ProPetro Holding Corp.

Good day. Welcome to the ProPetro Forwarding Corps Third Quarter 2022 Conference Call. All members, all participants will be in listening mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on your telephone keypad. To withdraw a question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mr. Matt Augustine, Investor Relations. 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 results for the third 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 directly 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, Matt, and good morning, everyone. First and foremost, I'd like to express thanks for the continued hard work and high level of execution from our ProPetro team. We are excited to report that in the third quarter of 2022, we continued our track record of operational excellence along with strong strategic execution and financial performance. I'll let David speak more to this in a moment, but at a high level, we are very pleased to produce sequential top line and bottom line increases in the quarter. Some of our key highlights include the highest adjusted EBITDA margin in the history of our hydraulic fracturing business with the exclusion of a COVID-related anomaly in the second quarter of 2020. We had nearly 80% incremental adjusted EBITDA margins for the total company on flat effective fleet utilization, reflecting our discipline returns-based strategy. Additionally, our submitting business had their highest revenue quarter ever while achieving 100% sequential adjusted EBITDA growth. Also, this was the third consecutive quarter of positive operating income for the company, excluding impairments. And finally, we completed the acquisition of Silver Tip Completion Services, a leading Permian Basin wireline and pump down company. There's a lot to talk about today and we're excited to share more on our strategy and recent actions mentioned above. We remain committed to executing on our discipline and focus strategy and it shows. In the third quarter, we took meaningful steps in our efforts to advance our strategy of pursuing accretive growth opportunities that expand our margins and increase free cash flow generation to create a stronger, more resilient, and more diversified company. Chief among those transactions is the one we announced yesterday, our acquisition of Silver Tip Completion Services. Also based in Midland, Texas, Silver Tip is a leading Permian Basin provider of wireline perforating and pump-down services. When coupled with our number one customer rated hydraulic fracturing and cementing businesses in the Permian, we now have a leading completions focused oilfield services company, and we are excited to have closed this value enhancing transaction and add this to our potent portfolio of services for our customers. However, before we speak in depth about Silvertip and the other important transactions that we have executed during the quarter, I want to take a step back and reflect on the macro environment in which we are operating and how we are looking at it from our vantage point. Just as it was when we spoke last quarter, the crude oil market continues to be structurally undersupplied, which is a trend we foresee continuing for the next few years, so as long as global investment in new production continues to lag. the overhang of a potential global recession has resulted in limited visibility into future near-term fuel demand levels. Given this limited visibility and E&Ps maintaining a disciplined capital spending posture when it comes to growth, we are anticipating steady to flat activity through the end of this year and into the first part of 2023. Additionally, for the E&Ps that are currently operating, equipment attrition continued delays in supply chain deliveries, and a tight labor market are further contributing to stagnated activity. Given these factors, we are seeing a number of EMPs elect to dedicate their resources and efforts towards high grading their service providers, with a clear delineation in the pressure pumping sector between those that are high grading to natural gas burning equipment like electric and Tier IV DGB and those that are not. This bifurcation is being even further exaggerated among those that are performing safely and efficiently at the well site and those that are not. As we look ahead, while at a slower pace, pricing momentum in the top half of this bifurcated market continues to be strong. The sense of urgency among our upstream partners remains intense, and opportunities continue to surface to expand margins through increased pricing. With a first-of-its-kind contracting window now open for frac services, we are optimistic that this momentum will continue. Additionally, we recently executed a new contract with Pioneer Natural Resources to start 2023 with two simulfrac fleets. We have already reserved the fleets not continuing with Pioneer with other Blue Chip customers, and our 2023 order book is full and effectively sold out with current market-based pricing effective in January. Next, I'd like to take a moment to highlight our expansion strategy and the actions we are taking to best position ProPetro for the long term. First, we are focused on optimizing our operations and industrializing our business, the result of which we expect to add resiliency to our ability to create meaningful incremental free cash flow in the future. Second, we are continuing to transition our assets to next-generation equipment in a more capital-like manner. And third, we are opportunistically pursuing strategic transactions that increase our competitiveness and accelerate value for our shareholders. To the first goal of optimizing our operations, we have initiated an internal optimization program for our maintenance and reliability operations. We expect this initiative will yield opportunities to improve our cost effectiveness and extend the life of our equipment, therefore reducing downtime and optimizing the utilization of our fleets. Second is our fleet transition. We are continuing to deploy Tier IV DGB conversions and look forward to beginning 2023 with six Tier IV DGB fleets in operation and at least seven in operation by the middle of 2023. This will give us one of the youngest dual fuel fleets of size in the region. As we've previously discussed, we have executed orders for two electric frac fleets from a leading manufacturer of electric equipment with expected delivery in the third quarter of 2023. Additionally, we are in advanced stages of contract negotiations with two large EMP operators to utilize these electric fleets in 2023 and beyond. Demand for electric-powered solutions is continuing to gain momentum, and we are excited to help our valued customers make their mark in the electrification of the Permian Basin oil field. We expect to have both of these fleets contracted by the end of 2022 with hopes of additional electric frac fleet orders in the future. As mentioned before, we believe in the upcoming electrification and industrialization of the Permian Basin. This technology coupled with the efficiencies that ProPetro is most known for, will support customers in their respective transitions to electrification. Given our view on the state of the global energy industry and the associated severe undersupply of crude oil and natural gas, we at ProPetro are convinced we are in the early stages of a sustained, multi-year-long upcycle and accordingly are confident in our plan to continue transitioning and electrifying our fleet. Finally, the third leg of our strategy, our pursuit of value enhancing, free cash flow, and earnings accretive transactions, particularly in more capital life businesses. This takes us to our recent acquisition of Silver Tip. Also based in Midland, Texas, Silver Tip is a provider of wireline perforating and pump down services, and together with our existing services profile, creates a leading completions focused oil field service company. Through its culture of data-driven decision-making and established track record of safety, Silvertip provides operators with efficient, high-quality wireline and pump-down services. Simply put, we are enthusiastic to have made this acquisition, which adds highly complementary, dedicated assets with substantial cross-selling opportunities to drive growth, strong free cash flow, and superior value creation. This combination also gives us more exposure to the completions well site and allows ProPetro to offer a more integrated and diverse service to our customers. Acquiring Silvertip represents another important step for ProPetro as we advance our strategy of pursuing accretive growth opportunities that expand our margins and free cash flow generation. In doing so, we are creating a combined organization that is even better positioned to serve our EMP customers with greater scale, efficiency, diversification, and integration. Going forward, Silver Tip's co-founder and president, Mike Wood, and his team of professionals will continue to manage Silver Tip within ProPetro, and we can't wait to begin sharing best practices while working alongside each other as we bring our companies together. And with the Silver Tip team receiving a large portion of their consideration for this transaction in ProPetro equity, we are fully aligned in our commitment to enhancing shareholder value. Indeed, both ProPetro and SilverTip share a like-minded and steadfast focus on leading the Permian in completion services execution, and we are excited to welcome the SilverTip team as we work to deliver best-in-class services for our customers, capture the significant growth opportunities inherent in this transaction, and unlock meaningful value for our shareholders of both companies. We expect this acquisition to increase 2023 adjusted EBITDA by approximately $65 to $75 million while converting approximately 80% of that EBITDA into free cash flow. Given this conversion rate, which is double our current conversion rate, the addition of Silver Tip will significantly enhance our free cash flow. And due to these attributes, we expect the transaction to be immediately accretive across all metrics. Moving forward, as we look to continue executing on our strategy, we will prudently deploy capital to fund value-enhancing growth opportunities along with investments in our frac fleet conversion. In parallel, we intend to reduce capital spending through enhanced operational efficiencies, deploy innovative technologies, and continue maintenance and operating process improvements. With that, I'd like to turn the call over to David to discuss our third quarter financial performance capital resources. David?

