ProPetro Holding Corp.

Good day and welcome to the ProPetro Holding Corp second quarter 2024 conference call. Please note this event is being recorded. I would now like to turn the call over to Matt Augustine, Director of Corporate Development and Investor Relations for ProPetro Holding Corp. 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. This morning we released our earnings results for the second quarter of 2024. 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. As we've communicated previously, 2024 is a prove-it year for ProPetro, and I'm pleased to report that we are delivering. In the second quarter of 2024, we demonstrated the effectiveness and resilience of our strategy. We have proven that despite a softer market environment, ProPetro can deliver and is delivering meaningful value for our customers, partners, and shareholders. David will walk you through our financial results in a moment, but first I'd like to share some important business highlights from the second quarter. Despite unexpected activity disruptions during the quarter, our focus on industrializing our business and prudent dynamic capital allocation has helped ProPetro deliver resilient free cash flow generation. We expect our strong free cash flow to continue thanks to the investments we've made and the strategic decisions we've taken to position our business for sustainable long-term value creation. Underpinning our strategy and our confidence are three core principles. which you have heard us discuss previously. Let me walk you through each and share some details on our progress. First, our company is set up to drive free cash flow generation. We've made meaningful investments through our fleet recapitalization and are now reaping the rewards. Demand for our next generation gas burning assets is strong and our transition towards a more efficient service offering that will remain relevant in our competitive market is progressing uninterrupted by market headwinds. We ended the second quarter with seven tier four DGB dual fuel fleets with each bringing industry leading diesel displacement. The rollout of our forced electric fleet offering is well underway and the results we've seen so far make us highly confident that we're on the right path to deliver enhanced customer value and ultimately superior shareholder returns. This quarter, we deployed our third forced electric frac fleet. This is the first force electric fleet we deployed with ExxonMobil as a part of our three-year contract with a second fleet expected to be deployed in the next few months. The agreement includes the deployment of two force electric fleets, wireline and pump down services in 2024 with an option for a third force fleet with integrated wireline and pump down services to commence operations early in 2025. Our three-year contract with ExxonMobil was a major milestone, and in addition to other contracted electric equipment, is a glimpse of ProPetro's future. Moreover, we will continue to allocate capital to our forced electric offering and away from conventional diesel equipment, following the demand trends and the customer preferences we're seeing in the market. On that note, We have placed an order for our fifth force electric fleet, and we expect it to be in the field under contract in 2024. In addition to electrification, we're evolving our business and capitalizing on our strengths in other ways as well. We have been executing committed contracts that help ProPetro to deliver through cycle returns. We continue to work closely with our customers, creating efficiencies tied to integrated services and higher equipment utilization. We are cultivating an incredibly talented and committed workforce and our progress and success today are made possible by our first in class operating team in the field. All resulting in a business that has more durable and resilient future earnings profile. Putting all these factors together, we are proud to deliver valuable, more efficient and flexible services while reducing risks and costs for our customers. We are very confident that our business is poised for our continued growth and success all made possible by our team here at ProPetro. Now moving to M&A, which has been and will continue to be an important strategic driver for our company. Our disciplined and opportunistic approach to deploying capital towards value-creative acquisitions remains a fundamental strength at ProPetro. Our silver tip acquisition continues to be a strong tailwind for our earnings and free cash flow, as does our acquisition of Par5 Cementing, which is now fully integrated into our legacy cementing business. This quarter, we were pleased to complete the acquisition of AquaProp, an innovative provider of cost-effective wet sand solutions. This acquisition is yet another example of our commitment to enhancing innovation and integration through thoughtful capital allocation. The addition of AquaProp is aimed squarely at further industrializing our operations with the ultimate goal of bringing more value to our customers and ProPetro through removing unnecessary equipment off-location. Furthermore, it builds on a reputation of delivering best-in-class integrated completion services desired by operators in the Permian Basin. We will stay disciplined and opportunistic in our pursuit of accretive M&A evaluations that make sense. Indeed, ProPetra's stable and robust cash generation results allow us to advance our fleet transition and participate in accretive M&A, all while maintaining a strong balance sheet. Importantly, it also provides optionality to return capital to shareholders. On that note, and as we announced last quarter, our board approved an increase and an extension of our share repurchase program through May 31st, 2025, with an additional $100 million authorized for a total of $200 million. Since the inception of our plan in May of 2023, ProPetro has repurchased approximately 10% of outstanding common shares. David will add more on this in a minute, but let me just say that our actions on this front confirm our board and management's confidence in ProPetro's continued earning growth and free cash flow generation. Returning capital shareholders will continue to be among our top priorities. The success I just laid out and the initiatives we are pursuing showcase ProPetro's strength. Despite some turbulence in the market, our strong performance is why we believe ProPetro shares are a unique investment opportunity and that the investment thesis is apparent in the discrepancy between our equity value and the strong financial performance evident in our results. Yes, the second quarter was challenging. Rig counts continued to move lower and pricing across our conventional diesel assets became more competitive. We experienced a weaker quarter sequentially in our wireline business, due to shifting customer schedules and also saw significant weather impact as we had several uncharacteristically strong storms push through the Permian during May and June. Yet our premium service offering coupled with our operational excellence, robust and blue chip customer base and superior service proved to be resilient as our dual fuel and electric equipment remained highly utilized. We're also pleased to report another quarter of lower capex relative to our original budget, which will further support free cash flow in our capital allocation plans moving through the remainder of 2024 and beyond. We are confident in our ability to deliver strong financial results through the balance of this year and into 2025. Turning now to our market outlook. While ProPetro is of course not immune to the macro pressures facing our industry, We continue to take decisive action, building out our high quality service offering and maintenance of our strong balance sheet designed to deliver meaning free cash flow generation. We remain optimistic about the strength of North American land oil field services potential over the next several years and are confident that our industrialized model geographic focus in the Permian Basin and the discipline execution of our strategy will pay off despite the slow to no growth environment that exists today. Lastly, and maybe most importantly, our pursuit of operational excellence allows us to effectively service our strong blue chip, Permian focused customer base, and is supported by our proven electric technology, which garners committed contracts. Our balance sheet is healthy and we have ample liquidity to be opportunistic in our capital allocation decisions. In sum, our evolving industrial model has proven to be effective. and we look forward to achieving even greater success. We expect to continue elevating ProPetro as well as our entire industry for years to come. I'll now turn the call over to David to discuss our second quarter financial results. David.

