Solaris Energy Infrastructure, Inc. Class A

Good day and welcome to the Solaris Oilfield Infrastructure First Quarter 2020 Earnings Conference Call. All participants will be in 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. Please note this event is being recorded. I would now like to turn the conference. Over to Yvonne Fletcher, Senior Vice President, Finance and Investor Relations. Please go ahead.

Yvonne Fletcher Good morning and welcome to the Solaris first quarter 2020 earnings conference call. I am joined today by our Chairman and CEO, Bill Zartler, and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and thank everyone for joining us today. We hope that you and your families are staying healthy and safe amidst the global coronavirus pandemic. We have seen a near instantaneous crumbling of global oil demand like no time in history. We won't reiterate the statistics that you all have now heard numerous times nor will we try to predict the tenor of this event. We do, however, believe this is an event, not a permanent change. Many lives, however, will be permanently altered and the way in which we go about our daily activities will undoubtedly be different in ways we cannot predict yet. We at Solaris have ensured the safety of our employees and their families and continue to keep the business functioning at its highest levels. Now I'll turn to our recent results. I'm pleased to share the details of another strong quarter delivered by the Solaris team. During the first quarter, Solaris generated nearly $48 million in revenue, $18 million of EBITDA, our fifth quarter of positive free cash flow, and paid our sixth consecutive quarterly dividend, despite a challenging market environment that was amplified toward the end of the quarter by the start of the global pandemic. I've been working in our great industry for more than 30 years and it's safe to say we're in uncharted territory. The combination of geopolitical and COVID-19 related pressures on the global supply demand balance for oil and related products have resulted in severely depressed prices. As a result, oil and gas operators have significantly reduced development budgets and activity. These reductions began in March and have accelerated into the second quarter with many operators going to zero frack crews and shutting in production as storage for liquid products becomes challenged around the world. As a result, we expect to see completion activities in U.S.-based land decline between 75% and 85% in Q2 from Q1 levels. As much as the oil-directed completion activity is deferred, while some dry gas-directed and leasehold-related completions continued, we expect our activity will follow the overall market. Despite the challenging macro outlook, I firmly believe that for several reasons Solaris will distinguish itself during this downturn and emerge even stronger on the other side of it. First, innovation and finding ways to create efficiencies is fundamental to our company's culture and our team. We remain on the offense during the downturn and will continue to innovate for our customers. We will continue to invest in our fleet. As an example, even now we are continuing to work and trial innovations that improve data, Thank you for joining us. We continue to innovate and win new customers then, and we intend to do the same this time around. Third, we will focus on controlling what we can control, including our cost structure. We have always operated Solaris with a very lean cost and organizational structure, but we have found additional ways to reduce our spending, including reducing headcount across the company, lowering salaries, negotiating with suppliers and vendors, and reducing capital spending. We've had to make some very tough decisions. One of the toughest has been to reduce our workforce by more than 50%. We know that maintaining our financial discipline, available cash, and a debt-free balance sheet will ensure Solaris has flexibility to take advantage of this downturn. We have our eyes wide open looking for potential businesses and technologies that will complement and enhance our current business. Finally, we will remain focused on generating value for our shareholders. Cumulatively, before entering the current downturn, we returned approximately $59 million in cash to shareholders since December of 2018 while maintaining a debt-free balance sheet and cash on hand. We are also not wavering on our commitment to ESG. On the environmental side, we recently renewed some of our energy contracts. We now have a commitment to purchase green energy. We also have begun installing remote sensors on our generators that will enable us not only to report emissions but also potentially reduce emissions by enhancing our preventative maintenance program and improve safety by reducing the number of truck trips to location. Speaking of safety, our TRIR metrics have continued their downward trend and we have achieved record lows for the company. On the governance front, we continue to maintain a conservative balance sheet and management and employees own approximately 16% of the company, which directly aligns our interests with the shareholders. Last but not least, the equipment we design, manufacture, and provide to our customers drives value from both an environmental and a socially conscious perspective. Our systems reduce the number of people required on location, reduce truck traffic and completion time through reliability and large inventory supply directly at the blender. In addition, our equipment is all electric and can be tied to electric power generated on site, eliminating the need to run diesel generators. Our latest R&D developments around software and automation further these benefits by taking additional personnel off location and reducing trucking requirements. To summarize, while the extent and duration of this downturn is out of our control, we will focus on what we can control, running as lean and nimble as we can, ensuring our customers receive exceptional service and many more. Thank you for joining us.

