Ranger Energy Services, Inc. Class A

Good morning and welcome to the Ranger Energy third quarter 2021 conference call. All participants will be in a listen-only 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 your question, please press star then two. Please note this event is being recorded I would now like to turn the conference over to Stuart Bowden, Chief Executive Officer. Please go ahead.

Thank you, Operator. Good morning, everyone. I hope everyone is well. And welcome to Ranger's Q3 2021 Analyst Call. As Operator said, this is Stuart Bowden, President and CEO of Ranger Energy Services, and I'm joined by Brandon Blossman, Ranger's Chief Financial Officer. Before we dive into the numbers, I think it's important to reflect on what the Ranger organization has accomplished over the last 12 months. During the first half of the year, we rebuilt our legacy business from the 2020 trough, rehiring and adding nearly 600 employees. More recently, through the acquisitions of Patriot, Perfects, and the Basic Assets, we have tripled the size and revenue potential of the company, building meaningful scale in our rigs and wireline businesses. The two wireline acquisitions increased our unit count more than five times, from 13 to 68 wireline units. We more than doubled the scale of our high spec rig business, along with the addition of incremental service lines and a significant number of ancillary assets. We also greatly simplified our capital structure. We refinanced our entire balance sheet, eliminated a potentially burdensome tax receivables agreement, and paved the way to collapsing our equity structure into a single class of stock. We also diversified our investor base. In short, Ranger is a very different company today than it was at the beginning of the year. We're pleased with the progress to date, but there's still a lot of work to do, particularly with regards to margin improvement and generating sustainable cash flow. Given the strong macro environment and given the early indications from our acquisitions, we are optimistic about our ability to improve margins and generate cash. I'm going to briefly review company-wide performance in Q3 and then talk about our future outlook. Then Brandon will review Q3 segment level financial performance. and outline in more detail the changes we made to the capital structure. I will then come back and talk about the basic acquisition in more detail and wrap up our prepared remarks. For Q3 company-wide performance, revenue increased sequentially $32 million from $50 million in Q2 to $82 million in Q3, driven primarily by the Patriot and Perfect's acquisitions. Please remember, Revenue associated with the basic asset acquisition is not reflected in the Q3 numbers, but will be fully reflected in Q4, since we took control of the basic assets on October 1st. Adjusted EBITDA increased from $2 million in Q2 to $3.3 million in Q3. Company-wide EBITDA margins remained at 4%, which is effectively the same as the EBITDA margin in Q2. On the rig side, we have enjoyed some pricing improvements in Q3. However, there has been little net benefit to the bottom line because of increased labor costs and supply costs. On the wireline side, pricing remains the biggest obstacle to improved performance. We are seeing positive benefits from the integration of our recent acquisitions, including cross-selling opportunities, cost benefits from consolidating yards, along with some crew sharing. Similar to rigs, these gains have been largely offset by increased labor costs. As we look forward, Based on October, including the basic assets, our annualized revenue run rate is now between $450 and $500 million. That is roughly split 60% for high-spec rigs and 40% for completions and other services. Torrent revenue continues to be modest. Based on expected price increases and potential activity increases, we are looking to be on the top end of that range for 2022 or to surpass it. Our target is to achieve 15 percent EBITDA margins or greater at the company level, which translates to segment EBITDA margins of 20 to 25 percent. Clearly, we have work to do since our EBITDA margins for the high-spec rigged business were 16 percent in Q3, and they were approximately 5 percent for completions and other services in Q3. In addition to expected increases in demand and tightening of the market, there are several initiatives already underway to improve margins. First, we are continuing to work on net price improvements across all service lines, and we are engaged in pricing discussions with the majority of our customers. These conversations are generally going very well, and most of our customers understand that prices need to increase to promote a healthy service sector. Further, several of our largest customers are asking for additional rigs, and we expect the market will continue to tighten in the coming months. Second, we are changing our sales organization to better leverage our sales team and promote cross-selling and cross-service lines, particularly amongst larger customers. Third, we expect margins will improve as we continue to relapse cost synergies from yard consolidations as we fully integrate our most recent acquisitions. We expect yard consolidations will continue through the end of Q1 of 2022. Finally, we've made several key management changes in our wireline segment, which we think will have a positive impact on future performance in our completions and other segments. other services segment. I'll now turn it over to Brandon to discuss Q3 segment level performance and our capital structure, and then I'll come back and talk about the basic acquisition and wrap it up.