Thanks, Sam, and good morning, everyone. As Sam mentioned earlier, we are excited to have closed on the acquisition of Silvertip yesterday. The transaction consideration consisted of the issuance of 10.1 million shares of ProPetro common stock, $30 million of cash, the payoff of approximately $7 million of assumed debt, and certain other transaction costs subject to customary post-closing adjustments, which implies a value of $150 million based upon the 15-day volume-weighted average price of ProPetro's stock as of October 27, 2022. The transaction was accretive on all financial metrics, including adjusted EBITDA multiple, free cash flow per share, and earnings per share. The Silver Tip acquisition provides additional corporate scale and another capitalized business within our core area of operations, the Permian Basin, helping us create a best-in-class completions-focused industry-leading business. The transaction is very earnings and free cash flow accretive due to its low capital intensity, and we look forward to evaluating other opportunities that can accelerate free cash flow and earnings for our shareholders. As we have always done in our evaluation of potential transactions, we want to reiterate our commitment to acquire existing capacity rather than adding incremental equipment to the marketplace, particularly in this continuing supply chain constrained environment. We believe this is also consistent with our disciplined fiscal strategy that informs our actions across the company. We also believe the combination of cash and stock was an appropriate balance of capital resources, enabling us to maintain healthy liquidity and a strong balance sheet. while aligning Silvertips management and shareholders. Now to our financial results. During the third quarter, we generated $333 million of revenue, a 6% increase from the $315 million generated in the second quarter. The increase is largely attributable to additional net pricing gains, favorable job mix, strong submitting performance, and our team's ability to consistently outperform for our customers without expanding our fleet activity. Our effective fleet utilization of 14.8 fleets for the third quarter was sequentially flat and in line with our prior guidance of 14 to 15 fleets for the second half of this year. We believe our disciplined approach of margin over market share continues to pay off. We achieved healthy bottom line growth for the past two quarters without deploying any additional assets. This foundation will further propel ProPetro forward as our hydraulic fracturing asset base shifts to a higher mix of natural gas burning and electric equipment by the end of this year and again shifting more so in 2023. Cost of services excluding depreciation and amortization for the third quarter was $224 million versus $219 million in the second quarter, with the increase driven by higher pass-through costs and inflationary impacts, including labor and material costs. Third quarter general and administrative expense was $28 million compared to $25 million in the second quarter. Adjusted G&A was $19 million and excludes $9 million relating to non-recurring and non-cash items. Depreciation was $30 million in the third quarter. The company posted a net income of $10 million, or a $0.10 income per diluted share, compared to a second quarter net loss of $33 million. During the quarter, we sold our cold tubing business to STEP Energy Services, resulting in a net loss on the sale of assets of approximately $14 million. Operating income excluding this loss would have been $27 million, reflecting the third straight quarter of positive operating income. As part of the coiled tubing transaction, we elected to receive consideration in the form of cash and shares in STEP, reflecting our confidence in STEP's ability to grow the coiled tubing business and create value. As part of STEP's leadership position in coiled tubing, we believe the assets now have the appropriate scale to effectively compete and achieve their full potential. We will continue to mark to market this investment each quarter. As adjusted EBITDA performance was strong, with margins expanding by almost 300 basis points, with adjusted EBITDA coming in at $90 million or just over 27% of revenue. Adjusted EBITDA increased 18% sequentially compared to $76 million for the second quarter. And as Sam mentioned earlier, incremental adjusted EBITDA margins were nearly 80%. The sequential increase and strong incrementals were primarily attributable to additional net pricing gains and continued fleet repositioning, while also being partially offset by rising cost inflation and other supply chain issues. Combining ProPetro and Silvertip results for the third quarter, revenues would have been $383 million, with adjusted EBITDA of $104 million, or 27.2%. Annualized adjusted EBITDA per fleet increased 18% sequentially from 20.5 million in the second quarter to 24.3 million this quarter. We also commented on the last call that EBITDA per fleet is expected to increase 25 to 40% in 2023 from second quarter levels. So we were pleased to begin seeing those increases already this quarter. As we finished filling out our fleet calendar for next year, and reposition fleets with more market-based rates, we believe pricing of our fleets will continue to improve, particularly as year-end repricing takes place. The market for efficient, high-performing hydraulic fracturing fleets remains tight due to ongoing equipment attrition as we are seeing evidence of some medium and smaller players struggle to maintain service quality. Our steady focus on achieving full cycle cash-on-cash returns across our operating fleet, paired with additional operating leverage in the form of a 15th fleet active later in the fourth quarter of this year, and the acquisition of Silvertip, gives us confidence to guide to a full year 2022 adjusted EBITDA expectation of at least $310 million, more than double that of last year. During the quarter, we incurred $150 million of capital expenditures. Actual cash used in investing activities, as shown in the statement of cash flows for capital expenditures in the third quarter, was $98 million, with negative free cash flow of approximately $26 million. This figure differs from our incurred CapEx number due to differences in timing of receipts and disbursements. Based on projected activity levels and purchases of additional Tier IV DGB pumps, Our outlook for full year 2022 cash capex is expected to be approximately $325 million, or the midpoint of our prior range, and our incurred capex will be slightly above the top end of our prior range of $350 million. These differences due to timing. Given robust industry fundamentals and our desire to transition our fleet to more natural gas burning and electric offerings, which command higher relative pricing, We are confident in our capital allocation strategy. Accordingly, with the backdrop of our 2022 equipment reinvestment cycle, capital expenditures in 2023 are expected to come in lower than this year, setting us up for strong free cash flow next year without any future anticipated debt service requirements. As of September 30, 2022, total cash was $43 million and the company remained debt-free. Total liquidity at the end of the third quarter was $155 million, including cash and $111 million of available capacity under the company's asset-based credit facility. Pro forma for the Silvertip acquisition and inclusive of their accounts receivables in our borrowing base, total liquidity is now over $200 million. Despite our reinvestment cycle this year, our cash position and total liquidity have remained strong. which in turn sets a strong foundation for us to execute on our strategy moving forward. And with that, I'll turn the call back to you, Sam.

