Earnings Call Transcript - ACDC Q2 2021

Operator, Operator

Hello, and welcome to U.S. Well Services Second Quarter Earnings Conference Call and Webcast. As a reminder, this conference is being recorded. It’s now my pleasure to turn the call over to Josh Shapiro, Vice President of Finance and Investor Relations. Please go ahead.

Josh Shapiro, Vice President of Finance and Investor Relations

Thank you, operator, and good morning, everyone. We appreciate you joining us for the U.S. Well Services conference call and webcast to review the second quarter 2021 results. Joining us on the call this morning are Joel Broussard, Chief Executive Officer; and Kyle O’Neill, Chief Financial Officer. Following their prepared remarks, the call will be open for Q&A. Yesterday afternoon, U.S. Well Services released its second quarter 2021 earnings. The earnings release can be found on the company’s website at www.uswellservices.com. The company also intends to file its Form 10-Q with the SEC this afternoon. Please note that the information reported on this call speaks only as of today, August 12, 2021, and therefore, time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of U.S. Well Services management. However, various risks, uncertainties, and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to review today’s earnings release and the company’s filings with the SEC to understand those risks, uncertainties, and contingencies. Also, during today’s call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. And now I’d like to turn the call over to U.S. Well Services’ CEO, Mr. Joel Broussard.

Joel Broussard, CEO

Thanks, Josh, and good morning, everyone. I would like to thank the entire U.S. Well Services team for their dedication and focus during a period of great change. Because of them, we delivered strong results, generating adjusted EBITDA of $36.9 million. On a per fleet basis, our annualized adjusted EBITDA from hydraulic fracturing grew by 39% to $7.3 million. Kyle will provide additional detail on our financial performance in the second quarter. But first, I want to provide context around U.S. Well Services’ decision to exit the diesel market and become fully electric. Throughout the process to become a public company in 2018, we told the market that U.S. Well Services fleet would someday be all electric. Since then, our team has worked hard to make this goal a reality. We have been studying the market and monitoring the regulatory environment, all while developing innovative technology to meet the needs of our customers. Over the last several quarters, pressure on E&P companies to grow cash flow and reduce greenhouse gas emissions has intensified. As a result, demand for next-generation fracturing solutions has surged. Meanwhile, the market for legacy conventional diesel fleet remains oversupplied with equipment, and pricing has yet to recover to pre-COVID-19 levels. We believe these trends are not cyclical but are permanent. Demand for older diesel equipment and higher emissions profiles is unlikely to recover. In response, we made the decision to accelerate our strategic transition to all electric frac services and technology company, and we continue to work tirelessly to execute this plan. In May, we announced the introduction of our newest Clean Fleet pump design, the Nyx. Nyx is a 6,000 horsepower dual pump trailer that represents the highest spec pump the market has ever seen. This design was informed by 7 years of operating history and is custom-tailored to deliver efficient, clean completions for our customers. We recently announced our plans to build four new Nyx Clean Fleets. Each fleet will consist of 10 dual pump trailers totaling 60,000 horsepower. We expect to take delivery of the first Nyx fleet in mid-Q1 2022. In connection with our decision to exit the diesel frac business, U.S. Well Services is in the process of divesting noncore assets, including conventional diesel-powered frac equipment and certain power generation assets. To date, we have completed over $21 million of asset sales, using proceeds to repay borrowings on a senior secured term loan. We expect the pace of asset sales to pick up in the third quarter and that we will remain active in selling equipment throughout the remainder of the year. Our strategy from here is simple. We’re going to continue to deploy the most advanced, cost-effective, and low emissions fleets in the industry, deliver best-in-class service quality, and reduce our debt load as we sell legacy assets. Now I would like to turn the call over to Kyle to review our second quarter financial performance.

