is.

Okay.

Fair enough. Thanks, guys. Thanks, John.

Thank you. Our next question will be from Ian McPherson of Simmons. Please go ahead. Thanks. Good morning, everyone.

Good morning. You've been pretty purposeful in clarifying we're not out of the woods yet with all the operational challenges, even if you're not You know, trying to grow activity fast, you're not necessarily seeing total relief in all of your pinch points. So I wanted to dig in on that a little bit and ask, are you seeing this play out more with regard to the high churn components on your fleets, your power ends and fluids and things like that? Are you speaking more toward the labor side or maybe your customers' consumables and sand and chemicals, et cetera? Or is it just everything? and do you still have prescribed fixes coming on the way that could help you elevate your margin improvement as you sort through these?

Yeah, Ian, fantastic question. This is Sam again. I guess I'll take a shot at talking about your question in a little bit more of a holistic manner and I don't think I can appropriately answer your question without reiterating how hard this business is. This is This is the front lines of the oil and gas operation today. Labor, materials, operational challenges, this business is tough. That said, we think we have the best team to execute in the best basin. So I think it's a bit of a combination of excitement about Our ability to continue to differentiate competitively because of our team, our asset base, our customers. But also an appreciation for the headwinds and crosswinds that still exist in the system. So we're trying to be as realistic as possible about how we're looking at the future. That said, are there going to be opportunities for continued pricing relief? Yes. at the same time, are there going to continue to be cost inflation pressures? Yes. So it's quite a broad sweeping set of circumstances that have to be balanced and managed all the time. So we think there's upside to go from here. We just want to be realistic about how hard this business is and also I don't think I can say all that without saying we think we're a little bit ahead of the curve as well. We're traditionally at the top end of the pricing scale, and I think from a profitability per fleet perspective, you could factually say that we're a quarter, if not two quarters, ahead of some of our competition from a trend standpoint.

Okay. That's helpful. Thanks, Sam. And then with that, and maybe following in a little bit more pointedly on prior question. For Q2, it seems to me that it would not be out of bounds to think that you could, again, get to mid-teens revenue growth over Q1. And I would assume that based on the EBITDA margin head that you experienced with the transient factors in Q1, that getting towards mid-20s margin, EBITDA margin in Q2 would not be beyond possible. Would you agree with that?

You know, I think that given our what I would call differentiated strategy around fleet deployment, I think that we're not looking so much around top line as we are margin expansion and improvement. So I think that I might be a bit more biased to a number inside of what you mentioned regarding top line. I think as far as margin expansion... I think that we do have some room to run there as we reposition fleets, as we continue to see the price deck lead and increase. Much of our business still has price openers where we can go back and recapture some inflationary impacts. So I think that we've got some room to run there.

That's great. Thanks, David. Yep.

Thank you. Next question will be from Walker Syed, ATB Capital Markets. Please go ahead.

Thank you. Good morning. So, Sam, your pumping up productivity is about 70% to 76%. I think Q4 was 76% higher than Q1 2019. Are we going to kind of start flatlining around that level? You think there's a lot more still to gain from productivity? Could you maybe comment on that?

Great question, Makar. We've been asked this I don't know how many times in the past, and to sound just like a broken record, as soon as I personally think we can't push it any higher, our operations team in combination with our customers proves me wrong yet again. Are there opportunities to continue to increase pumping hour productivity? Sure, I think it's more along in the zip code of the bottom end of our operating portfolio. I think the top end of our operating portfolio is Best in Class. So I think there will be continued gains, Wakar. I think it'll be at a slower rate. I hesitate to call that a plateau because I've been proven wrong by our team so many times before. But I think it will continue to grind higher.

Yeah, and Wakar, this is David. You know, just to highlight one of the call-outs on our earnings release and what we mentioned earlier, you know, one of our simul-frac fleets hitting Thank you very much. but we seem to be surprising ourselves each month as we continue.

Great. Sam, another question. We hear from some of your competitors that there are some kits to upgrade Tier 2 equipment into kind of dual fuel, but that system may have the same kind of emissions profile if not better than Tier 4 DGBs. Have you heard anything to that effect? Do you think there is some merit to that?