All right. Thank you very much, Stuart. For this quarter, I'm going to change it up a little bit relative to what we've done historically for my comments. I'm going to go straight to the segment financials. skipping some of the high-level corporate numbers that Stuart mentioned and that you can easily read in the press release. I'll spend a little bit more time on those segments, specifically on the KPIs for our two most significant businesses, try to give you a little bit more detail on those two lines in terms of operating metrics, and then move on with some comments and details on the balance sheet before handing it back to Stuart. So first for the high spec rig segment, here revenues increased 3% or a million dollars moving sequentially from 29 million to $30 million. The revenues were up segment margins decreased a touch moving down from 17% in Q2 to 16% in this quarter. That resulted in a slight drop in EBITDA from 5 million to 4.8 million in Q3. First, on the revenue side, driving that 3 percent revenue increase was an increase of 3 percent, or $18 an hour, in the hourly average rig rate, moving from 566 in Q2 to 584 in Q3. As a sidebar, I'll note that our reported Q2 hourly rig number, or rig hours, was higher today than as we reported in Q2. That was some of the prior period adjustments that we did in Q3, bringing those hours that we reported for Q2 up. And of course the offset is bringing the reported rig rate down. So you'll note that as you compare the Q3 release to the Q2 release. Again, however, on the adjusted numbers, hourly rates are up $18 an hour. That increase in rig rate coincided with about a 3% increase in average hours worked per rig per day. That reflects a small relative increase in the number of 24-hour rigs working during the quarter. So an increase in 24-hour work to Q3 over Q2, though that was modest. Partially offsetting that rate increase was a reduction in rig revenue hours, which saw hours decreasing just slightly 1% from 51,900 hours in Q2 to 51,200 hours in Q3. As we've talked about in the last two or three calls, this reflects the work that the high spec rig team is doing in terms of balancing rates and number of hours worked. So I think that actually is a fairly successful outcome in terms of that balance. On the expense side of the high spec rig segment and driving that downtick that we saw in margin, we did see quite a bit of wage inflation in the quarter with direct field level labor costs up 11% on a per unit basis. That's on a per rig hour basis. However, I will note that there were anomalies in Q3 with some unexpected customer schedule changes late in the quarter, temporarily idling a couple crews in the north. Those particular issues are now passed and month over month numbers on wages, labor on a per unit basis in October look to be showing some, still some inflation, but at a much more modest level on that 11% that we saw on a quarter over quarter basis. Partially offsetting that increased per unit expense on labor was a return of the repair and maintenance costs back down to more historic levels. This is post that inflation that we saw in Q1 and Q2 as we moved incremental rigs into the market, preparing those for higher spec customers than they had been working for in the past. As we move on to wireline, I think probably here's a good point to talk about segment reporting. So as you know, historically, we've talked about wireline as part of the completions and other segment. Once upon a time, our wireline business was quite a bit smaller than it is today. As we move forward, you should expect us to revamp our reporting segments. And what I would expect to see here is that we all have higher spec rigs as a standalone reporting segment, wireline as a standalone reporting segment, and then all our other business lines grouped into a single segment. So still three segments, but we'll stand wireline on its own, and we'll be able to talk about that business line in more detail as we report it as a single segment. I would say that we will try to get that change done by Q4 reporting, and if it doesn't show up in Q4 reporting, it will be a 2022 Q1 event. But again, look for that. Having said that, I will try to give you some incremental details on the wireline business in preparation for it as a standalone segment. So, backing up at the segment level, completions and other services revenue increased 160% or $31 million moving from Q2's $20 million to Q3's $51 million. Other non-wireline services within that segment, the revenue was up 31%, but that represented just $1 million of that $31 million increase. The vast majority of the sequential increase in segment revenue was, of course, due to our wireline acquisitions, which moved wireline-only revenue up nearly 3x, or $30 million, moving the wireline revenue up from $16 to $46 million. As a reminder, we did close the Patriot acquisition, the wireline acquisition, as largely biased towards production work mid-quarter, Q2, and a completion work focus perfects near the beginning of Q3. So that means that the numbers that we're talking about on a Q3 basis, the incremental contribution for Patriot will be incremental half-quarter, and Patriot's contribution will be almost the entire quarter of Q3 with nothing showing up in Q2. So with that in mind, let's go to the KPIs, and here we'll focus just on the perforating completion side of the wireline business, leaving aside for now the production side of our new larger wireline business. So for completions, of the 46 wireline trucks, which are currently available to the completion market, we had an average of 20 trucks working during the quarter. That's a 230% increase over Q2's six unit count. On a stage completed per truck per day basis, those 20 trucks that were working saw an 11% uptick in efficiency, moving from 5.6 stages completed per truck day to 6.1 stages completed per truck day. That combination of additional trucks completing more stages per day resulted in a 275% increase in stages per quarter, moving Q2 stage count of 3,000 to 11,400 stages completed during Q3. Pricing on a per-stage basis was down quarter over quarter 10%. That's the result of the lower perfex pricing blending into the overall composite pricing for the business. Now moving to expenses and margin. Again, this is just on the completion side of our wireline business. So despite that 10% drop in composite stage pricing, overall margins for the completion work in the wireline business held flat at 5%. That was the result of a similar drop, 10% drop in total expenses, again on a per unit basis. That 10% drop in total expenses was made up of a reduction in composite gun costs as we rolled out the use of the X-Connect gun system, at least for the business, for the trucks that historically used it in the Legacy Perfects fleet. This reduction in composite gun costs was partially offset by a modest increase in direct labor expense. So that's it for the wireline business. Moving on to the balance sheet. Here, there are several moving pieces that do bear a bit of explanation as we move quarter over quarter. First, there was a material increase in net debt. Net debt was up $30 million quarter over quarter. like to break that down into some smaller, more pipe-sized pieces. First, $11 million of that $30 million net debt increase is related to the Perfects acquisition. Remember, we took on $11.4 million of debt in conjunction with the Perfects acquisition. That debt was secured by a handful of rolling stock that came over with that Perfects acquisition. disclosed previously, but that is a third of that total $30 million increase. The balance, just under $20 million of that quarter-over-quarter increase in net debt, reflects incremental draw on our revolver. That incremental draw was primarily driven by our two wireline acquisitions, working capital needs. Remember, we did not bring over working capital with either of those businesses, along with some transaction and other related one-time expenses. A couple of other balance sheet nuances to highlight. One, the restricted cash line item shows a $42 million balance. That's a new line item for us and a big, fairly big balance. That $42 million was cash raised to fund the basic acquisition with the cash coming in just before the end of the quarter and going out to pay for the basic acquisition on October 1st, just after the end of the quarter. That $42 million balance is fully offset further down the balance sheet on the other current liability line. So that's a wash, but it does show up and is, again, a new line item. That will, of course, go away in the fourth quarter. You also note that our revolver balance, is now shown on the current deadline rather than in long-term debt as it has been shown historically. So this is just a technical artifact of the new revolver credit agreement and is definitely not reflective of the four-year term of that credit agreement. Now, moving on to liquidity. We ended Q3 with $11 million of liquidity. That was down from Q2's ending balance of $16 million. Importantly, I'll note that that liquidity number today stands at $28 million, so quite a bit of an increase. That is largely due to how we structure the basic acquisition. So as a reminder, we did structure that acquisition to be liquidity enhancing. Point one, our $24 million equity raise was around $5 million in excess of our purchase price. And that was specifically to ensure that all transaction transaction-related fees would be easily covered, leaving no net liquidity impact on close in terms of cash flows. Also, our refinancing done before the close of Q3, which included the revolver that we talked about, also included a new incremental term loan B, which we have discussed before. At the close of the financing, that term loan B was undrawn, but at its At the close of the basic transaction, we did draw that term loan B to its $15 million base value. That $15 million injects directly incremental liquidity onto our balance sheet, and given that the pay down of that $15 million is tied to the asset sales that we have started and will continue through the next 12 months, that cash benefit is expected to be a permanent addition to our balance sheet. And then finally, my last comment here will be on cash capex. We spent $2 million on growth capital this quarter and just $200,000 on capitalized maintenance. Of that $2 million of growth capital, 700, or the largest chunk by far, was spent on a couple of larger ancillary pumps to go out to top-tier customers with our high-spec rigs. with the balance of that amount spread out over several small items in both the wireline and the rig side of the business. And I think that concludes my comments, and I will hand it back over to Stuart.