Kyle O’Neill, CFO

Thanks, Joel, and good morning. U.S. Well Services averaged 9.3 active fleets during the quarter, with a utilization rate of 85%, resulting in 7.9 fully utilized fleets. Revenue for the second quarter was $78.8 million, up 3% sequentially. Not included in this number is $22.5 million of income generated as ProFrac converted its license-linked note purchase in our June 2021 offering into three $7.5 million options to license the Clean Fleet technology. Looking at our service and equipment revenue, we saw a 5% increase quarter-over-quarter on revenue per fully utilized fleet. Revenue from our sale of materials, including sand, chemicals, and trucking and sand storage grew over 80% sequentially as a greater share of our customers opted to source materials through U.S. Well Services. Cost of sales for the quarter was $59.3 million, down 5% from the first quarter cost of sales of $62.6 million. While this sequential decrease was primarily related to lower fleet activity, I will note that repair and maintenance expense on a per pump hour basis declined 7% quarter-over-quarter as electric fleets made up a larger proportion of our total working fleet. During the second quarter, we continued to feel the impact of rising inflation across various points in our supply chain, most notably the increases in trucking costs, fuel, and lubricants. We’re working with our suppliers to keep cost increases under control. In many cases, we will pass some or all of the cost increase through to our customers. SG&A was $7.2 million for the second quarter, down 2% from the prior quarter. Excluding stock-based compensation, SG&A was approximately $5.5 million as compared to $5.9 million in the first quarter. The sequential decrease was driven mostly by a reduction in professional fees. Adjusted EBITDA was $36.9 million for the second quarter. Included in this figure is $22.5 million of income attributable to the licensing of the Clean Fleet technologies and patents. Adjusted EBITDA from hydraulic fracturing operations was approximately $14.4 million for the second quarter, up 25% from the first quarter adjusted EBITDA of $11.5 million. Annualized adjusted EBITDA per fully utilized fleet was $7.3 million, up from $5.2 million in the previous quarter. Maintenance capital expenditures on an accrual basis were $4.8 million for the second quarter. On an annualized basis, our adjusted EBITDA less maintenance CapEx per fleet was approximately $4.4 million. Looking at our balance sheet, the company ended the quarter with total liquidity of $70.7 million, consisting of $12.6 million of availability under our ABL facility and $58.1 million of cash. I want to add some additional color on our plan to use asset sales to reduce our term loan balance. At the end of the second quarter, our total principal balance on the senior secured term loan was $233.7 million. So far in the third quarter, U.S. Well Services has completed $19.2 million of asset sales. After applicable prepayment penalties, our principal balance was reduced by $18.9 million. We expect to repay an additional $14 million of borrowings in the near term as pending transactions close. If we are successful in reducing our term loan balance to $110 million by the end of 2021, U.S. Well Services will pay 0% interest on our term loan for the first quarter of 2021 and 2% interest on the remaining three quarters of the year. Additionally, if the loan balance is below $103 million by April 1, 2022, our interest rate on the entire term loan will be 1% for Q2 through year-end. Before Joel offers some final remarks, I’d like to provide details on the transaction we completed at the end of June and how we anticipate our capital structure will evolve over the next several quarters. In the initial transaction, we issued $125.5 million of 16% convertible senior secured third-lien PIK notes and received $86.5 million of gross proceeds. $22.5 million of the notes were license-linked notes, convertible into three $7.5 million licenses to build and operate Clean Fleets. Prior to the end of the quarter, the license-linked notes were converted in full, and U.S. Well Services recognized $22.5 million of income. $103 million of the notes are convertible into U.S. Well Services common stock at a weighted average price of $1.42 per share. $39 million of $103 million of the equity-linked notes represents an exchange of our Series A convertible preferred stock into convertible senior notes, reducing the outstanding balance of our preferred stock from $62.2 million to $25.2 million. Since the end of the quarter, U.S. Well Services has issued an additional $11 million of notes convertible into common stock at a weighted average price of $1.13. The convertible notes automatically convert to common equity once our preferred shares are converted or redeemed, and our 20-day volume-weighted average share price exceeds $2 for 10 out of 20 consecutive trading days. This offering not only helps us fund our upcoming growth capital expenditures for our new Clean Fleets, but also, when combined with our asset sales discussed earlier, is a huge first step toward the goal of deleveraging the balance sheet and simplifying our capital structure. With that, I’ll turn the call back over to Joel.