Thanks, Sam, and good morning, everyone. As Sam mentioned, despite broader market headwinds, we generated strong returns and continued to execute on our strategy. With our significant capital spend of the last few years behind us, We have transitioned to focus on higher free cash flows and consistent earnings. And today, we have results that evidence the turnaround we've discussed in prior quarters. In the second quarter, revenues decreased 12% versus the first quarter to $357 million. Net loss was $4 million, and adjusted EBITDA decreased 29% sequentially to $66 million. The decreases across our second quarter financial metrics were mostly attributable to unexpected activity disruptions and softness across our conventional diesel equipment and wireline offerings, as well as significant weather impacts in the Permian Basin. Additionally, we incurred an operating lease expense related to our electric fleets of $12 million for the quarter as compared to $9 million in the prior quarter. Our effective Fract fleet utilization for the second quarter was 15.5 fleets, which was above the guidance range we had provided. Thanks to efficiencies exceeding our expectations from previous years, we are shifting away from reporting on fleet utilization based on days worked. Instead, we'll focus on guiding and reporting the number of active frac fleets, which we believe better represents asset utilization in our hydraulic fracturing business. During the second quarter, 14 hydraulic fracturing fleets were active, and we expect to run approximately 14 active fleets in the third quarter of 24. Moving to our capital program. Net cash used in investing activities during the second quarter of 24 was 57 million, of which 21 million was related to the acquisition of AquaProp. As we shared last quarter, our supply chain and operations teams are scrutinizing our capital spend more than ever, and we're also conducting supply chain assessments to maximize returns from our vendor relationships. I'm pleased to share that the work they are doing is already driving favorable results. And here's where the story we've discussed in recent quarters gets very interesting and encouraging. As Sam mentioned, despite a challenging environment and weaker financial results sequentially, the company delivered a fifth consecutive quarter of impressive free cash flow, achieving $48 million, which represents a 17% sequential improvement over the first quarter. If we exclude cash used for acquisition consideration for AquaProp of 21 million in the second quarter, free cash flow adjusted for acquisition consideration was 69 million, bringing total year-to-date free cash flow adjusted for acquisition consideration to 110 million which represents 69% conversion ratio of adjusted EBITDA to free cash flow adjusted for acquisition consideration. This is the dramatic change we've been working to produce through dedication and diligent strategic execution. Our entire organization has been involved in this transformation and there remains work yet to be done. As we continue to demonstrate, the inflection point we reached in reduced capital spend is a strong tailwind for cash generation and is a testament to the success of our fleet transition and optimization of our business. Accordingly, we are now reducing our prior guidance of $200 million to $250 million for 2024 capital expenditures down to a range between $175 million to $200 million. Using the midpoint, the new guidance represents a 40% reduction compared to last year's capital spend of $310 million. ProPetro's cash and liquidity position also remained strong. As of June 30, 2024, total cash was $67 million and our borrowings under the ABL credit facility were $45 million. Total liquidity at the end of the quarter was $145 million, including cash and $78 million of available capacity under the ABL credit facility. Moreover, the transformation of our fleet to more force electric fleets will drive an even greater decline in associated maintenance capital spend, resulting in increased free cash flow and more durable profitability, particularly with the multi-year contractual coverage we are seeing for these fleets. In the remainder of 2024, we anticipate further validation of our strategy and a demonstration of the earnings enhancement resulting from our investments in the business. As Sam shared earlier, ProPetro's improved cash generation profile allows us to pursue our fleet transition while also participating in a creative M&A and maintaining a strong balance sheet. Importantly, it also provides optionality to return capital to shareholders. In the second quarter, we remained active in our share repurchase program, retiring another 2.5 million shares. Since the inception of the program, we've retired approximately 11.3 million shares, which equates to nearly 10% of shares outstanding as of the inception of the program in May 2023. This translates to the return of nearly $100 million to shareholders. We will continue to opportunistically execute share repurchases under the increased and extended $200 million repurchase program authorized by our board in April 2024. We also believe that our strategy will continue to deliver and afford us the flexibility to stay dynamic, selective, and opportunistic in our capital allocation approach. Each of the core principles Sam discussed plays a critical role in our success. We look forward to delivering for all of our stakeholders as we pursue our ongoing electric fleet conversion, organic and continued inorganic growth, and the disciplined pursuit of increased shareholder value. In fact, In just the first half of this year, we've allocated 61% of our free cash flow adjusted for acquisition consideration to higher priority capital allocations with $45 million in share repurchases and 21 million toward targeted acquisitions that we expect to accelerate cash flows further. ProPetro's foundation upon which our strategy is built could not be more solid with our strong balance sheet refreshed asset base and operational excellence positioning us for the long term. Our strategy is carefully crafted to drive success in the slow to no growth environment in which we are operating today. Without question, a consolidated industry and even more activity disciplined Permian customer base presents challenges. ProPetro is up to that challenge and we are thriving. The crux of our strategy is that it benefits not only ProPetro, but also our customers by delivering the very best commercial and industrial solutions for their completions programs. We believe that is a winning strategy to drive durable earnings and cash flows. With that, I'll turn the call back to Sam.