Great. Thanks, Brandon. To come back to the basic asset acquisition, there's actually quite a bit to talk about. We are very pleased with the progress to date on the integration of Basic into Ranger, and I would be remiss if I did not thank everyone in the organization for their hard work and dedication to making the integration successful. It's been a heavy lift, and what the team has accomplished in the last month is truly incredible. Regarding active rigs, we operated a total of 180 rigs in October, 67 legacy Ranger rigs and 113 legacy Basic rigs. This easily makes Ranger the largest operator of active well servicing rigs today. 180 rigs is admittedly more than we originally intended to run, but we have strategically kept them running for several reasons. First, we want to keep crews. We're seeing an increase in demand for rigs, and manpower and crews are turning into the critical bottleneck to putting additional rigs out. Second, even though BASIC's average hourly rate is lower than Ranger's, customers are showing a willingness to accept higher pricing. Therefore, we believe we can earn attractive margins across all of these rigs. It is worth noting that Ranger and BASIC had different go-to-market strategies, with BASIC often providing lower spec packages relative to Ranger's higher spec packages. That said, we believe both types of packages can generate attractive returns, so we will keep both types of packages running. I bring this up so that you aren't surprised if average hourly rates for rigs are lower across the combined fleet next quarter. Again, we are actively pushing price, but there is more lower spec work in the basic fleet, which will impact the company-wide averages next quarter for hourly rates. We also, as have noted, think there is additional upside to the basic acquisition. We, as we noted in an earlier call, we also purchased quill tubing and nitrogen fracking assets in Colorado, a P&A business in Wyoming, and our rentals and fishing tool business is part of the basic asset purchase. We are currently evaluating the earnings potential of these businesses and will, in the coming months, lay out our longer-term strategic intent as it relates to each of these businesses. Regarding asset sales, Most of our time has been spent evaluating the condition and capabilities of the specific assets that we purchased, which are located in over 50 different yards. However, we've already sold one physical property for $675,000, and we expect a number of light duty vehicle sales and engine and transmission core sales to be completed before the end of the year. We will also begin selling physical properties as we clean out and consolidate yards, which, as I noted, we expect to continue through the end of Q1 2022. In sum, we believe we're on track for asset sales, and we continue to believe that we will realize at least $15 million of asset sales. Regarding rig demolition, we began demolishing rigs earlier this week. An initial scrap list of approximately 100 rigs has already been identified. and we expect approximately 75 rigs to be cut up before the end of the year. Of course, there will be many additional rigs beyond this initial 100 to be scrapped, so we will be taking rigs out of the market well into next year. To wrap up, I'd like to reiterate that we are very excited about our recent acquisitions. We've strengthened our market position in both our rigs and our wireline businesses. We are seeing an increase in demand, and we are excited about the macro outlook and the future need for our services. We believe there is more embedded opportunity within the basic assets than originally contemplated. In addition to the greater number of rigs running, we purchased several other business lines and a lot of ancillary equipment that we are evaluating. And we are more, as I noted, running more rigs than originally anticipated. We still have a lot of work to do, but we feel we're off to a great start. We're confident in our ability to be the prudent consolidator in this space. Finally, with regard to future acquisitions, we will continue to be very disciplined in our approach. Given our new scale, we will only pursue acquisitions with compelling economics and a strong strategic fit. Phrased another way, we will be acquisitive, but only at attractive valuations. Thank you for your time. This concludes our prepared remarks, and we'll now open it up for questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your questions, please press star then two. The first question comes from Ian McPherson of Piper Sandler. Please go ahead.