Thanks, David. I'd like to again mention how proud we are here at ProPetro to be a vital part of an energy value chain in the Permian Basin that happens to be one of the most secure and reliable energy sources in the world. We believe that the oil and natural gas produced in this region and across the United States will be fundamental to producing products and powering all other industries here at home and across the globe for decades to come. We, along with our peers, customers, and others across the oil and gas value chain, will continue to innovate and improve while providing the most reliable and secure energy for the foreseeable future. Inside of these broader circumstances, we are laser focused on executing our strategy that we have outlined here today, optimizing fleet transitioning and executing on value enhancing transactions and partnerships. To do that, we will look to enhance operational efficiencies and maintenance capabilities so that we can prudently deploy capital while at the same time reduce our overall spend. We will continue to work to identify and capitalize on value enhancing growth opportunities particularly those in the completion services space. Additionally, we will continue to take steps to tradition our fleet, and as we do so, we anticipate the need to order additional electric fleets in the coming months. Of note, it is always important for us to acknowledge that the equipment discussed today will be deployed under our ongoing margin over market share strategy and will likely not add any net capacity to the overall market. Moving into 2023, we will continue to make certain that we are striving to achieve proper cash on cash returns for our entire deployed portfolio of assets across all service lines. Before we turn it over to Q&A, I want to again thank the entire ProPetro team for another quarter of reducing risk and creating value for our customers through safe, reliable, and predictable operational performance. The results we put forth today and the exciting transactions we have consummated would not be possible without their hard work and dedication to our mission, our safety record, and to each other. Our team's ability to execute at such a sustained high level gives our management and our board the confidence to move forward with our strategy, including the acquisition of Silvertip. Lastly, I want to again welcome the entire Silvertip team to the ProPetro family. We believe we have the most potent collection of services in the Permian Basin, and we will work hard to continue to enhance our ability to serve our customers. With that, I'd like to open up the line for questions. Operator?