rated $48 million of revenue, adjusted EBITDA of approximately $18 million, and positive free cash flow of approximately $11 million. We averaged 83 fully utilized systems deployed to customers, which represents a 6% sequential decline. Excluding the impact of deferred revenue and other charges, revenue increased 6% sequentially, driven by an increase in last mile services, which is a large trucking component at pass-through margins, and offset by a reduction in the total number of systems deployed. Adjusted EBITDA declined 13% sequentially, primarily driven by the reduced number of fully utilized systems, which drove lower cost absorption. Nearly 124 problem systems worked with varying degrees of utilization in the first quarter. Our calculation of 83 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter, which we believe is the best measure for modeling purposes. Now turning to additional detail on the first quarter. Gross profit for the quarter was approximately $21 million, down 12% from the fourth quarter after excluding the impact of deferred revenue, primarily due to the decrease in fully utilized systems. Gross profit was also negatively impacted by a lack of cost absorption as cost reductions lagged the activity decreases that began in March. Excluding bad debt expense and the catch-up benefit of renegotiating 2020 professional fees, Total SG&A costs for the quarter were approximately $5 million in line with prior guidance. For the second quarter of 2020, we expect total SG&A to be in the range of $4 to $4.5 million. During the quarter, we generated a gap net loss of $19.1 million or $0.65 per share. This net loss included approximately $48 million in non-cash impairment losses that resulted from the risks and uncertainties associated with the significant reductions in demand for oil due to COVID-19 and certain actions by oil producers globally. Approximately $38 million of this impairment was related to the complete write-off of our Kingfisher Transload Facility in Oklahoma, while the remainder related to Goodwill, inventory, and other assets. As a reminder, we built the Kingfisher Transload Facility under a seven-year take-or-pay contract that was ultimately canceled. between the agreed cash consideration for the contract termination and the cumulative earning contribution of the facility, we have recouped virtually all of our original investment on the asset. Adjusted pro forma net income for the first quarter was $14.8 million or 32 cents per share versus 9.7 million or 20 cents per share in the fourth quarter. As a reminder, adjusted pro forma net income adjusts for not recurring items and also assumes a full exchange of all Class B shares for Class A shares for a more comparative period-over-period presentation. Please refer to our press release issued last night for a full reconciliation of adjusted pro forma net income. Operating cash flow is approximately $12 million in the quarter and after total capital expenditures of approximately $1 million, our free cash flow was a positive $11 million for the quarter. During the quarter, our accounts receivable balance increased primarily due to the increase in last mile trucking services that I referred to earlier. We returned a total of $32 million to shareholders in the quarter, including approximately $5 million in dividends and approximately $27 million in share repurchases, which includes an additional $5 million authorization made by the company's board in late February. The share repurchases were made as part of a program which was completed in mid-March. There is no share repurchase authorization currently remaining. We ended the quarter with approximately $46 million in cash. The decrease from the $66 million in cash at the end of the year was primarily due to the completion of our share repurchase program, as well as an increase in working capital referred to previously. We expect working capital to begin to unwind as activity continues to decline in the second quarter, although the pace will likely be slow given the current environment. In fact, we have already seen some benefit in a working capital release. As of April 30th, we had approximately $55 million of cash on the balance sheet, which reflects approximately $9 million increase over the March 31st balance and over $1.20 per share of available cash. We also continue to have $50 million of available under our undrawn credit facility. Turning to our outlook, as Bill mentioned, we anticipate the fully utilized US frac crew count could be down between 75% and 85% sequentially. as operators adjust their budgets and activity levels to the significant reduction in oil demand and commodity prices. We expect our business to perform in line with the overall sector with identified opportunities to outperform through targeted share gains as activity normalizes and as customers continue to recognize the value of partnering with Solaris, including a cycle of continuous innovation and a balance sheet with staying power. While we are cutting costs as quickly as we can, we do expect activity will fall faster than we can keep up with on the cost side during the second quarter. We've reduced our total operating costs by at least 50% from Q1 levels, which is primarily driven by a workforce reduction of greater than 50%. However, due to a lag in cost reductions relative to the pace of activity decline, we expect profitability will decline significantly more than revenue in the second quarter. EBITDA could be even flat to slightly negative. However, we expect to remain free cash flow positive as we benefit from the continued unwind of working capital. In the meantime, we will continue to look for ways to build flexibility into our cost structure for what is hopefully a short-lived role in U.S. completion activity. Some of the cost measures we are considering could include the possible use of furloughs, new work schedules, and more creative vendor and resource management. We are entering this downturn with a debt-free balance sheet and more than $50 million of cash, which leaves us with over $100 million of available liquidity. This position provides significant optionality to opportunistically and thoughtfully evaluate both organic and inorganic growth opportunities while also continuing to return cash to shareholders. With that, we'd be happy to take your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch-tone phone. If you are using a speakerphone, please pick up your handset before pressing the keys. And to withdraw your question, please press star then two. Once again, it is star then one to ask a question. Our first question today will come from George O'Leary of TPH and Company. Please go ahead.