Joel Broussard, CEO

Thanks, Kyle. U.S. Well Services has always been on the leading edge of hydraulic fracturing technology and solutions. I’m excited for what this team will deliver over the next several quarters as we continue to execute our strategic plan and transition towards full electrification. Operator, please open up the call for questions and answers. Thank you.

Operator, Operator

Our first question today is coming from Ian MacPherson from Piper Sandler.

Ian MacPherson, Analyst

It’s great to see the value of your IP validated here and monetized in a really strong way. So congratulations on that.

Joel Broussard, CEO

Thank you.

Ian MacPherson, Analyst

As we look ahead to the next three quarters, transitioning away from diesel and likely introducing the first Nyx, can you help us understand the expected trajectory of your EBITDA? Specifically, was conventional horsepower a significant factor in the EBITDA we observed in Q2? If that’s the case, how much of it needs to be sold off immediately? Or is it possible to achieve some of your asset sale goals for the second half without immediately divesting the remaining EBITDA contribution from your last few conventional fleets? Can you provide some insights on that?

Joel Broussard, CEO

The EBITDA contribution from the diesel fleet for the first half of the year was minimal because diesel pricing did not recover as quickly as we anticipated. As of June, we had 1.5 diesel fleets operational, and now we have just one left, which will be completed on the 26th. Therefore, we will finish with diesel operations on August 26th. Josh, would you like to provide further details on this?

Josh Shapiro, Vice President of Finance and Investor Relations

Yes, sure. I mean I think what Joel said there is right that the contribution from diesel fleets was fairly minimal throughout the first half, and we would expect to see at least fleet-level profitability stay where it has been and then improve as we start deploying the Nyx fleets and absorbing more overhead.

Joel Broussard, CEO

SG&A would drag down the profitability until we get back to 10 electric fleets.

Ian MacPherson, Analyst

Yes. Yes. Got that.

Joel Broussard, CEO

We’re transforming the company, and that’s just part of the transformation process.

Ian MacPherson, Analyst

We do have some transitional quarters ahead, particularly with absorption in mind. You've announced several new customer trials, and it seems like there's a significant upgrade to your offering with Nyx. Can you discuss the economic perspective and the return objectives for your upcoming new builds, and how they compare to the EBITDA per fleet you are currently earning on your earlier generation Clean Fleets?

Joel Broussard, CEO

Yes. On the new fleet economics, we expect a 24-month payback on the first we’re building, and that’s on a cash basis. The trials that we’ve done, everyone we trialed for so far is interested in going electric, and we feel that the four fleets we’re building will have more demand than equipment for our new generation electric fleets.

Ian MacPherson, Analyst

Not surprisingly. I have a few more I can take up with you guys offline.

Operator, Operator

Our next question today is coming from John Daniel from Daniel Energy Partners.

John Daniel, Analyst

I guess the first one will go to you, Joel. Just clearly, the demand for this equipment is on the rise, but we’re seeing sort of two paths, right, that people going electric and then some others opting for Tier IV DGB. What do you think is driving the customer preference between the two at this point?

Joel Broussard, CEO

Josh, do you want to take that one?