Thanks, David. To build on what David just said, and before turning to Q&A, I'd like to reinforce ProPetro's compelling investment thesis and and the recent actions we've taken to sustain meaningful cash flow generation and to limit our capital spend, further accelerating our true earnings growth trajectory. We remain confident in our strategy and the future of our company. Despite the headwinds and the slow to no growth environment evident in the energy services space we operate in, our company is uniquely and favorably positioned. We've been successful in transforming our fleet, pursuing accretive M&A, and executing on share buybacks, all while maintaining a healthy balance sheet and liquidity profile. The results you are seeing today are just the beginning. We will continue to build on our progress long into the future. Despite what you may be hearing across the oilfield services space, demand remains strong for our services. Our next generation fleet, operational excellence, and strong blue chip Permian customer base will sustain the momentum we have. I'd also be remiss not to mention that the demand for our forced electric fleet outpaces our current supply. Moving forward, you will continue to see us capitalize on these positive trends. We are clear-eyed about the market pressures that persist, but also about the assets we have to navigate the turbulence. Our best-in-class commercial architecture supports our strategy and positions ProPetro to continue delivering strong free cash flow generation for the remainder of 2024 and beyond. Finally, I couldn't be prouder to lead an incredible ProPetro team. It is because of their dedication that we are able to confidently present and execute this roadmap. To the whole ProPetro team, I thank you for your commitment. It is what gives our leadership conviction that we have the right strategy and remain the leader in the Permian Basin. With that, I'll ask the operator to open up the line for questions. Operator?

Thank you. We will now begin the question and answer session. To ask a question, you may press star then 1 on your touchtone 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. At this time, we'll pause momentarily to assemble our roster. Our first question comes from Luke Lemoine from Piper Sandler. Please go ahead.

Hi. Good morning. Sam, you talked about the outlook for the second half of the year, looking a lot like the first half. You had some variability in 2Q, which you wanted to detail about. I'm kind of guessing when you look at the back part of the year, maybe you're expecting some of these issues, transitory issues to go away in 3Q, a little bump in 3Q, and then some seasonality in 4Q. But if you could just kind of maybe write a little more detail and kind of frame up how you see the rest of the year unfolding, that would be helpful.

Yeah, Luke, I mean, I think you described it pretty succinctly and pretty effectively. I'd say what you just described in terms of a little bump in 3Q and some seasonality in Q4 is likely the way we're looking at it. I think when we said back half looking similar as front half, that's probably more of an activity focused comment. That said, I think we're also, the closer we get to 4Q every year, the more we find out about holiday seasonality around Thanksgiving and Christmas. Remains to be seen exactly what that looks like, but we're fairly confident that 4Q will be strong as well.