Good morning, Bill, Kyle, and Yvonne.

Good morning, George.

I just wanted to, that last comment I thought was interesting that you made, Kyle, you know, you guys do have a pristine balance sheet sitting in a big net cash position, and sometimes it is good to play offense while everyone else is playing defense. So just curious as you look out at the growth landscape, both from an organic and inorganic standpoint, what you see out there that I think the second part is probably the easiest, which is what we want to stay away from. We've always stayed away from anything, I'll just say, commoditized. Fundamental to our business has been

working with customers, partnering with them to innovate around taking costs out of their operations, making their operations more efficient. So I think that's where we see the opportunities both on an organic and inorganic basis. So from an R&D standpoint, we continue to innovate on our products, added new products, have more in the pipeline, and that'll continue to be a fundamental component of our business. During downturns, opportunities get created to find new ways to cut costs, to remove things that you thought were necessary, and just change the way you're operating. So from an organic standpoint, we're very excited about that component. From an inorganic standpoint, we've always had our eyes wide open. We've been very cautious. The only notable transaction I think we've done in the last couple of years was The Raltronics Acquisition, which brought with it tremendous software capabilities that we continue to leverage today. So I think from an inorganic standpoint, we look at things that can help drive our current baseline of business, but then also diversify the revenue stream. We recognize that today we are 100% completion-oriented, and some of our guidance today was directed towards the reduction in activity that we have seen and expect to see. As we look at the longer term prospects for Solaris, we think it's a really neat business that's positioned very well from a balance sheet standpoint, from a culture standpoint to build out something more diversified. We're going to be very cautious about it. And as I said, we've been looking at it for, I guess, really since the beginning of the company's foundation. But we do believe that, to your point, from a balance sheet perspective, from a cash flow perspective, we're really well positioned here. And there's going to be a lot of distrust. There's no doubt about it, both on the private side as well as the public side. We've been through a lot of cycles. We chose to build this company with virtually no leverage. I think that's going to play out well for us. It certainly won't be the case for everybody in the business. And so we'll use that to our advantage.

That's super helpful, Kyle. And then nice cash build, free cash flow number during the quarter. Sounds like April working capital was helpful again. If completions activity is down 75% to 85%, and then who knows what happens in the last two quarters of the year. There's some talk of kind of a cessation of the frack holiday at some point and people actually adding some activity back late in the year. Is there more to do on the working capital front that can kind of help keep you guys free cash flow positive and then just talk a little bit about the variable cost nature of your business and then what you guys can do on the cost front to maintain kind of margins and free cash flow generation ability?

So on free cash flow, I think, yes, we do see an unwind, as mentioned on the prepared remarks there, of some working capital in our accounts receivable. Obviously, times are challenging. Certain companies are going to reduce or slow down their pay cycles, but we do feel like that will be an unlock that will drive free cash flow here for the remaining part of the year despite significant reduction in activity. from a cost structure. Also noted, our cost structure is quite low if you look at just a comparative basis across the industry. It's a specialty rental business whereby we don't have large crews staffed on a permanent basis to be on location 24-7. We do have a team of technicians and maintenance folks and controls and many more individuals that are out every day on locations, but they're kind of moving around. So we have variabilized a bit of that and that's been some of the obviously very difficult decisions we've had to make as a team to reduce that workforce. But clearly, as activity comes down, it's prudent for us to bring in those figures. From a cost standpoint, we've rolled out salary reductions virtually across the board for the company. is sharing in the sacrifice, so to speak. We have gone out to many of our third-party vendors to get concessions. So I do believe we've got a pretty variabilized cost structure, but it's pretty hard to keep up completely with the rate of activity drop. But all that kind of pulled together, I would say we do foresee positive free cash flow for the remainder of the year.