Thanks. Good morning, Stuart. Brandon, how are you?

Good. How are you, Ian?

Good, thanks. I appreciate all of the detail in the opening remarks. On your question, go-forward consolidation strategy? Are you leaning more in one direction or the other between service rigs and wireline, or do you see both of them as areas for further growth?

I'll start, and I'll let Brandon add on. So I think the short answer, Ian, is that we see opportunities in both segments. You know, I think there are more near-term opportunities that I think the market is aware of on the rig side, which are being evaluated. But I think, you know, again, I think we see opportunities in both segments.

I agree completely. And I'll just, my addition will be that we have and likely will continue to be incredibly opportunistic here. I think that the basic deal reflects but that willingness to go after something that looks like it's going to be an exceptionally good deal and to be cool on things that may get pushed in terms of valuation. So I think, you know, point one, it's great to have a strategy, but it's also great to be willing to modify that strategy based on the facts that are presented to you at any point in time. So I think we'll be biased towards creating the most value wherever that sits and It may be rigs. It may be wireline. It may be building up one of these new business lines that we acquired with a basic transaction. So we have a bigger portfolio of business lines and probably more strategic options than we had three months ago. And so you may see us do something even surprising. Not that we have any plans to, but I think, again, we're open to a variety of possibilities.

Got it. Thank you both. And then, Stuart, if I heard correctly, you said your run rate annual revenue capacity is $400 to $500. Now you hope to hit or eclipse that high end for 2022 with 15% margins. Did I get those notes correct?

Yeah. So right now our run rate is between $450 and $500 million. I would say our target

To be clear, that's an October run.

Yeah, that's an October run rate. So as we think about annualized, as we think about into 2022, as you said, Ian, we would expect to be on the top end of that range or to surpass it because of price increases and activity increases. We do have a target for 15% EBITDA margins, as you alluded to, at the company level. I think our intent is to get to that run rate by the second half of the year. I think it will take a quarter or two to get there, just based on the integration that needs to be done going forward.

Which side of the business needs more price improvement to hit that goal, or would you say it's equally weighted in terms of where you are and where you need to be by the middle of next year to get margins?