Okay. And then, David, pretty big reduction in the CapEx, especially if you go from the high end to the low end of your revised guidance. Can you just talk about what changed there a little bit?

Sure, Luke. We have seen, as we have continued to transition our fleets from more conventional equipment, a decrease in the capital intensity required. And so that's part of it. The other part, if you look at our strategy slide, is optimizing our business and what operations is doing. And I'll give a lot of credit to Adam and his team is extending the life of the equipment as we use it in the field. So those benefits, that effort that has been put in over the last 18 months is beginning to bear fruit, along with the fleet transition from a conventional to electric equipment. And just to give you some sense of that, you know, our hours, our pumping hours from Tier 2 diesel equipment dropped 25% sequentially during the quarter. The hours coming from electric went up 60%. sequentially and Tier 4 DGB went up kind of mid-teen. So we're seeing that transition that we've talked about. It's going to play out in our P&L and our cash flow more significantly as we go forward.

Yeah, and I think David said it well, Luke. The one thing that I would add is that this guidance change for us, which is fairly significant in our eyes, is We're not deferring any CapEx here. We are still giving the business absolutely everything it needs to perform at the highest levels and into the future.

Okay. Got it. Thanks a bunch.

The next question comes from Derek Podhaser from Barclays. Please go ahead.

Hey, I just wanted to ask about the pricing trends you're seeing out there. You said in the release you're seeing some pricing pressure in the Tier 2 diesel assets, which makes sense. But have you seen any pressure leak into the Tier 4 DGB assets? And then where do you think we should bottom out here as far as pricing? Just your overall outlook on pricing, that would be helpful.

I'd say for our next-gen assets that we're calling, you know, our dual-fuel and our electric assets, pricing remains very strong. You know, on a Individual case basis, is there a little bit of pressure here and there? But yes, but nothing material, I would say. The pricing story as we see it in the frack market in the Permian Basin is mainly a diesel pricing story. They're still on the fringes of a few irrational players that are pricing things pretty low and that can disrupt the diesel market, which is really a minority piece of the overall market. It's definitely a minority piece of our offering. And that applies to the rest of the market too. So that's one of the reasons why, although we're seeing some pricing pressures in that part of the market, we remain super confident about ProPetro's prospects from just a general competitiveness standpoint and a profitability standpoint going into the future, because that's a waning part of our portfolio. And we are likely accelerating decisions to wind down all investments and in diesel equipment maybe a little sooner than we initially expected. So, yes, the diesel market has been pricing affected. Also, yes, the remainder of the gas burning, you know, electric dual fuel market has been very strong.

Got it. That's very helpful. And then maybe more on that point about the fleet transition. I mean, we're getting down to single digit tier two diesel fleets here. What do you expect to be at 100% natural gas burning fleet? And then on top of that, It sounds like your fifth fleet, fifth force fleet is coming in at the end of the year. You might have a third option for Exxon next year, which sounds like would need to be a sixth fleet. So maybe more just about when you can get to 100% natural gas and also the cadence of E-fleets, how we should think about it for 2025.

Yeah, well, thanks for pointing that out on the force electric fleets. We did, within the quarter, pull the trigger on the fifth force fleet. which is a new development from our last conference call. We pulled the trigger on that fleet and fit it within this lower CapEx guidance range. So we're pretty proud to be able to do that. That is accelerating, I think, what the main question is you're asking of, you know, when are we basically 100% gas burning? And I think the biggest variable to get us there is probably what market demands are. Is 2025 come with higher activity overall in the industry? Does it have a greater demand pull on our entire portfolio? That likely maybe draws out the harvesting of some of these diesel assets for us. If the market remains kind of flat and muted, which we think it will, we use the term slow to no growth pretty often that we need to go out into the market and create our own wins through operational excellence and next generation assets, that likely that diesel equipment might go away a little more quicker in that scenario. But, you know, will we be running diesel fleets this time next year? Yeah, probably, because we have relatively young, high-performing assets in that part of our portfolio that probably deserve a shot to earn a return on their way out. And that's kind of how we're looking at it. But investing in diesel is likely, from a capital spend perspective, the lowest priority from a capital allocation standpoint.

That makes sense. And just a quick clarifier, on the fifth force fleet, was that a purchase or is that another lease?

That's a lease, Derek. And we are benefiting from our lease program, but keep in mind, there's a very different calculus there. We're replacing equipment that has shorter useful lives with assets that last materially longer to 3x the useful life of what we would consider from the conventional equipment. So it's a very different calculus. We think it's an investment in the long-term viability of the company, and we're seeing that the conversion is very much desired by our customers and generating very efficient and more higher margin profitability as we go forward.