Our next question today will come from Jacob Lundberg of Credit Suisse. Please go ahead.

Hey, good morning. You guys are obviously talking about a very strong decline in activity next quarter, but I'm curious on your customer conversations that you've been having around the second half of the year to the degree you're having any. Are customers indicating or any customers really indicating to you a willingness to pick crews back up in the second half, or is nobody just looking out that far at this point?

I think we're obviously having discussions. Most important discussions right now are the near term, and I think people are keeping their eyes on what's going on from a macro standpoint. We've got, obviously, a significant supply-demand imbalance. The return of the demand piece is TBD. We're starting to see some good signs here in Texas. I know we're opening up pretty significantly today. So until that demand component comes back, the macro supply demand imbalance is going to obviously challenge a return of activity. But that being said, we are seeing significant reductions in production. Obviously, globally, we're seeing customers shut in wells. Some of the wells they're completing today are actually not getting put on production. So yeah, people are obviously optimistic and hopeful around what the second half of the year looks like from an oil standpoint. From a gas standpoint, we're seeing better, I guess, stickiness in terms of activity overall. But I think just in general, it's going to be a bit of wait and feel.

Got it. That's helpful. And then I guess also, I guess in the current environment, everything's just falling. It might be pretty tough. But as things stabilize, do you think this environment helps or hurts your ability to gain traction with the chem systems?

Intuitively, it feels like it should help because, again, it's about reducing individuals on location. It's about reducing supply chain costs. It's still a question of, in a completion engineer's 10 things to do today, is this going to be on his list? We're dealing with customers that are laying off a significant component of their workforce, so it does create an opportunity to potentially talk to some different individuals within a company around different value propositions. So I think innovation does, in general, happen during times like this. If we look back at the history of our business, We really inflected in early 16, late 15 in terms of the adoption of the SAN system. So as far as innovation, I think these are the windows where you can get your foot in the door and people are willing to try something a little differently. You know, you go back six months ago and completions in the junior primary focus was getting as well as completed on time and on budget. On time is obviously less of a are concerned right now. So as far as innovation and R&D, people are willing to try new things at this point in cycles.

Our next question today will come from Martin Malloy of Johnson Rice. Please go ahead.

Good morning. Good morning, Marty. You spoke in your prepared remarks a little bit about potentially gaining customers during the downturn. Could you maybe elaborate some more on the competitive dynamics right now and your expectations as far as potentially gaining customers? I know that there are some other players in the mobile profit market that are less well-capitalized than you are.

Yeah, and I think the other thing is, you know, we're going to continue to innovate in this time period. And so by doing so, I think we continue to build a better competitive offering. And so I think that's one of the ways we think we can we can gain shares. So we're not just going to sit in the downturn and wait for activity to pick back up. We're going to continue to demonstrate to customers additional ways to get more efficient with what we've done historically. So I think that's a component of it. Obviously, there's a fair amount of financial distress, but we're not going to use that as our ammo. Our ammo is going to be around the activity, the offense that we can play. And it could even include some of the stuff George asked about on M&A. So we're kind of positioned to start looking at things that could be bolt-ons that all of a sudden make are offering, you know, look more attractive to somebody that historically may not have been as interested in Solaris.

Thank you.

Our next question today will come from John Hunter of Cowan. Please go ahead.

Hey, good morning. Morning, John. So can you talk about, you know, clearly there's this – Thank you for joining us.

We started to see a pretty significant drop off in activity in March. It's come in on a Monday and by Tuesday, somebody was saying by the end of the month, they were going to be shut down for the foreseeable future. So the drops really were pretty fast and furious throughout March. I would say April directionally looks like if we hold at April levels, we're sort of at the bottom end or the low end of the 75 to 85% decline. So I think we're kind of already very much there, but don't have a ton of, or I would say it said differently, I think we're kind of at that bottom end of the range and we've got visibility around being able to hold there, but I think there's obviously risk going forward. And that's why we provide the wider range.