Yeah, I think that may be a little bit debatable, Wakar. Through testing that we've done directly and what a lot of the engine manufacturers would say, Tier 4 is a better emissions profile. I think that's why it was government-mandated. Also a big part of this is the diesel displacement. These Tier 4 DGB engines were purposefully designed to displace more diesel, and we are seeing with our own fleet, and I think against some of the anecdotes we're hearing from customers and competitors, that these Caterpillar Tier 4 DGB dual-fuel engines have quite a bit higher displacement rate, and we've been really pushing the envelope. with some of these new units we have, which is an emissions improvement as well as a significant cost savings to us and our customers.

Yeah, we're seeing, I think, in the neighborhood of 50% to 60% displacement on the Tier 2 DGB kits, whereas we're getting, in some cases, in excess of 70%, even upwards of 80% displacement.

Car, just to add one more thing, I think it's fair to note that all of these conversions also have an effect on engine life or asset life. So you have to maximize the tradeoffs of how much diesel can we displace and how long will that conversion or modification last and could it be detrimental to a large component of our fleet.

Yeah, good point. David, just one last question. Could you maybe talk about what the working capital cash inflow or outflow could be for Q2 and then for the remainder of the year? And then any comments on free cash flow for the year?

Sure. You know, working capital, net working capital increased during the quarter related to some delays in getting some tickets signed. We resolved that very, very quickly. And so I think that there'll be some unwinding of that to our benefit going into the second quarter. And generally, we've been able to maintain fairly flat changes in working capital as we progress. And, you know, again, keeping in mind what I would call our more capital efficient approach to the market, you know, again, not looking for top line, but rather Thank you very much. We underspent our original plan in the first quarter due to supply chain constraints. Some of that's going to show up, we hope, in the second quarter so that we continue to get the equipment that we need. But then we'll be looking to 2023 to determine what type of spending profile we'll have in the second half of the year. I think it's still hard to say, but I would be biased toward... You know, neutral or even negative for the year. And again, it's just going to be dependent on how the market plays out.

Great. Thank you very much. Appreciate the answers.

Sure. Thanks, Lekar.

Thank you. Next question comes from Aaron Jaram, J.P. Morgan. Please go ahead.

Yeah, good morning. Aaron Jaram with J.P. Morgan. Sam, I had a bigger strategic question for you. As you're aware, your primary peers are pursuing a bit more of a vertical integrated strategy regarding stimulation. And you guys have generally held firm to just being a pure pressure pumping company. So I wanted to get your thoughts on some of the pros and cons of of a more integrated or vertically integrated offering to customers, if that makes sense, just given how we're seeing a much higher mix of privates in the market who maybe could benefit from that more integrated offering. So I was wondering if you could talk a little bit about that and any future plans that you may have to do some things outside of just pure frac, maybe in terms of sand logistics, wireline, et cetera.

Sure. Great question. I think this is something that we ask ourselves quite a bit internally here as we analyze market opportunities to improve our service and product offering as well as what our customers may or may not be asking of us in combination with making sure that we're continuing to focus on what the core of our business is. I guess I would say, from afar, my perspective is a few of our competitors that are more integrated into things like Wireline, per se, that is offering a more integrated well site service. I would say that the core of their business, from a profitability and a spending perspective, is still pressure pumping, same as us. We look at that and say, if we were to add ancillary services that would integrate us better into the completions well site, can they compete for capital in the same way as our core business? Can they bring through cycle cash on cash returns that we're targeting with our core business? I don't think we have all the answers to that yet, but I think just to give you some context in terms of how we're looking at that, and we continue to analyze opportunities on an ongoing basis. We have a high bar and we want those things, if those opportunities materialize, to be accretive to our offering, not dilutive in any way. And we want to put ourselves in a position in whatever service line that may or may not be added to our current core business, that we can also be the best in the Permian Basin from an operational perspective. That's maybe of utmost importance to us. is being able to provide a differentiated quality service to our customers. So those opportunities have been few and far between over the years, but we continue to keep our heads up and our eyes open and look at opportunities on an ongoing basis that might meet all of that criteria that I outlined.