Great. Thanks, Sam and David. I'll turn it back.

The next question comes from Arun Jayaram from JP Morgan. Please go ahead.

Good morning, gentlemen. One of the things I'd love to hear about is just kind of a potential bridge to think about kind of third quarter inter profitability. And maybe we could start with, you know, what type of tailwinds do you expect from the Aqua prop acquisition as well as the Exxon fleet? And maybe you could highlight maybe some of the quarter specific impacts that you felt in 2Q, maybe wirelined, as well as some of the weather? And again, just trying to bridge to thoughts on 3Q.

Sure, I'll start. David can fill in the gaps. The last question you asked about 2Q, I think we outlined it pretty clearly in all of our materials. It's the product of three main factors, weather, schedule disruptions, and pricing. We'll We probably won't give quantitative detail on which one of those was more and which one was less, but definitely a combination of all those three things. I'd like to just call out the schedule disruptions, maybe to give a little bit of commentary. We had during the quarter, basically one customer that had two of our fleets make some last minute decisions to delay some work. So that creates some white space and some kind of jaggedness and uncertainty in the calendar, what we then do, knowing that that work is coming back at a good price with good visibility, is try to fill the gap with whatever we can to keep the crew, the equipment hot, and to cover as much fixed cost as we can. That then has a knock-on effect on something like pricing, because going out and looking for last-minute work is not the most profitable way to run a FRAC business, we believe. But those three things, weather, schedule, kind of unpredicted schedule disruptions in pricing. And then back to your, I think what your first question was around where we go to 3Q. We do believe activity will stay relatively flat. We do think profitability will come up. We're still seeing a little bit of, we did see a little bit of weather in July. So how much profitability comes up is, is, is, We haven't quite totally quantified that, but we do expect overall Q3 to be up. Activity and the calendar look a little more strong. Wireline, I'd say both wireline and cementing are improving going into third quarter, which is, you know, at certain times over 25% of our business, those two businesses, wireline and cement, so they can't be discounted in the grand scheme of things.

Yeah, and really, this is David. The only thing I would add there is that I think we're probably less sensitive to the month-to-month variability of the business and working on generating durable earnings and free cash flows over the longer term. And so I think that, you know, crew continuity is very, very important to our team and to our customers and also in generating the results of optimizing our business. And so that's what we're sticking to. And I think As it relates to cash flow performance going forward, we do see consistency moving into the second half of the year and beyond.

Great. Just my follow-up. David, on the leasing of the forcefully new builds, at what time is the first time you can elect to exercise your buy option on the new builds? At what time, in opposed to the startup of the lease payments, is that option occur and just maybe give us a sense of, you know, could you give us, help us quantify how much, what is the residual cost if you decide to buy out the leases?

Sure. The initial term is 36 months. We do have options to extend beyond that should we so choose, but the purchase option at that time is in the neighborhood of $10 million. We do have some credits that we earn as we generate hours, but that's essentially where the number is. Great. Thanks a lot.

You bet. The next question comes from John Daniel from Simmons. Please go ahead.

Hey, good morning. I guess I'm at Simmons back again. Sam, you made a statement that Q4 would be strong. I mean, you're making that statement for ProPetro. Or is that a broader view on the Permian?

That's probably more so for just us, John. And strong, I guess it's, to add on to that, strong relatively maybe to what we've seen for other Q4s. You know, in the last several years, you've seen Q4s that haven't skipped a beat. quite literally, and you've seen Q4s that have almost been cut in half across the industry. But as it pertains to us, I think the way we've positioned ourselves with our customers and this next generation gas burning equipment kind of puts us to the baseload or the top of the heap of most of our customer portfolios, especially these E-Fleets, right? They have mechanisms in them that account for any white space and things like that. So, is it a product of, you know, just us and our customer base? Maybe, but the more long-term arena, just the entire EMP space gets around their activity and they contract things like E-fleets and have stronger dedicated agreements for things like dual fuel fleets. It just bodes well for more stability throughout the year. That said, I mean, you know, we, we could always be surprised as it pertains to Q4. But conversations with our customers right now are pretty good from an activity standpoint going into the end of the year.

Okay. And then sort of a pointed question here. Thanks for that. Just given the opportunities for additional electric fleets, because I imagine you're not going to stop at five just given the success, do you buy any more Tier 4 DGB engines going forward? And as you looked at 25, would you anticipate anything tier two rebuilds?

