Solaris Energy Infrastructure, Inc. Class A

Good morning and welcome to the Solaris Oil 3rd 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 that this event is being recorded and I would like to turn the conference over to Ms. Yvonne Fletcher, Senior Vice President of Investor Relations. Please go ahead.

Good morning and welcome to the Solaris Third 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 you everyone for joining us today. I'd like to begin this morning by saying thank you to our employees. I recognize how challenging this environment has been. Amidst the presence of a global pandemic and an unprecedented industry downturn, you have adapted well to the rapidly changing needs of our customers, new work safety guidelines, and organizational changes without missing a beat in continuing to provide safe, first-in-class service. Your efforts have helped us navigate this downturn while continuing to generate cash and maintain a debt-free balance sheet. This is quite an accomplishment. I'm very proud to share it with the investment community today. Thank you again for your flexibility, commitment, and hard work, and I'm excited to see what this team can accomplish on the other side of this. Now turning to our third quarter results, Solaris had an increase in fully utilized systems of 70%, generated over $20 million in revenue, had adjusted EBITDA of approximately $3 million, had our seventh quarter of positive free cash flow, and paid our eighth consecutive quarterly dividend despite the continued challenging environment. Our customers returned to a modest level of completions activity during the quarter as pandemic-related lockdowns were lifted and oil prices recovered modestly. This drove a 70% increase to 34 fully utilized systems for the third quarter, up from 20 fully utilized systems in the second quarter. This increase was primarily driven by increased completions activity in the Permian Basin, which saw the sharpest activity pullback in the second quarter and was the first to rebound in the third quarter. While we are active in nearly all basins, we are positioned well in the Permian and benefited from this trend in the quarter. Today, our overall activity is running slightly higher than the third quarter average. However, a seasonal holiday impact could drive a decline as we approach year end. Therefore, we expect our fourth quarter activity could be flat to up modestly. We also acknowledge that crude prices have taken a significant dip recently, and should they remain at these levels, there is some downside risk to fourth quarter activity levels. While it is still early to make a call on next year's activity, many of our customers have expressed intentions to add freight crews next year if crew prices hold closer to the $40 level. Should other operators set budgets to maintain oil and gas production levels, we'd expect overall industry activities levels, as well as ours, to increase in 2021. However, the pace and ultimate level of the increase is still an unknown, as many operators likely prioritize balance sheets, examine dividend policies, and digest recent M&A activity as they plan for 2021 and beyond. And the pace of economic recovery and crude price volatility remains a risk. What is more certain for the coming years is that operators and service companies alike will continue to focus on increasing operational efficiencies to maximize cash flow. We firmly believe that companies that can provide the most efficiencies will be the ones that will be most successful. One of the ways in which the industry will achieve efficiency will be through the use of data analytics and software with the end goal of using machine learning to further automate processes, utilize predictive maintenance, and essentially do more with less. During the quarter, we helped many of our customers achieve new sand throughput records for a single day and sustained over multiple frac jobs. Polaris equipment was developed with efficiency and safety improvement in mind from the very beginning. One of our core beliefs is that well-built, reliable equipment coupled with information and automation would provide the next leap in efficiency gains, and all of our product enhancements and R&D efforts share this goal. Looking at software as an example, Solaris was a pioneer in developing our original PropView software solution, which initially provided our customers with profit inventory visibility. In 2018 and 2019, we scaled it into an application called Solaris Lens, which has grown into a suite of features that bring more data, analytics, and efficiency opportunities to our customers' fingertips, not just for sand, but also chemicals. These enhancements mean our customers can now see key well-set event history, such as the number of stages they pumped that day, the average sand pump per stage, or time between stages, while also giving us real-time data analytics to manage the supply chain and help us perform preventative maintenance. We are continuing to evolve the system's capabilities and expand the data analytics we provide. We have recently partnered with Amazon Web Services to help us achieve these goals. We've worked closely with Amazon to enable Solaris Lens to provide storage and analytics of trillions of events per day up to 1,000 times faster than a server and a fraction of the cost of traditional relational databases. These data time series, when fully integrated, are able to provide the backbone for data-driven frac improvements. We've continued making these investments in software and other R&D projects during the downturn, but we've also done it with strict capital discipline, cost control, and focus on cash generation. Our capital expenditures should end the year near $5 million, which is a small fraction of what we've spent in prior years when we were building the business. Our costs are also down significantly both at the field level and the corporate level. We achieved this primarily in the second quarter by reducing headcount, eliminating non-essential spend, and working with our vendors. During the third quarter, we shifted focus to looking at ways we can get even more efficient going forward, and our team has also done a fantastic job making sure we collect the cash we earn. As a result, we've had another quarter of positive free cash generation. Our current cash balance remains above $60 million, approximately $1.36 per share, despite having gone through the toughest downturn in the industry's history, continuing to invest in our business and paying shareholders a consistent dividend. As we stated before, our free cash flow and conservative approach to our balance sheet provide us with the flexibility to be measured in our capital allocation and avoid the need to potentially overreact to short-term changes in the industry landscape. Sharing our excess cash with the shareholders that helped build our business continues to be important for us. Lastly, I'd like to offer some thoughts on what Solaris will in the much talked about energy transition. We view oil and gas as a vital resource in the global economy and expect demand to increase as the world gets back to normal. We believe that oil and gas will remain competitive in the global energy picture by using technology to continue lowering its cost curve and carbon footprint. This is something that has been core to Solaris since its inception. Everything we are focused on is about how to help our customers develop their reserves using the least amount of resources possible. Our work towards increasing automation, improving well site safety, and reducing waste are all things that will both help lower the cost of energy as well as its total carbon footprint. Lower cost and lower carbon footprint go hand in hand, and I wouldn't bet against this industry's ability to achieve both. With that, I'll turn it over to Kyle.