Right, that's helpful. And by the bottom of the range, it's the lesser reduction, not the lower end, the bigger end of the range. Clarify.

Correct, right. And then just on pricing, I mean, I know your offering is such a small piece of the overall well cost for an operator, but I imagine nothing's really immune from pricing declines in this market. to that end, kind of what are you seeing on the pricing side from your customers?

Yeah, well, just anecdotally, I would say, you know, nothing is immune from our cost structure either. Every dollar counts for us, so we're going after every dollar on our side as well. But I think, yes, you're right. It is a small overall component, but nothing goes unforeseen when oil prices have dropped like they have. The fundamentals of what we do haven't changed, though. At the end of the day, what we offer is an overall reduction for our customers and their total cost to deliver sand, to complete their wells, etc. That's sort of been our approach. We have proactively reached out to virtually every customer we've touched over the last couple of years to be in front of them with, here's what we're doing during the downturn. We're going to continue to innovate, as I mentioned. We're looking to drive down costs for our customers. We're not reducing the maintenance or the coverage or the service quality. So that remains very important. We've got the staying power, as we discussed. But I think when we look at pricing, what we continue to do is try to be winning with our customers in activity. And what we think about there is the more a customer uses us, the lower their prices in general. We like that trade off. So that's kind of how we've approached it is, you know, we'd like to be your dedicated partner and doing so, you know, let's look at this pricing range. So I think, you know, we saw a little bit of a directional reduction in the overall rental rates in the first quarter. And we'll probably see a little bit more in the second quarter as the overall mix and book gets updated. But I don't think it's something we're leading with. It's more about being proactive to say to our customers, look, we know you're feeling a lot of pain. Let's partner up here. And that, you know, really, to be honest, that has been received quite favorably by most of our customers.

Our next question today will come from Stephen DeGennaro of Stiefel. Please go ahead.

Good morning. Hope everybody's doing well. Morning. I guess just one thing I wanted to hit on, and this may be a stretch, but I was just curious if you'd seen this. Do you think, I mean, your systems, I believe, lead to less people at the well site, especially relative to the containerized solutions. Are you seeing, has there been any talk about the benefits to that going forward? I mean, obviously everybody's, still a lot of the large integrated service companies are talking about automation and limiting people at the well site. Have you have you had discussions along those lines or is that something that's come up?

Yeah, that's a constant discussion and it's effectively a combination of our operating cost structure versus a competitive operating cost structure as well as a safety issue and a complexity issue on the well side. So I think that has been a universal difference between a containerized solution and a vertical solution since day one. So those are constant conversations I think as the industry and many more. How does that play into the comeback and the need for labor and does our system with lower labor requirements, especially specialized labor, dealing with work lifts and moving things around, how does that change and how easy is it to ramp those back up versus ramping our system up? I think we do have a significant advantage there.

Thank you. Just quickly, and I don't think there is, but when you look at idling equipment and ultimately Reactivating, is there much cost to that for you?

No, it's trucking and we're preventatively looking at all our systems and using this opportunity to clean them up, change the oil, have them ready to go, do any damage. They've been, a lot of them in the system, out in full duty for several years now and it's time to, a little bit of time to bring them in and shining them up a little bit and make sure that the All of the wear parts are ready to go. And if I looked at our small capital expectations, it's going to be on some work on the systems. But we're using some of our labor to do that and do that as efficiently as possible in the downturn. So the cost to bring them back on order is very, very low. They were working one day. If you park them out in Carlsbad, they're not going to have any damage and be ready to go in four or five months when things turn around.

Okay, great.

Thank you. Thanks, Steve.

Our next question today will come from Chris Boy of Wells Fargo. Please go ahead.

Thanks. Good morning. I was wondering if you could give an update on the chemical systems, the number that have been converted to the advanced design at this point, and whether you have any operating today?

So we, you know, we've provided some of those numbers in the past. I don't think they've changed. So we're not deploying any incremental capital and a number of others. So we've been working on that. We've been working on that. We've been working on that. We've been working on that. We've been working on that. We've been working on that. in front of customers talking about the value proposition. And I think, you know, again, during this downturn, it does represent an opportunity to put those out.