Fantastic question on the tier four. I think we're trying to figure out that exact same thing right now. With the demand pull, two things. With the demand pull that we're seeing on our E-Fleets and our contract structure, coupled with things David mentioned earlier about the lower operating cost profile lower maintenance CapEx that comes with these E-Fleets, it's very, very convicting to us to continue to push more aggressively into the E-Fleet space. And from an equipment standpoint, that is number one on the capital allocation list. It can be the best for capital. So I think that tier four investments are dependent on what wins we can create in the fleet space as it pertains to tier two diesel, we're basically done there from a capital spending standpoint. So we have no reason or motivation to be doing things like rebuilding diesel engines at this time.

Fair enough. The last one for me, I promise, is you have obviously seven fleets that are tier four dual fuel. Have any of those customers told you that they prefer the tier four dual fuel solution over electric? And if so, why?

I think it's more the other way around. Honestly, the tier four, many of our tier four customers are first time tier four dual fuel customers. So we've been working together on, you know, what it looks like to use gas in our operations and and kind of create fuel wins. That said, it's really a stepping stone and a waiting line for electric equipment. Once we have some success with dual fuel with a certain operator, you're blending 60 plus percent, which we think we're all but industry leading in the Permian Basin as it pertains to blending diesel displacement percentages, creates a lot of savings for our customers And then the next step in the conversation is what does it look like to go to a hundred percent gas, which is electric at this time?

I don't know, Adam, did you want to add to that? Yeah, no, John, the only thing I would add to that is, you know, the customers that have been running the tier four for a while now have seen and grown to love the efficiencies, you know, the 20 plus hours per day. And it's really Shelby and his team going in there and improving and showing them the results of, are currently deployed force fleets and showing them that they won't lose any efficiency gains by switching over. They're only benefiting from the 100% fuel displacement, diesel displacement. So I think it's just showing them the proof is in the pudding. We're showing them data. We're showing them results from the current force fleets running, and that's getting them over the bridge there.

Cool. That's all I got. Thanks, guys.

Thanks, John.

Thanks so much.

The next question comes from Scott Gruber from Citigroup. Please go ahead.

Yes, good morning. Good morning, Scott. I want to get some more clarity on the CapEx drop, which is pretty impressive, especially in light of the ordering of the fifth, fourth fleet. You know, was the drop mainly due to, you know, cutting the Kierkegaard diesel Fleet Cap X or was there also an element of slowing investment in their ancillary services? If that was a factor, how should we think about ancillary service investment in 2025?

Scott, I'll make just a couple simple points first and David can add on if he needs to. This is tailwinds from a Next-generation equipment standpoint, number one, a lot of maintenance capex tailwinds. Every day we have another electric fleet in the field, the more data and confidence that we have in its lower operating expense, lower maintenance capex. That's a huge part playing here. Another part is, and you've heard us talk about this, it's kind of easy to categorize this as a buzzword, but the broader optimization of our business is really starting to show through. And as it pertains to CapEx, it's showing through in two main ways. One, we've done a lot of really intentional, directed, focused work around extending equipment life for all the main components, for everything we're doing on a frack location. And the wins that we've seen there are really, really impressive. And that's due in large part to our operations team and the focus and work that they've put in to really, really get better at that. fluid ends, power ends, engines, transmissions, all these large components. If you make 10, 20% of life improvements in each one of those, they have massive follow-on effects. So that's one part of it from an optimization standpoint. The other part is what we're doing inside of our supply chain. We are really ramping up our sophistication, how we contract and transact with the whole value chain and trying to ensure that we're getting the best quality parts and services from our supply chain for the best prices. And there's a lot of wins that are showing through there.

Yeah, Scott, this is David. The only thing I would add there is that, you know, about 30% of our capital budget is related to growth or what we would consider non-recurring investments. The rest of it is related to maintenance of our equipment and going forward. And as Sam mentioned, you know, we've been getting much better in that arena. And we've also been deploying assets that are less capital intensive. And so as we do that in our acquisition strategy, as well as in our fleet conversion, that we believe will continue to play out favorably.

No, it's good coloring. Certainly reducing the capital intensity of the base is a great trend to see. Just another question on contracting structure. You guys discussed the bonus payments on your Exxon contracts last call. How prevalent are bonus payments across your other contracts? And just as you guys continue to deliver efficiency improvements for customers, are you thinking about incorporating bonus structures into more contracts going forward?

Scott, if I'm If I'm reading your question right, you might be referring to like performance bonuses that we try and put in some of our agreements. Is that what you're referring to?

Yeah, exactly. Just curious, you know, whether you're able to capture some extra margin from the efficiency improvement that you're delivering to customers.