We will now begin the question and answer session. To ask a question, you may press star then 1 on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. So draw your question, please. At the time, we'll pause now for our roster. Looks like our first call is going to come from Stephen Gingaro. Go ahead.

Good morning, everybody.

Good morning, Stephen.

So a question, and I know you don't want to go into a lot of detail on a specific customer, but when we think about the potential for price uplifts, on the Pioneer assets relative to what maybe is high utilization because you had a pretty consistent schedule. How should we think about those two factors and what it could mean for underlying profitability of the assets?

Sure. Steven, this is Sam. Throughout this year, there has been a portion of our fleet, some of which are with Pioneer, who have had locked-in pricing for the entire year. That said, most of our portfolio has experienced steady pricing increases throughout the year. So there is a portion of the incremental, a pretty significant portion, actually, of the incremental margins that came through this quarter that are due large in part to that pricing progression. And as we stated in our prepared remarks, we do expect to see that to continue into 2023, albeit probably at at a little lesser speed.

Yeah, Steven, this is David. I think one other thing just to add is we have a very sophisticated pricing model that evaluates customer productivity across our customer base. And so differences in productivity at the well site are incorporated into the specific pricing. And we believe that our current market rates will be well improved from January 1st levels of this year.

Great. Thank you. And then just my other question was around the market. And Sam, you talked about the market and how your capacity ads are probably not net additions. You know, we hear from all the public operators who kind of echo that sentiment. What do you see in the market as far as privates? I mean, I think outside of evolution, I'm just trying to get a sense for giving insights into the overall market supply outside of what the publics are doing.