Yeah, I'd say it's on the wireline side. If you kind of think about how pricing has developed, rig pricing crashed earlier and then started to climb back. whereas Wireline had a slower decline on pricing but hasn't really come back. And I think you're seeing that when you kind of look at other people that have announced earnings this quarter. So I think there's really kind of more opportunity and there needs to be better pricing. It's more of an acute problem on the Wireline side. What I would also say is if you look at the rig side, I would change my comments a little bit for the basic side. Some of the basic pricing is well below what our margin requirements are, and we are very actively pushing that up. So I think you will see in the coming, you know, kind of quarters on the rig side an increase, particularly on the basic side.

Okay. That's helpful. Thanks. And then lastly, how are you thinking about maintenance capex today? if you get to call it 75 million annualized run rate of EBITDA second half next year, what kind of free cash flow conversion out of that EBITDA could you hope to get?

So as we forecast out for 2022, we are trying to hold the line at that $2.5 million of maintenance CapEx per quarter, so $10 million per year. All indications are that we should be able to hit that so far. Having said that, there's still many basic rigs that we need to understand whether or not they will be in the market and what the required kind of catch-up maintenance on those will be. So that's the variable. As you know, we took down 500 incremental rigs. We have not visited every single one of that 500, though we've made a lot of progress. And as Stuart pointed out, we have 100 of that 500 earmarked for parting out and or cutting up and destruction. But that still is a good handful of rigs that we'll have to figure out what will happen. Part of that will be determined by the macro backdrop and how much demand there is. So that's a fudged answer, but I think $10 million a year on maintenance CapEx is going to be our target, and the macro will determine whether or not we hit that. But that would be good news if we don't.

Yeah, and I'd add to that. I think the macro is important. I think probably everyone is at a place where if we put a significant number of new rigs out, that will require some maintenance to get them put into service. Okay.

Awesome. Thanks. Well, you guys are undertaking a lot of yeoman's work here with this consolidation cleanup. So well done and good luck and look forward to catching up next time.

All right. Great. Thanks, Ian.

Thank you, Ian.

The next question comes from Jason Vandel from Evercore ISI. Please go ahead.

Yeah. Good morning, Stuart. Good morning, Brandon. Good morning, Jason. First question, can you guys talk more about the trends you're seeing in the high-spec rig market and some of your expectations for the market itself in 2022? Do you think labor continues to remain tight, and does your scale help with that? And also, how do you guys continue to approach the balance between rates and rig hours and that balance there?

Yeah, thanks for the question. I'll start. So I think the first question, you know, is about how do we see the market developing? I'd say I think we see the market, we see demand continuing to increase. And I think we do think that labor, you know, will remain constrained. I think OSHA's COVID-19 emergency temporary standard may also impact that to the negative. Um, so I think all of that together will kind of lead or we're expecting it to lead to a tightening of the market, um, which obviously is attractive for pricing, uh, going forward. So I think that's, that's the first thing, um, that, that I would say on that, you know, I think as that is a backdrop based on the conversations we're having with customers, you know, I think you're kind of asking how do you balance rig hours and, and, uh, and rates, you know, frankly, in the conversation with customers, part of it is, hey, if you don't let us get pricing to where it earns us a reasonable rate of return, we will take that rig and we'll give it to our higher paying customer. So that's exactly what is sort of happening as we think about it. And it kind of goes back, Jason, to why we're saying we want to keep these rigs running in cruise, because we don't want to lose the cruise. So now we have a different conversation with our customers that will allow us to high grade customers as we go forward. So. Got it.

And then, actually, along the lines of the high-grading you talked about there, you guys did a lot of work even before the downturn in high-grading your traditional customer base and shifting more to top-tier clients. How different was BASIC's customer base compared to your own? And will you continue that strategy going forward by trying to put their rigs more with your high-graded customer base?

Yeah, I mean, it's interesting. If you actually look at our customer base – I mean, they obviously have in some regions, I would say they probably don't have quite as attractive as a customer base. That said, their customer base is not bad. It's their pricing. So, you know, if you kind of look at it, and I think it's important to remember with C&J, remember Basic bought C&J, and C&J had a pretty robust customer list. So I really think it's probably less about changing customers out as much as it is about getting better pricing with those customers.

And, Jason, I'll just add that BASIC looked from our vantage point to be trying to be everything to every customer. So there's the full range of full high-spec packages on one side. I'll note that on a relative basis, much lower as a percentage versus our fleet, as you would expect, all the way to fair rigs with four-man crews getting barely more than labor variable costs. And so there's, and there's everything in between. So to Stuart's point, they had a very robust, they have a very robust customer list. There was strong overlap with us, but they were, I think pretty apparently pursuing a strategy of getting as many rigs out into the market as possible and focusing solely on revenue. And I think to the detriment of margin overall, I think it's better than we expected, but that doesn't mean there's not a whole lot of work to do there still.