I'd say that part of our commercial architecture is pretty small. I don't want to say it's insignificant, but it's fairly small. It's small. Well, and each one of these contracts, I'd say each customer we contract with, the structure can look different from customer to customer. And I think that's one of our main advantages commercially, without saying too much, is trying to custom fit our services to the needs of our customers, right? This is not a set in stone structure that we just go kind of shove to people. This is a very collaborative effort with each individual customer. And I think that's where we greatly benefit from like a commercial transacting standpoint. But really what, and I'd say why part of the reason why some of the performance bonus things, especially in the E-Fleets is relatively small is because most of our customers we're talking to about E-Fleets are chasing consistency and predictability. So they want that 20, 21, 22 pumping hours per day every day, and they want their costs to look the same every single day. So if we can find kind of a window where we can both mutually benefit from that efficiency, you know, at a right price, we're not afraid to lock those prices in for considerable amounts of time with or without performance bonuses.

I got it. Appreciate the call, Sam.

Yep. Thanks. The next question comes from Wakar Syed from ATB Capital Markets. Please go ahead.

Thank you for taking my questions. David, just a housekeeping question. What were the shares outstanding at the end of the quarter?

$106 million.

Okay. All right. So that's not the average for Q2. It's the shares outstanding at the end of the quarter, right?

Let me... Now, actually... Shares outstanding would be 104 million at the end of the quarter. But the average shares for the quarter in terms of calculating EPS is 106.

Okay, great. And then... Yeah, sure. So, Sam, on AcroProp, how many pumping crews are you currently catering to through ACWPROP, and how would that change maybe in the second half and then into the next year?

Yeah, we're basically at around four right now, and that's likely headed north from there through the end of the year. We're trying to grow that as quickly as possible, Waqar. So to say what the top end is throughout the tail end of the year is I think a little bit too soon, but we're definitely trying to use that as a mechanism increase profitability and cash flow, but to also give our customers more reliability and more of an industrial solution.

And what's your customer reaction to it? What is the positive feedback? What is the negative feedback on this new solution?

I think one of the things that we like and the customers that are using this the most is just its simplicity. It's simplicity and flexibility on location. So because we're not bound by a container, a silo, or a box, we can really change the amount of sand we can store on location, therefore affecting how many trucks you need to service a job, things like that. So I think that's really what kind of drove us to make that decision, that acquisition, to add it to our offering and integrate a little bit more in that direction. That said, I mean, let's be real with ourselves. I think the sand market in general, the sand value chain is very, very dynamic and fast changing right now. I mean, I think people have found ways to mine more sand in more places. And I think that's causing quite a bit of disruption in the sand supply side. That's why we hesitate to to invest in things like mines quite yet, because as soon as you stand up a mine somewhere, it could be quickly made inferior to another mine just down the road for just distance and geographical purposes. So we'll keep a close eye on that. And look, we're not expecting AquaProp to be on 100% of our frac locations. and it to be adopted by every single customer we have, but we do think there's a legitimate growth opportunity, and we'll continue to press into this year and go into next year.

Yeah, Walker, this is David. I think one thing just to add to that, we looked across our fleets and compared NPT related to sand containment logistics, and there's a significant difference, and I think as we deliver value to customers, pumping efficiency and NPT as some key metrics that they look at. So we think that's a real sales opportunity and business development opportunity to continue to deliver value to Profetro's customers.

Yeah, I would just add on to the NPT discussion. David says it's just not around the silos and the trucking portion of it. It's also the frack equipment, the blender, you know, removing things like screws that have a lot of hydraulic failures on location that we see. That's been very beneficial, too.

Makes sense. Well, thank you very much. Appreciate the comment.

The next question comes from Kurt Khalid from Benchmark. Please go ahead.

Hey, good morning, everybody. Thanks so much for all the insight and color. Really appreciate that. Hey, I wanted to first get some clarity on something that I'm just a little bit confused on. So I think in your commentary, Sam, you referenced that you had an average of 15 and a half fleets operating in the second quarter. And then in a similar commentary, you referenced 14 fleets. Just want to make sure. Did I mishear that?

No, you didn't miss here. We're actually making a change this quarter from what we've done traditionally in the past, the way we disclose activity. I don't know if you remember, Kurt, but dating all the way back to like 2017 maybe, we disclosed effective fleets by number of days worked in the quarter. So we previously defined an effectively utilized fleet as working 25 days in one month or 75 days in one quarter, because we thought that was normal. That's no longer normal. We normal is in excess of 25 days a month. So when you add up all the days for 2Q and you use that effective fleet utilization, 75 days in a quarter, you get the 15.5, but we never ran more than 14 fleets during the quarter. So we're, we're getting to a point where we thought that that was just a inaccurate way to describe our asset level activity. So going forward, we're just gonna call out active fleets of which it was 14 in second quarter. We believe it'll be 14 again in the third quarter. And then I think on a go forward basis, we'll just add commentary around that of if we experienced any white space or if it was a full calendar.