Yeah, Steven, I think the most important thing to focus on as you and really we look at the entire frac market is that upwards of maybe over 80% of the market's capacity is in seven to eight pressure pumping names. I would say all of those seven to eight companies have fairly sophisticated operations maintenance programs, supply chains that are going to allow them, and I would include us in this group, to sustain their activity in a healthy manner going into next year. There's a significant portion of the remaining 20% that might be a bit disadvantaged in circumstances in the market like we're seeing today. From a cost standpoint, from a supply chain standpoint, just an ability to persist. in this environment. So, while you may see some, you know, what are perceived as net ads from some of the bigger players, I would say that most of those ads are keeping up with overall attrition throughout the market.

Great. Thank you for the details.

Our next question is going to come from Derek Polarheiser of Polar Players. Please go ahead.

Hey, good morning. Just want to dig in on the silver tip deal a little bit more. Just talk about the synergies or the cross-selling with the wireline integration. You mentioned the $65 to $75 million of EBITDA you expect for next year. Is this inclusive of the expected uplift that you'll get by integrating the wireline fleets, or is that more of a standalone figure? Just want to get more of a sense of the profitability uplift on an EBITDA for fleet perspective now that you're vertically integrated with wireline infrastructure.

Sure, Derek. This is Sam. Great question. The $65 to $75 million in adjusted EBITDA that we mentioned attributable to Silvertip is in addition to the legacy business as you see it and model it today. So that just goes on top of any estimates that you have for us next year. One of the things that we are excited about inside of this Silvertip deal is a pretty significant customer overlap. So there's quite a few frac locations that we're on today where Silvertip is out there with us. And we're excited to kind of push into maybe industrializing some of those locations with better processes, practices, and possibly even trimming down the need for labor on some of those locations by kind of sharing the load and providing more of a packaged service to our customers.

Yeah, and Derek, this is Dave. Just to add to that, you know, this is not a synergy story. We're acquiring this business because of the goodwill and reputation of Silvertip, and we have not modeled any synergies here. So this is on a standalone basis. We've already seen collaboration between our business development groups. That has been very positive, and we think that's some upside, but no synergies modeled.

Okay, I understand. I mean, would you expect some synergies to flow through just considering you get more utilization uplift integrating wireline and frac? You obviously have some cost redundancy that you can minus out of the system. Just really looking for a sense of the uplift that you can see from that. Yeah, I think the short answer to that is yes. Okay. Okay, that's fair. Just want to switch over to the attrition topic again. I mean, I think Investors are struggling with how that's really going to look like as far as from those top six or seven guys that you mentioned. Can you walk us through that if you have some more of these Tier 4 DGBs coming into the fleet, and then particularly the EFREX coming in, it sounds like you'll be making additional orders. How does that flow down the line of your fleet to maybe your most underperforming Tier 2 pumps? How does attrition look like? for Propecho where it's not a complete net addition, where we actually will see tangible evidence of fleet replacement with some of the newer fleets that are gonna be coming in.

Yeah, this is Sam again. This is, I think, Derek, a very important topic for people to understand around our sector. A few different things come to mind inside of that question, one of which is just how different we're operating as pressure pumpers today as we were in years past. If you rewind to say 2019 and you compare the average frac site to in 2019 to a frac site today, it is not uncommon for there to be upwards of 50% more equipment on each individual location. And it is not uncommon for that equipment to be pumping say 30 to 40% more hours per day. So I think we're really early innings of, of, uh, the market in general, understanding the broader effects that this new attrition, um, new attrition speed of attrition is going to have on the entire market. That said, as we look at that in our fleet specifically, uh, most everything you're seeing us do from, especially from a tier four DGB perspective is converting existing capacity. The long-term goal, as we discuss internally here, is to migrate investment away from equipment that burns diesel and towards more equipment that burns natural gas. For us, those things are things like dual-fuel DGB and our electric offering. We're balancing real-time market opportunities with with the speed at which we want to execute on that conversion program, keyword conversion.

Yeah, okay.

Very helpful. I'll turn it back.

Our next question is going to come from Scott Gruber of Citigroup. Please go ahead.