Okay. Yeah, I mean, that dovetails into the next thing I was going to ask. You know, when a company takes a frack holiday, I suppose it's a chance for them to reevaluate everything they're doing and come back with a fresh setup post the holiday and fracking. Is there any specific kind of approach you're taking to that in terms of trying to be in front of people during this and kind of suggest the value proposition for chemicals or switching to the prop and silos from other solutions? Just curious whether you expect that to be a tailwind or if there's anything special to think about there.

To the distraction point, we have all of our commercial and sales folks focused 100% on their customers to the extent they can. We're not dropping a lot of breakfast off to folks, but we're on the phone with them talking about them trying to develop the real economic proposition that's behind the combination of our sand system and the chemical system across the board as well as the last mile offering. We have not stopped playing offense and will continue to do so. We have new things to go in and present to them around some belt scales and some measurement tools and some additional automation. and a number of other features that we continue to add to the system. So we're in front of them with new ideas and our sales guys are on a regular basis. Great. Thank you.

Our next question will come from Ian McPherson of Simmons. Please go ahead.

Hey, thanks. Good morning. Kyle, I wanted to ask if we don't know really when and where the trough is, We get near the trough by the end of this quarter in the summertime, and it's not a lot different than 80% down from March. By that point, when your cost reductions catch up with the suddenness of the revenue reductions, do you think that you could stabilize at a modestly positive EBITDA level in the back half of the year once Your costs and sales have leveled together, or is it still going to be a struggle to defend positive EBITDA in that scenario, do you think?

Yeah, I think there's some level of fixed costs, obviously, being a public company. So there's some notion there. and there's X number of systems required to be working to cover that component of it. But to the extent, you know, this is protracted and prolonged, we'll again continue to keep beating up the cost structure. We're not going to stop. I'd say we've really done two different reductions in spend, I would say, and to the extent further needed, you know, the team is prepared to do that. So, yes, we will continue to right-size the business for what the top line looks like. But we are, you know, positioned from a balance sheet standpoint to be patient and not be penny wise here. Again, going back to the very earlier comments, we're here for the long run. And, you know, we view this as an opportunity. So we don't want to, you know, cut too deep into the into the bone such that we're not able to take advantage of what to your point, and a lot of other companies choose, they've got to remain breakeven or their doors closed. and so we've got a little bit of an advantage there to play.

Understood, thanks. And then my other question, this is maybe a little bit kooky, but just given the suddenness of the cessation and activity, is there any significant amount of sand at well sites that's filtering in place and as a renter of storage where you have maybe some stickiness to unintended

I wouldn't call it material. Ironically, Kingfisher, we've got obviously some sand in silos. People thought there'd be more activity up in Oklahoma, and that hasn't happened, so there is some forward staging occurring there.

And again, if you would like to ask a question, please press star, then one. Our next question today will come from Jason Wendler of Imperial Capital. Please go ahead.

Hey, good morning. I was curious as you kind of continue to talk about the balance sheet, Kyle, you know, with the dividend, you obviously completed the repurchase of the shares. But how do you think about the dividend as you go through these, you know, next couple months or quarters?

Well, we're obviously looking closely at that and talking to our board about what we do. We stand by our desire to continue to return money to shareholders. We've got a lot of flexibility around that, and we're going to do what we feel is appropriate for the next quarter, looking out a couple of quarters and anticipating what activity looks like.

Okay. And then also just, again, with the balance sheet being in such great shape and discussing M&A, would there be larger opportunities in which you would put leverage on the balance sheet or are you thinking still more like the deals you've done in the past where they're relatively small and you kind of fold in in your current balance sheet?

That's a great question. I think we have looked at that. I think we are, as you guys can tell from our history and our position, we're fairly debt averse. It would have to be something that had tremendous potential, tremendous protection for us to get comfortable borrowing in this environment to do much, but every opportunity is unique and we're focused on that.

Our next question today will come from JB Lowe of Citi. Please go ahead.