And then as you guys look across the customer base and your expectations into next year of higher activity levels, is that really broad-based? Are you seeing an increase in activity and demand entirely across the universe, or is there a certain part of that customer base that's driving that?

Yeah, I guess I'll start. I do think there's a regional answer to that, and I think the greatest increases we're seeing are in the Permian, so certainly in Permian. And then I would say inside of the mix of kind of daylight work to 24-hour work, I think we are seeing an increased demand for 24-hour work. That said, daylight work is pretty robust. It's some of the cheapest barrels that E&P operators have to add.

And then in terms of where that incremental demand falls on the customer from large-cap IOC all the way down to the mid-cap and smaller-cap P&Ps?

Yeah, I mean, I would say on that that we're actually seeing increases in demand at the large caps right now. I mean, so if you think about the last year, a lot of the demand increases had been from smaller players, you know, as the bigger players really remained very disciplined. I'm not saying we're seeing that trend reverse, but I think we are seeing – more demand from the bigger players.

And then the last quick one for me, just a housekeeping question for Brandon. Can you give us some guidance around Q4 G&A and share count? Thanks.

Yeah, so share count will be just under $25 million when all is said and done. I think that's 24.8 or 20 – exactly, it's 24.78, I believe, is where we'll end up on share count. And then GNA, you know, there are a few changes in GNA in terms of bringing on quite a bit of more activity. However, I think that I would say the $16 to $17 million a year run rate that we have been seeing should not change materially as we move into 2022.

And I would just say on the GNA, I mean, and I think it's probably worth highlighting on the yard consolidations, And this is really at the segment level, but there is a lot of G&A tied up in the large number of yards that BASIC ran. So remember, when we took over the BASIC assets, we, in essence, took over 28 different properties. We think that those will basically be a net addition of 10, not 28. So there's a lot of yards, and that includes utilities, Internet access, you know, people, kind of everything. So I think as we work our way through that in Q4 and Q1, you'll see the segment level G&A wind down.

Sounds good. Thanks for taking my questions. I'll turn it back. Thanks, Jason.

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

Hey, guys. Just one for me. Stuart, as you guys talk to customers, you've just now taken the basic assets access has got Forbes and superior pioneers about to do something. Um, do they get what's happening in terms of the market backdrop and when do they really sort of see the light and say, it's time to, you know, sort of allow you guys to generate an appropriate return on your investment? Yeah.

I, you know, I, I think it's happening in real time, John, uh, from the conversations. I mean, I'll give you just like one anecdote. Uh, we had one customer, I'll give you two anecdotes. One customer was a smaller customer that we went and said that these needed to be the new rig rates for us to continue, you know, working beyond what we had committed to. They were pretty upset, used some pretty colorful language. And we said, we're going to, you know, okay, well, you know, we'll finish up our jobs that we committed to and we'll walk away. Half an hour, they called back and agreed to it, right? So clearly our view is that they got on the phone, called around and realized that there wasn't anything available there. And another one with a much bigger customer said that they wanted to add additional rigs. They were trying to use that as a bargaining chip for basically a volume discount. We very quickly said, we'll talk about additional rigs only until we get our first pricing, you know, basically the first wave of price increases. That's been a multiple conversation event, but I think we're getting there. So it's a long way of saying, John, I do think that they are starting to they're starting to get it.

Okay. And when you see this, what I'm going to call positive traction, right, and you have an ability to look at further consolidation or just acquisition opportunities, it would seem to lend itself well that you focus on those, you know, two areas of core competency where you have scale and are growing it as opposed to maybe, you know, trying to consolidate something else to have that third wheel. Just your thoughts there, and then I'll just turn it over to you now.

Sorry, John, can you rephrase that real quick?

Well, what I'm saying is it sounded like a response to one question or maybe in the prepared comments that you might look at other acquisition opportunities sort of outside the scope of wireline in the rig business. And I would contend that when you look at the positive traction you're going to get and continue to get on the rig side, you should stick with those two competencies as opposed to trying to grow a third business line. Just your thoughts on that.

Yeah, I mean, and I guess I would sort of go back to the, you know, look, I think we've proven that, you know, on the acquisition side, we'll be incredibly disciplined. I mean, I think there is a risk in the macro environment as it's happening right now that we may see some of the things that are going or that are out in the market right now. go for pricing that we probably wouldn't chase up, right? And I think that is likely, it wouldn't surprise me if that's what happens. Again, we're going to be kind of looking at everything and we think we are a logical consolidator. I think you're alluding to something else that's important is if you kind of, you know, on the management team, we've tripled the size of the company last year right 2022 is all it is all about execution right i mean it's got to be about execution margin improvement cash flow um we can't put any of that at risk uh we kind of recognize that that's it's critical for us to do that right well i like what you guys have done uh and i know you're going to be visit integration so good luck with that and uh thanks john you guys the next question comes from daniel burke of johnson rice please go ahead

Good morning, guys. Good morning, Daniel. Good morning. Let's see. Ian touched on the completion side of the business, but wanted to revisit that briefly. I mean, I'd imagine when we look at a Q3, we're seeing some frictions related to onboarding, perfects and the like. But just curious, without benefit of net pricing, which will come, where can you all – where can the margins for – the completion of the services business go? Or where can you get them on your own? I just want to understand what net pricing has to yield versus what you can do internally.