Yes, good morning. I wanted to touch on CapEx for next year. You guys mentioned it's going to directionally be down, but I wanted to That's about a few of the moving pieces. So two EFRAC fleets on order. Can you just remind us, you know, when the spending for those fleets hits, kind of between this year and next year? And you mentioned, you know, potentially ordering additional fleets over time. So, you know, would any of that hit? Is any of that going to be kind of built into the budget next year? So kind of thinking about this. EFRAC spend component of 23, if you could mention that for us.

Sure, Scott. I'm glad you asked that question. This is something that we think is just a very favorable aspect of our transitioning to the electric equipment. We actually have a very favorable lease agreement. And essentially, we're able to make this transition without any material capital investment. We're going to be matching our revenues with our costs in that regard and still maintaining some healthy margin. There will be some customer-supplied equipment. I would consider it about 10%, 15%, 20% of the total cost of the fleet deployment, and that spending will probably be occurring in the first half of next year. So, again, very, very minimal capital investment, and we've incorporated that into the general guidance that we're giving you now. We'll hopefully be able to provide some more specific guidance as we finish out our 2023 planning on the next call.

Oh, so the EFRAC suites will be leased, not owned?

That is correct. We were able to... negotiate a very favorable lease transaction that effectively enables us to have a very capital light entry into the E-Fleet space. This is something that we think is pretty exclusive and very favorable to us and our capital efficiency going forward.

Got it. And what do you guys think about maintenance for next year on the legacy fleet? And how much is the fluid end component running for you guys on a per fleet basis?

So I think just generally speaking, as we continue to invest in equipment that doesn't have the same refurbishment requirements, and I'm talking about the electric equipment, that over time that will decrease our maintenance capex. But I think right now, given the what Sam mentioned regarding the intensity of how equipment is used on location, it's essentially going to be similar to what we've experienced recently. And although we have a very significant optimization program to help to expand and lengthen the equipment life, I would model what we've utilized in the past, which is approximately $3 million.

And just the – I mean, you're going to have, what, seven DGB fleets by the middle of next year, fairly new equipment. Is that a mitigant in terms of the maintenance expense, just having those pumps be so new?

You know, I think – yeah, I mean, Sam mentioned, and we have a slide in our investor deck showing the age of our – assets and how the significant investments we've made over the last couple of years and are finishing up this year and continuing into next year somewhat gives us a young fleet. That being said, there's still significant utilization of equipment with the pumping times that we've seen continue to increase and the size of the fleets on location as Sam mentioned as well. So I think overall, as we continue to renew our fleet, that we should see some mitigating of that spend, but don't want to understate the intensity of what goes on location. I think our big pursuit here is to replace diesel and even tier four DGB engines with electric motors over time. But that's going to take some time.

Gotcha. Gotcha. And just overall, kind of the legacy fleets, are you still thinking kind of then like high single digits, maybe like $9 million per, you know, inclusive of the fluid end spend?

Yeah, that's right. I think, you know, given inflation, that could be biased to higher. But if that eases somewhat in 2023, then maybe – maybe we're able to keep it in that range.

Okay. Appreciate all the calling.

Thank you.

Our next question is going to come from Aaron Jaram of JPMorgan Chase. Please go ahead.

Yeah, David, I was wondering if you could maybe help us think about how the accounting around the leases, maybe follow up to Scott's question, on the two EFRACs will work, and how do we think about you know, margins, you know, including kind of the lease obligations. So just trying to think about, you know, some of the moving pieces, you know, for the model.

Sure, and we're continuing to evaluate the specific characterization of those leases, but we believe that they will be embedded in our cost of services and that I think you'll have some slight degradation with that cost, but The way we've priced the fleets, we're still generating very high-quality EBITDA per fleet in the 30-plus range, and that's how we're looking at it. So I think overall, total company, it may be slight degradation, but I think given the repricing that we're expecting in 2023 and the cadence of the industry,

overall you know we're still sticking with our guidance for next year as far as EBITDA for fleet hey Arun this is Sam I'll just add on to what David said our our overall goal with this structure was to was to smooth out from a free cash flow perspective what has traditionally been a pretty jagged and lumpy sector from an investing standpoint where absolute you know risk and capital gets passed around in big chunks. So when you hear us mention working to industrialize our business, this type of economic model we think fits that kind of longer, flatter type of line rather than the investing volatility that our sector has been so accustomed to in the past.

Yeah, and Arun, one more note on that. When we take delivery of the assets in the late second quarter, early third quarter of next year, we will gross up our balance sheet for those minimum lease obligations. And then we will essentially accrete those through cost of services as we use the equipment. And then we'll have purchase options on the back end of those leases should we choose to acquire them.