Hey, good morning everyone. Good morning. I just have a question on if we see associated gas production come down in places like West Texas. And we actually see, you know, coming out of this downturn, we see some more demand for actual gas wells being drilled. Just wondering what – if you guys have looked into – I don't think you have a very large footprint out east, and I'm not sure that silos are used a lot in the Marcellus. Have you guys looked into, you know, talking to some customers out in the Marcellus or the Haynesville about silo storage that you may not have, you know, previously talked to? just wondering about your strategy on that front.

Yeah, the history honestly is some of the first systems ever used were out in the Northeast. So some of the original systems manufactured and sold were sold to a pressure pumping company that took them to the Northeast. Specifically because of the small pads to put a concentrated level of property on a small location, there's nothing more efficient than a vertical silo. So it's actually very advantageous. Some of the challenges up in the Northeast are on the movement from well site to well site. But that being said, they're moving drilling rigs, etc. So it hasn't been prohibited. So we've always had a presence there. And yes, going into the challenged oil backdrop, we are repositioning some of our commercial time and efforts around both the Haynesville as well as the Marcellus. So again, it's not somewhere we Thank you for joining us. Well-designed as well as the profit loadings in some of the oil plays were more advantageous for us to be going after because some of the value propositions were higher. But when we look at the Northeast, things like three packs, we've run a lot of three packs because some of the profit loadings are smaller. So definitely an area where we expect to continue to put focus on and extend the current presence that we already have.

And how many silos do you actually, how many systems do you actually have in those plays at the moment? And I imagine it's not, it doesn't cost a lot of money to move one of these things from West Texas.

No, and quite frankly, several years ago, we took several out because we were short in other basins. So yeah, we have wheels and we do move. So that's not really an issue. Directionally, I'd say the gas plates probably represent 20 to 25% of our current deployments.

Okay, thanks very much. Stay safe, everyone. Thanks.

Our next question will come from Brian Sinks of B. Reilly FBR. Please go ahead.

Hey, good morning, guys. Good morning. Just to come back to pricing for a second, for systems that remain deployed, do you think that your pricing has remained somewhat more stable because you've charged on that? monthly basis versus other services that charge by the day or maybe by the stage?

Yeah, I think that's been historically the case. The volume-based pricing has generally been more variable. And again, back to the rental model, as you get more efficient, you benefit from the fixed rental cost. So when they translate that fixed rental cost into a dollar per ton or a dollar per stage or a dollar per well, the numbers have been coming down because of the efficiency. So, yeah, I think that business model, that partnership model provides alignment and, therefore, more stickiness.

Gotcha. And then can you just comment on any differences you might see in customer behavior based on the type of customer, whether it be a major, a small EMP or a service company? I mean, that's...

That's a complicated question because we can analyze it in a lot of different ways. I think the most relevant probably point right now is obviously the majors generally have a diversified asset base and they may have downstream elements in their business such that they can still continue to not be completely fully levered to what's going on in the oil Land. So I think the majors are probably better generally positioned to withstand some pain here. But then again, there's lots of independence with incredibly successful business models and asset bases and balance sheets that were really great. I think the challenge right now is going to be how do you finance your business and how have you had your production and how are you going to weather this storm? So whether you're an independent or a major, that's sort of academic in some ways and I think in general the larger majors probably on balance probably have a stronger position.

One element of your question was about the mix between service and operator business and I think that as there's such turmoil and such dynamics with capital spending budgets and timing of that and the operator it gets extremely difficult for the service guys to plan so I think that The nature of the pressure pumping is unless there's a really long-term relationship in place with the operator, their planning is a second derivative of what the operators are doing, therefore a little bit less certain and more volatile and difficult to plan for. But I think everybody is in a state of a little bit of what do we do and re-planning for the rest of the year.

And ladies and gentlemen, This will conclude our question and answer session at this time. I'd like to turn the conference back over to Bill Zartler for any closing remarks.

Thanks, Allison. I'd like to close with a thank you to all of our employees for the continued commitment and execution of the business to our customers for their continued partnership over this difficult period. While we're clearly not through the virus and its numerous lasting impacts on all of us, The team should be extremely proud of what we've been able to do and keep the business alive and the industry functioning during this troubled times. Our operations are continuing without interruption to provide hopefully essential services to our customers, a high level of service there and to our suppliers and shareholders. We remain committed to helping our customers further increase efficiency, safety, and savings on wells by continuing to The conference is now concluded.

We thank you for attending today's presentation, and you may now disconnect your lines.