That's great. I really appreciate you clarifying that. So second point of clarification, you guys referenced that you expect improved profitability off of your second quarter level, right? And you were saying you haven't quite quantified that yet, and that's fine. But effectively, as a group here, investors and so on, we probably should not be thinking about, you know, first quarter profitability and the equation of how things might play out in the second. In other words, the way things are shaken out in the industry, it doesn't look like getting back to first quarter levels is something that could even be remotely feasible in the second half of the year. So we're thinking about working off a second quarter EBITDA base, not a first half 2024 EBITDA base. Is that a fair way to think about it?

Yeah, Kurt, this is David. I think that's right. And I think what we've tried to point to is really our confidence in our ongoing cash flow performance and consistency there. So look, the market's going to do what it does. We built a business that can thrive in a fairly stagnant market. We're building additional capabilities with some of the M&A activity, and we'll continue to drive that business model going forward.

All right, that's awesome. And then just on that front end, David, how should we think about free cash conversion as a percent of your How are you guys thinking about targeting that free cash flow conversion?

Well, I think that we've been aspiring to generate in the neighborhood of 50% plus EBITDA free cash flow conversion. We've exceeded that year to date. And in the M&A front, we certainly are targeting businesses with higher EBITDA. EBITDA, free cash flow conversions, the fleet conversions that we're executing on, we believe, have higher levels as well. So I think, you know, 50% is what we would be targeting, and we'll see how the market plays out and supports that.

That's awesome. Appreciate that, Collin. Thank you.

You bet.

Again, if you have a question, please press star, then 1. The next question comes from Don Crist from Johnson Rice. Please go ahead.

Good morning, guys. Thanks for squeezing in here at the end. Sam, I wanted to ask about power generation. Obviously, outside of the oil field, there's been a lot of discussions on data centers using turbines, et cetera. Are you finding it hard to find power for plants? your new electric fleets, and do you see that as a bottleneck going forward if you wanted to add, you know, five or ten more electric fleets in the future?

To date, it has not affected or impeded our progress. I mean, maybe a day here and there as we're getting these first fleets stood up, when we're getting new fleets stood up and deployed, but to say it's had a meaningful effect would be incorrect. Going forward, look, I think for some of the reasons you mentioned, there's just going to be a lot of demand on electricity and cost-effective power generation of that electricity going into the future. I personally, personal opinion, not a pro-Petro opinion, but I think the data center demand is a bit overhyped. That said, most of the data center demand will likely be in positions to pay more for some of the power generation maybe than some of the oil field opportunities are. So it'll create some significant competition nonetheless. I think how we kind of manage through that is how we always have in a very collaborative kind of open manner with our entire value chain and supply chain, trying to make sure we're creating legitimate opportunities for people in our supply chain, you know, companies in our supply chain, not just, you know, picking up the phone on a minute's notice and expecting people to just appear out of thin air to service us. This is a very, you know, we have a very when we go to talk to a customer about an E-Fleet contract of which, you know, that's a, that's usually a long drawn out conversation over multiple months, if not a year, we like, we, we very often have power providers under the tent with us, um, as we're, um, working on, working on those contracts and those opportunities. So, um, we'll continue to kind of leverage our creativeness, flexibility on the commercial end to make sure that that doesn't become a problem. That said, I mean, the supply chains from a build standpoint for generators are just full right now. So the more quickly you can make decisions about the future, the more likely you are to have what you need to service your customers. But to date, I think we've navigated that very, very well.

I appreciate that color. And taking it just one step further, you know, several of your competitors have gone into the CNG space. Is the infrastructure on CNG keeping up with the demand shift towards natural gas burning equipment? And is that a potential investment opportunity for you all going forward?

Yeah, there's one thing that's definite. We can say this without a doubt. The gas is there. There's a lot of gas in the Permian Basin. The better question is, how do we get it to the right spot at the right price at the right time and the right quality? That's where the opportunities are. We've not made direct investments in that arena, although we've worked with many people that have. And I've said this in times past, that's an example of an integration opportunity that we keep a very close eye on. Probably much like we've kept an eye on last mile logistics and sand storage on location. And we think that that reached a relative maturity point to make an investment like we did with AquaProp. And we'll be waiting for that window if opportunities arise as it pertains to things like gas. I think CMG is an oversimplistic way to think about gas as it pertains to powering frac equipment in the future. I think we should just be talking about gas in general because there's plenty of it. We just need to get it in the right quality and the right quantities in the right places.

I appreciate the call, and I'll turn it back. Thanks, Sam.

There are no more questions in the queue. This concludes our question and answer session. I would like to turn the conference back over to Sam Sledge for any closing remarks.

Yeah, thanks, everybody, for joining us today. We appreciate your interest. Hope to talk to you and see you soon. Have a great day.

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