Josh Shapiro, Vice President of Finance and Investor Relations

Sure. Customers are leaning towards next-generation solutions, whether electric or Tier IV dual fuel. This shift is primarily driven by fuel cost savings and emission reductions. The Tier IV dual fuel offers a partial solution for both cost and emissions. In terms of fuel costs, the more diesel is substituted, the more savings customers can experience with dual fuel. However, no dual fuel fleet completely eliminates diesel, and many still use CNG when operating on natural gas. While there are some fuel cost savings compared to conventional diesel fleets, these savings are not as significant as what customers would achieve with our electric fleets using field gas. The same applies to emissions; the Tier IV DGB engine is rated Tier IV but was designed more to reduce NOx and particulate emissions rather than carbon dioxide. The CO2 emissions from a Tier IV engine are similar to those from a Tier II engine. Although the Tier IV DGB engine offers some benefits, it does experience methane slip due to incomplete combustion of natural gas. Its emissions might not be as good as a Tier IV diesel, but still not as beneficial as our electric fleets. However, one reason customers lean towards DGB is its availability; electric fleets make up less than 10% of the active fleet. Accessing some benefits drives customers toward DGB instead of electric solutions, but the preference for electric is stronger due to its more comprehensive benefits.

John Daniel, Analyst

I’m curious about whether the customers you mentioned are considering another option because they might be looking for a multiyear commitment for your project, while other solutions may be cheaper and require less commitment. Have you observed anything along those lines?

Joel Broussard, CEO

We’re actually looking for a 12-month commitment now, John. And also, we operate Tier IV engines. I know how much those cost on a CapEx basis to operate, and electric is just so much cheaper.

John Daniel, Analyst

Can you provide more details about the maintenance cost per fleet, comparing the two options now that you've transitioned away from conventional? Any insights would be appreciated.

Joel Broussard, CEO

Josh?

Josh Shapiro, Vice President of Finance and Investor Relations

Yes, sure. I mean historically, we’ve seen a 35% to 40% all-in cost advantage for the electric versus the diesel. I think you’ll start to see more of that play out in numbers as we’re able to eliminate diesel operations from our financial results we report.

John Daniel, Analyst

Fair enough. And then the final one...

Joel Broussard, CEO

John, that really showed up in this quarter's earnings when you look at our EBITDA versus maintenance CapEx. We still have a few diesel fleets working, but that is nearly approved.

John Daniel, Analyst

I just remember from years ago in New Republic, that was something you guys talked about; it was hard to see, and now it feels like we’re able to see it, so...

Joel Broussard, CEO

We’ll really get to see in the last three months from September, October, November, we have no diesel cut in the working.

John Daniel, Analyst

Okay. And then the last one, guys, hopefully, you can answer, but we know that some of the equipment went to Alamo because that went out via 8-K. I’m not sure if you can name the buyers of what’s been sold subsequent or what’s on the docket. But can you describe for us the type of buyer, whether it’s an existing player, a new player? Or just any color along those lines would be helpful.

Joel Broussard, CEO

Josh, do you want to take that one? You’ve been handling most of the asset sales.

Josh Shapiro, Vice President of Finance and Investor Relations

Yes, sure. The interest has been kind of across the board. There have been service companies interested in buying some of the equipment, some resellers, some refurb shops. I’d say the interest has been pretty wide. The bulk of what we sold to date in the third quarter was to Alamo in the transaction that we kind of publicly disclosed, as well as a buyer, non-service company.

Operator, Operator

The next question is coming from Stephen Gengaro from Stifel.

Stephen Gengaro, Analyst

Two things, if you don’t mind. The first is you referenced the profitability in the quarter and not having a lot of diesel contribution in the EBITDA line. So just kind of back of the envelope; I mean, when we sort of do the math on how many Clean Fleets are out there in your current fleet, it looks like EBITDA per fleet is running around $9 million in the quarter for the electric assets. Is that a ballpark reasonable number?

Joel Broussard, CEO

Kyle, do you want to take that one?

Kyle O’Neill, CFO

Yes, we do not report the electric versus the diesel, but the electric equipment is definitely at a substantial premium. So that’s within a reasonable range.

Stephen Gengaro, Analyst

Okay. You’re going to have to report just electric soon, Kyle. But that kind of step-up is not a ridiculous thought process as you go into the next quarter given the amount of fleet you plan to have work and seem to be all electric.