Right.

Yeah, I can hit that. So the levers that we have in the wireline business today are gun prices and labor costs. Labor costs, not on an absolute perp, PERSON FIELD LABOR BASIS, BUT ON A NUMBER OF CREW PER JOB. SO HISTORICALLY, MALLARD HAD ONE FEWER PERSON PER CREW THAN PERFECTS DID. THAT'S A CULTURAL SHIFT FOR THE PERFECTS FOLKS, AND IT'S UNDERWAY, BUT IT'S CERTAINLY NOT ANYWHERE NEAR FULLY DONE. SO WE HAVE SOME DOWNWARD COST OF FLEX ON THAT SIDE OF IT. AND THEN GUN COSTS, I think we pretty neatly cover the spectrum with our related party X-Connect guns and then the historic use of the Dyna guns at Mallard. They have different attributes, but certainly they're coming at very different cost points, and that's another lever that we can play with. Now, the gun usage is definitely something that happens in conjunction with customer consultations in a big way. So that is also, as you imagine, ongoing. To answer your question succinctly, we print a 5% margin at that business now with the two levers I talked about. I think something in the 15% to 20% would be achievable without a dramatic change or without any change in pricing. But that's probably aspirational right now. We really do need to. get pricing up, and it's not just for us. I mean, I think we have one of the most, if not the most, optimized plug-and-perf wireline businesses out there relative to the peer group. Pricing needs to go up for some of our peers to make a cash-on-cash, not return, but just survivability factor there.

Yeah, that was helpful. Thank you. Thank you for that, Brandon. As a final follow-up here, maybe premature or a little early to ask this, but in terms of the financial projections you shared for BASIC, I guess a month ago, any updated thoughts or learnings, or is that still, I assume, appropriate?

Yeah, I would say right now, I think we would say that it is appropriate and we're cautiously optimistic that there's upside to that. And again, I kind of go back to there are more active rigs running than we originally anticipated. You know, we had internally modeled between 80 and 85 basic rigs running. We obviously have a lot more than that running, but we think we can do that, you know, profitably. So we think there's upside there. And then we also think there's upside in the additional service lines that we purchase. So, you know, I would say those numbers still hold, but we're getting more optimistic to the upside.

Great. Okay. I appreciate the comments, guys. Thanks for the time. Thanks.

The next question comes from Derek Podhazer of Barclays. Please go ahead with your question.

Hey, good morning, guys. Morning. Good morning, Derek. I wanted to stick on the high spec rigs. I want to talk about your outlook for the completion rig packages. I know part of the basic acquisition strategy around that was to increase those type of packages that you roll out. I believe you were pretty much at full capacity on the ranger side. You got more of the ancillary equipment. You got more of the basic rigs that are on completion packs. So maybe just talk to us about where you see the increase of completion rig hours through the end of this year and primarily into next year.

So the top line is, as you noted, we do pick up a lot of ancillary equipment, and we do think as you go into 2022, you'll see an increase in demand for 24-hour completion work that tends to be higher spec work. So we do think that's happening. I'm a little hesitant to sort of give you numbers, and let me explain why. For Q4, I think there's some mixed messaging for Q4 on the completion side as people sort of exhaust budgets from 2021. They are in budgeting season. I do think that 2022 is going to be quite robust, but I think 4Q may look similar to what we're seeing right now.

Okay, got it. And then any color you can give on 2022, like how many More rigs could be added at our completion. Just thinking about the real leverage you can have on the rig rate side.

Yeah, we're looking at each other.

Yeah, right. Okay. You know, it depends, obviously, all on the macro backdrop. The good news, as you alluded to, is that we will have more flexibility in terms of moving rigs into the 24-hour market. We won't be constrained on random pieces of ancillary equipment because of the basic acquisition. But we have not given any firm indications from our EMP customers about what their 22 programs look like. So we'd be probably stepping over ourselves if we tried to give you any guidance on that.