And just real quick, David, is the leasing arrangement with the manufacturing of the equipment or is it with a third party kind of financing company?

It is with the manufacturer.

Okay, great, great. And then as we think about incorporating the acquisition under our model, Can you give me a little bit of help on thinking about DDNA, GNA, and any maintenance capex for that business?

Yeah, I can give you some general ideas. I think that from a quarterly depreciation perspective in next year, we're probably going to be $32 million to $33 million per quarter We'll continue to refine that as we incorporate that business into our model. As far as CapEx going forward, we've provided some information in our investor relations deck that reflects less than $10 million of maintenance CapEx next year for the business.

Great. Thanks a lot. Our next question comes from Luke Lemoine of Piper Sandler. Please go ahead.

Hey, good morning and congratulations on Silver Tip. Sam, you talked about ordering, I believe you talked about ordering more additional fleets in the coming months. Can we probably think about this as a couple more? And then I guess at this point, would these be 24 deliveries? And do you see a need to order additional tier four DGV fleets? Or do you think all replacement fleets going forward are probably electric?

That's a great question. I think, yes, it's fair to look at additional eFleet orders in the ballpark of a couple. We've said this multiple times past, and really it's been our strategy here at ProPetro for a long time in terms of committing to orders for new equipment, is that we like to see demand, specific demand of ProPetro outstrip our ability to supply before we pull the trigger on certain things like this, like especially electric fleets. So demand is still very strong, as we mentioned multiple times in the scripted remarks. And to tie back to a mention I made earlier in Q&A, winding down investment in diesel burning equipment and winding up investment in natural gas burning equipment is a key part of our fleet conversion strategy, if not a cornerstone of it. So from a Tier IV DGB standpoint, I think we're in pretty good position where we are now. We'll probably wait to see a couple more specific opportunities materialize before we change the speed of that conversion program. So you're looking at a fleet next year that if we're running the same number of fleets we are today, we would have nine out of 15 of our fleets less than two years old in natural gas burning. So we think that's a very significant competitive advantage.

Got it. And then if you did order more E-Fleets in the coming months, would that be at 24 delivery or could it still be late 23 at this point?

Yeah, it would be cutting it close. I'm not sure if we have a direct comment on that yet, but it'd be... It'd be very close. Okay.

Got it. All right. Thanks a bunch.

Our next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

Hey, guys. I got a few this morning. Thanks for including me. I'm going to follow Luke's lead here and stick with the electric. Can you remind me? You may have said this on the last call, and I just simply forgot because I'm getting old, but who's going to own the power on the electric fleets when you get them?

John, this is Sam. It's going to be kind of on a customer-by-customer basis. Each of these first two fleets, the prospective customers, we have them earmarked for. We will probably be supplying power through a third party on one of them, and on the other, they will likely be sourcing power themselves directly. And we'll look to remain nimble on that front moving forward.

Okay. Just housekeeping. A couple more here. I know you've been sort of asked multiple different ways on the E-Fleets, whether they're, you know, just on how you, they're not expected to be additions. I guess my question is, obviously, you know who the two customers are and you probably won't say, which is fine. But when they look at these E-Fleets, are they looking to replace an existing fleet or are they looking for these to be incremental? And if they're looking to replace a fleet, is it one of yours? Does that make sense?

Don, as it sits today, it could be one of each. Okay. So, and we're trying to measure up against, you know, how we want to, you know, what activity level we want to hold throughout the year next year as well. But it could be a little bit of both.

Okay. A couple more, and I apologize for being a hog here. You mentioned on the investments in dual fuel and electric, clearly that's a big push on your frac side. As you look at the integration of silver tips, What are the demands there for dual fuel or electric wire line? There have been a few companies out there that have been dabbling in it. I'm just curious, what are the demands from customers with respect to that? And if they say, hey, we want all these to be electric, what's the capital cost for you guys if that happens?

Sure. Great question. I think the demand or focus is probably much less lower than it is on something like frac equipment just given the fuel consumption intensity right you don't have wireline units consuming really only a fraction of one percent of the fuel that something like a frac fleet consumes that said given our transition into more natural gas burning and electrified offerings that becomes a pretty significant kind of play to run into this conversion and this electrification of the oil field. So through our diligence at Silvertip and conversations about how we can work together going forward, that has definitely been a part of them and especially on the E-Fleet side.