Kyle O’Neill, CFO

Yes. I want to caution you that as we decrease from nearly eight fleets operating in Q2 down to about five, the overhead will significantly impact that. So I think that more than $9 million of EBITDA per fleet reflects field-level results, and then that will decline with the absorption of overhead.

Stephen Gengaro, Analyst

I understand your point. From what I see regarding your financial position, it appears that you are actively working to improve the balance sheet, while also making significant capital expenditures. This seems quite ambitious from our standpoint. Could you explain your current expectations for the balance sheet, the capital expenditures planned for the latter half of 2022, and how you envision the balance sheet changing? Is it possible to maintain a relatively secure financial position while still supporting the growth you have outlined?

Joel Broussard, CEO

Kyle?

Kyle O’Neill, CFO

Sure. Right. So in the June transaction, we raised approximately $97.5 million of cash proceeds from June and the early part of July. That’s resulted in about $50 million after the Smart Sand settlement fees and expenses and some required debt pay downs. Cash requirements for these new building fleets will be around $100 million to $115 million. Most of that will be due when the fleets are delivered in early to mid-part of 2022. We’re currently selling assets to reduce the term loan balance. We’re targeting to get that below $110 million from a little over $230 million at the end of the quarter. We’re looking at about $120 million of debt paydown. $50 million to $60 million of additional funding will be needed to build all four fleets, which we think we’ll be able to source through several different options, including equity, equipment financing, etc. We think it’s a very achievable plan, and we really need to get back to nine or ten active fleets to have the critical mass to really start to see the true economic benefits of our Clean Fleets.

Joel Broussard, CEO

Yes, I’d like to add one thing to that. We’re going to do it between equity, debt, and also additional license sales.

Kyle O’Neill, CFO

As you consider the purpose behind building these fleets and the associated economics, the combination of the new fleets and debt reduction should significantly enhance the value of our shares.

Stephen Gengaro, Analyst

Okay. Okay. And then the $120 million of incremental debt paydown that you envisioned comes from what?

Kyle O’Neill, CFO

Primarily, assets.

Stephen Gengaro, Analyst

Excuse me?

Kyle O’Neill, CFO

From assets.

Joel Broussard, CEO

Sorry, Kyle.

Stephen Gengaro, Analyst

Yes. So those are asset sales in addition to the ones that you have already announced so far, right?

Joel Broussard, CEO

Correct.

Kyle O’Neill, CFO

We’ve announced about $20 million of asset sales. There would be an incremental $100 million through asset sales or scheduled amortization.

Operator, Operator

Your next question is coming from Daniel Burke from Johnson Rice & Company.

Daniel Burke, Analyst

Joel, when you mentioned additional license sales, do you mean to the party that already has the options to, I guess, acquire additional licenses? Or would it be a second or multiple other parties than ProFrac?

Joel Broussard, CEO

We feel ProFrac and potentially others at this point.

Daniel Burke, Analyst

Okay. Fair enough. Given that we've discussed the asset sale plans, they appear essential for reducing the debt level by the end of this year. Therefore, asset sales need to move at a good pace. I believe you've set a target of around $130 million in total asset sale proceeds. While it may not all be finalized by the end of this calendar year, is that target still realistic?

Kyle O’Neill, CFO

Yes, that’s still in the range of what we’re targeting.

Daniel Burke, Analyst

Okay. All right, guys. And then maybe just one other one. When we think about the new fleets coming in on the electric side, can you talk a little bit about the power generation strategy you’ve got in mind for the fleets?

Joel Broussard, CEO

We will let the client decide which power generation asset they prefer. We believe that turbines are currently the best and the most environmentally friendly option. Regardless of their choice, whether it’s grid power, a reciprocating engine, or a turbine, we will support the client’s decision.

Daniel Burke, Analyst

Okay. And Joel, I think the plan would be not to put those on the balance sheet, though, is that fair?

Joel Broussard, CEO

Absolutely.

Operator, Operator

We reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Joel Broussard, CEO

Thank you for your participation in the call. Have a great day.

Operator, Operator

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.