Great. And my follow-up, Sam, is you guys have been repositioning fleets over the last couple, two, three quarters. And I was wondering if you could maybe just elaborate on some of the benefits from that repositioning as we start trying to think about our forward expectations in our model. So maybe give us a sense of how many fleets have been repositioning and some of the benefits from a margin perspective from these moves.

Yeah, Arun, quantifying that is a bit... on the competitive side in terms of information. But qualitatively, I can say that we've done a good bit of that. And that's been challenging. It's easy for guys like David and Adam and myself to get on the call and talk about that. And very difficult on our marketing, business development, and operations teams to really execute on that type of strategy. And that's a bit differentiated or different then how we have conducted ourselves in prior cycles. We don't get the pleasure to expose our revenue stream to a global index crude market like our customers do. So we have to expose ourselves to better earnings opportunities not only through pricing but also through putting our teams and our assets with better earning opportunities and with better customers. So it is, you know, I could not say enough about how our team has worked together to execute on, say, repositioning fleets. There's probably less of that to do moving forward. We've done quite a bit of it. But it's always an option as we continue to chase this through cycle return. Got it. Got it.

Thank you.

Again, if you have a question, please press star, then one. Next question comes from Don Chris of Johnson Runnies. Please go ahead.

Morning, gentlemen. I just wanted to ask a couple questions about SimulFracts. I know that's moving towards the future of the industry and wanted to know what your thoughts are or where you see your fleet moving from a SimulFract perspective versus a kind of one-pad completion going forward.

Yeah, Don, this is Adam. I would just comment on that. You know, Samuel Frack, we would – I think collectively as a management team, what we've had to experience all of last year and coming into this year is it makes a lot of sense for both sides as long as, you know, the terms are correct as far as pricing and as well as the operation of the EMP as well. I mean, that's a tough job. I mean, I think Sam – noted earlier how tough this business is just simply on the zipper frack side, but as you throw simulfrack into the picture and the amount of equipment and personnel and logistics that need to be hitting on all cylinders to make that operation meaningful to both sides is far and few. I would just say that there's definitely, just like in the pressure pump, there's people that do it better than others and Aligning yourselves with those that have the infrastructure and the logistic capability to continue an operation like that is probably what we would focus on, you know, as we look to more simulfrac for the business.

And, Don, this is Sam. Just to add, you know, one piece of information on top of that. My personal belief is that they're, you know, say heading into 2023, sector-wide, there will be more simulfrac, not less. That said, I don't think we – We are of the belief that it's going to be much more. I mean, it's going to be very marginal growth. This type of operation is not for everybody. You have to have very sizable acreage positions. You have to have very, very good water infrastructure and the ability to move that water around. We're happy to work with some customers that do do that very well, but it won't be for everybody, and I think more growth in the simulfrac will be very slow.

Okay, and just one follow-up on that. How do you account for the fleets that you have doing simulfracs now? Were they counted as one fleet or one and a half fleets or two fleets? How do you all normally do that when you're reporting?

Today, they're still counted as one fleet. When we quote utilization, it's on a working day measure. So one working day for a simulfrac fleet is measured similarly as one working day for a zipper fleet. That said... how we account for it financially is quite different because the replacement cost of the equipment on location for something like a simulfrac operation is far different than say a Midland Basin standard zipper job. So the returns profile needed to meet that replacement cost and that intensive operation is significantly different.

So similar on the utilization,

when we're quoting you things like effectively utilized fleets, but quite a bit different as we measure our economics for that type of an operation.

All right. I appreciate the caller. Thank you. I'll turn it back.

Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Mr. Sam Sledge for closing remarks. Please go ahead.

Thank you, and thank you everyone for joining us on today's call. We here at ProPetro are proud to play a part in an innovative energy industry where oil and gas remains critical to everyday life across the globe. We hope to talk to you soon, and we hope that you join us for our next quarterly call. Have a great day.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.