Yeah, and it's, John and David, it's not a significant expense to convert those to be able to support electric capability.

Got it. My final one is a very big picture, but Sam, just your thoughts on the Permian Basin frac market in 23. You know, as you're talking with customers, they're starting to go through the budget process. Do you see big incremental gains in Permian frac crew count or stable? Just opine, if you will.

I think it will be relatively stable, John. There's obviously a good number of dual fuel conversions and new E-Fleets coming into the system. We're fairly confident that attrition is outstripping all of those ads on the bottom end of the market. So we think it'll remain tight and virtually sold out throughout the entire year next year.

Great. Thank you for allowing me in.

Thanks. And as a reminder, if you have a question, please press stores and 1. The question is going to come from Don Christ of Johnson Rice. Please go ahead.

Good morning, gentlemen. Just one on Silver Tip from me. Can you say what the utilization of the 23 wireline units are today? Are they fully utilized?

Just shy of 20 right now.

Okay. So there's some upside there for increased EBITDA if those three go to work. Correct. On the last call, David, I believe you talked about free cash flow being somewhere in the neighborhood of 50% of your EBITDA for 2023. With the silver tip acquisition, you know, in the estimated free cash flow 55 to 60, is that additive? And, you know, is that closer to 65 or 70% now after this acquisition? Am I thinking about that right?

Look, Don, we're going to be continuing to incorporate the financial numbers and evaluating our budgets for next year. So I want to be very thoughtful about that and let you know that we'll provide further guidance. I think we've provided some information in our investor relations deck that you can take a look at. But definitely accretive to free cash flow for sure. on an absolute basis, and I think it would certainly help blend our conversion upwards. So let us spend some more time finishing out our planning for next year. We'll give you a bit more guidance on the next call.

Okay. Yeah, I wasn't trying to nail you down on a specific number. I just wanted to know that it was accretive. Okay. I appreciate all the color. Thank you. You bet.

As a final reminder, if you have a question, please press star, number one. Next question will come from Waqar Saeed of ATB Capital. Please go ahead.

Thanks for taking my question. Sam, as you look at Silver Chip, I understand there is supply chain challenges. It's very difficult to recreate a company like that. But were you to buy all these assets somehow, let's say theoretically, what would the cost be? What is the kind of the replacement cost of all the assets? Because there's always a lot more than just like 23 wireline trucks and, you know, 15 pump down units. There's also all the other cranes and other equipment that comes with it. And so what would the replacement cost be in your view?

Yeah, Makar, I think we'd rather not comment on what the replacement cost we perceive may be. Some of that's a little bit of competitive information. That said, You are correct inside of what is a very tight Environment labor supply chain equipment all the above Coupled with the fact that this is a business that pro petro has not historically been in We think that this is definitely the right way for us to enter Another service line. That's that's complimentary to frac So I think what's what's what's most compelling for us is one the team that silver tip brings along with them the expertise reputation and execution they bring from a performance standpoint, and the free cash flow profile of their business. Those two things lead the way for us, and we're pretty excited to push into 2023 with that offering.

Yeah, well, this is David. Just to add one little comment, you know, we have no desire to create additional equipment capacity in the marketplace, so our strategy around pursuing high-quality operations and acquiring that free cash flow and earnings capability we believe is the right strategy here, and we've done that. We've got a lot of confidence in Mike Wood and his team, and we think that's the right way to go. Okay.

And then, Sam, there are multiple different E-Fleet designs out there. What design are you buying or who the manufacturer is?

We're not publicly disclosing the name of the manufacturer, but we can tell you that this is a very tried and true solution that exists and has been in operation for years and years across the globe. Mainly, we'll have conventional pumping systems on the back of these trailers, so a fairly significant portion of this equipment will be something that our legacy team here at ProPetro is already very familiar with. You can look to us to hit the ground running operationally with this electric offering.

Great. Thank you very much. Thanks, Vikar.

This concludes our question and answer session. I would now like to turn the call back over to Sam Sludge, CEO. Please go ahead.

Thank you, and thanks again to everyone for joining us on today's call. As I mentioned before, and I'd love to mention again, we are very proud here at ProPetro to play a part in the innovative energy industry where oil and gas remain critical to everyday life across the globe. We hope to talk to you soon, and we hope you join us for our next call.

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