Okay. No, fair enough. I want to switch over to Wireline. I know this was touched on a couple questions ago, but the perf gun usage, obviously Dyna came out with announcing a pricing increase, and you now have the X-Connect guns. Can you maybe, I know there's a lot of customer education you need to go through. Could you talk about when you expect those first ex-guns to go on the Mallard unit? You know, how far, how, you know, I know the process just started, but is that a 2022 event? How close are you there? Just thinking about how that could be a real leverage on helping the cost side of the equation to move those margins up.

Yeah, so I guess a couple of things. So the first thing is, Derek, it's not quite as simple as it seems from a gun cause perspective because they actually do require slightly different manpower to prepare the guns and load the guns. So it is a slightly more complicated calculus than just simply gun costs. That said, we do have on the Mallard side some customers that are specifically asking for certain types of guns, you know, which we need to honor. But I do think that as we move into 2022, you know, we're going to try to minimize gun costs and leverage the Perfect or the X-Connect system to a greater degree.

Okay. And then just my last question. Can you touch back on the divestitures? I think you mentioned a figure. I didn't know if that was a fourth quarter this year or 2022. Just think about how you have all that extra equipment and what that can be as far as a nice cash windfall for you guys.

Yeah, so right now we, and I think we've been consistent in our guidance saying that, you know, at least $15 million in asset sales over the next 12 months. You know, again, I think we are consistent with, you know, we're maintaining that. One of the reasons that, you know, maybe to help kind of understand what would tend it more to 15 and what would tend it more to the other side, You know, we've talked about some of the ancillary service lines that we've picked up and that we're evaluating the strategic intent and, you know, what kind of returns those assets can generate. If some of those business lines we do exit, that will actually drive up asset sales beyond the 15. So, you know, to kind of think about that's part of the tradeoff we're making is sort of, hey, do you want to sort of generate more asset sales or build, you know, kind of attractive returns? So that's part of the calculus we're working through.

Appreciate the color, guys. Thanks.

All right. Thanks, Jarrett.

The next question comes from John of Dialectics. Please go ahead.

Hey, guys. Thanks for taking my question. The last two questions kind of covered what I was thinking, which was really trying to connect the October run rate of 450 to 500 with kind of the outlook next year with the bridge in the middle being, uh, pricing's going up, hours are going up. Uh, we might start new businesses, uh, and, and figuring out kind of what that, it would seem like there would be a large, uh, opportunity for growth between an October run rate number and kind of second half 22. Obviously you haven't made the decision on the ancillary business lines as you just explained. And there's a big question mark in the macro backdrop. But, you know, what you're seeing now kind of in some kind of range, am I at least thinking about this right, that there is a reasonably substantial, call it 10% to 20%, 5% to 20% growth opportunity with your existing businesses relative to the October run rate with kind of what you're looking at?

Yeah, I'll take it. Thanks for the question, John. Appreciate it. Look, I think that's right. I mean, I think if you even just, you know, if you kind of start to marry what we're saying and you say, look, we're on the rig side, we're at a 16 percent margin. We need to be, you know, 20 to 25. Let's just say we took 10 percent price increase to get their net price increase. Well, there you are. You're already at, you know. well north of 500, maybe even 550 in revenue. So I think that's right. I think if you're sensing any sort of hesitation, the labor market is incredibly tight right now. And so it's a situation where adding new crews really is a challenge. I think it's a challenge for everyone right now. So I think part of what that means, we were talking about earlier, John, is that It's going to be a kind of, you know, mix of cruise existing rigs or existing cruise into higher margin customers, right? So this can be a migration. I think unless the labor market changes, it's going to be difficult to add a lot of new rigs or wireline units out.

Is that it? Yep, that's super helpful. And just one last question on these kind of ancillary businesses that could either be asset sales or business lines. Can you give us some idea of the kind of orders of magnitude that we're talking about in terms of revenues? And I assume they'd kind of have to hit your kind of corporate margin targets, but are we talking about $10 million? 50 million, 100 million? What are we looking at in terms of how big you think these businesses could be? And then to the extent you exit them, what could they be in terms of asset sales?

Yeah. Again, thanks for the question, John. I would say on an annualized basis, from a revenue perspective, we're thinking they're probably in the 25 million, maybe 25 to 30, so between 2 and 3 million monthly revenue.

At roughly corporate margins.

Correct. Yeah. And if we don't get corporate margins or see a clear pathway to that, then don't be surprised if they show up as asset sales.

Right. Super. Guys, thanks a lot and good luck. You've got a lot of work.

Yeah. Appreciate it. Thanks, John.

This concludes our question and answer session. I would like to turn the conference back over to Mr. Bowden for closing remarks.

Again, thanks, everyone, for joining. I'm sure we have a lot to add from what we talked about. There is a lot of work going on. Hopefully, you sense our optimism about what we're doing and what we've accomplished today. So, again, thank you, everyone, and I look forward to talking to you next quarter.

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