Atlas Energy Solutions Inc. Q2 FY2024 Earnings Call

Greetings and welcome to Atlas Energy's Second Quarter 2024 Financial and Operational Results Conference Call. All participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kyle Turlington, VP, Investor Relations. Thank you. You may begin.

Hello and welcome to the Atlas Energy Solutions conference call and webcast for the second quarter of 2024. With us today are Bud Brigham, Executive Chairman; John Turner, CEO; and Blake McCarthy, Chief Financial Officer. Bud, John, and Blake will be sharing their comments on the company's operational and financial performance for the second quarter of 2024, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. Securities laws. Such statements are based on the current information and management's expectations as of this statement and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in the annual report on Form 10-K we filed with the SEC on February 27th, 2024, our quarterly reports on Form 10-Q, and our other SEC filings. You should not place undue reliance on forward-looking statements and we undertake no obligation to update these forward-looking statements. We will also make reference to certain non-GAAP financial measures such as adjusted EBITDA, adjusted free cash flow, and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in the press release we issued yesterday afternoon. With that said, I will turn the call over to Bud Brigham.

Thank you, Kyle, and thanks to everyone for joining us today for our second quarter conference call. Before we jump into many of the exciting developments at Atlas, I first want to thank everyone involved with the response to the fire at our Kermit plant on April 14th. The combined efforts of our employees and first responders transformed this event into a strong testament to the unique culture of Atlas. It also served as a demonstration of our unmatched advantages, particularly our distributed mining and logistical assets and thus the associated redundancies, which uniquely enable us to reliably serve our customers even in the most extreme and challenging circumstances. Though the fire and the ensuing operational challenges negatively impacted our second quarter results, our team worked around the clock to ensure that every single one of our customers had all of their supply needs met during the quarter, and that they didn't miss a beat in their critical development plans. Our customers have options when it comes to proppant suppliers. But in Atlas, they can be confident given that they have the partner with superior distributed mining and logistics assets, a partner who is constantly looking for new ways to improve safety and reliability. We will always move heaven and earth to fulfill our obligation to them. We will always put our customers first. Thanks to the effort from our operations and construction teams, the rebuild of the Kermit facility feed system was completed by the end of June and has since returned to full load-out operations after a brief ramp-up period in July. Given that preventing a repeat incident is of the utmost importance, the rebuilt feed system now incorporates significantly enhanced safety equipment, including rip detection technology, misalignment switches, enhanced belt tracking rollers, and both fixed and mobile fire suppression equipment. Most of these concepts were developed for the Dune Express, and we now plan on adding them to the feed system at our Monahans facility in the near future. While events like the fire are unfortunate, adversity makes good organizations better. I truly believe that Atlas is a better company than it was just a few months ago. And for that, all of the credit goes to our employees. To all of you listening today, thank you for all your effort, creativity, and can-do spirit. I could not be prouder to be on your team. Wrapping up my section, these are very exciting times at Atlas. Our initiatives to make the Permian a more efficient factory on the ground are advancing at a very exciting pace. John will cover these in some detail, but importantly, the construction of the Dune Express, our 42-mile overland conveyor system continues on pace and on budget. We are now just months away from commissioning. And I believe it will be a major step-change advancement for proppant and logistics in the Permian Basin with even more to come. With that, I will turn it over to John.

Thanks, Bud, and you're right. These are exciting times for Atlas and the Permian Basin as a whole. Before I get into my prepared remarks, I would like to congratulate Chris Scholla on his promotion to COO for Atlas. Since joining Atlas in 2017, Chris has proven to be an effective and creative leader. In 2019, Chris led our entry into the oilfield logistics market. With this promotion, Chris will lead all of our operations. Congratulations, Chris, you deserve it. With the Dune Express now just months away from commissioning, we are in sight of our goal of running commercial sand down the conveyor by the end of this year. 39 out of the 42 miles of conveyor modules have now been installed, and we remain both on time and on budget with our original construction plan. Our crews began installing the belt in July with installation expected to wrap up by the end of September. The Fluzone crossings were completed in June, along with 3 of the 6 major road crossings. Additionally, more than 90% of the 76 pipeline and lease road crossings are in place as are most of the wildlife and cattle crossings. Delivery of the electrical houses is expected in September. With power concerns growing in the more regulated New Mexico market, it is worth reminding everyone that Atlas already has an electricity service agreement in place. As we approach the end of construction, the initial commercial base of the project now becomes critical. Today, we have more than 9 million tons of sand contracted for delivery into the Delaware Basin next year and a line of sight on incremental volumes to add to that total. In addition to the continued progress on the Dune Express, we continue to push forward in our other initiatives aimed at revolutionizing proppant logistics. On July 23, Atlas entered into an agreement with Kodiak Robotics, whereby Kodiak will offset a select number of high-capacity trucks with its cutting-edge autonomous driving technology. In May, Atlas in partnership with Kodiak made the first-ever driverless commercial delivery of sand to a well site. Using the Permian Basin's expansive private lease road network, a driverless truck traveled more than 21 miles from our Drop Depot just off ride pan roads to the customer's well site with no personnel inside the cab. Once at the well site, on-site employees entered the cab and unloaded the sand. The vast network of private lease roads across the Permian Basin are ideally suited for this type of application, where traffic is limited and average speeds are under 20 miles per hour. We believe this has the potential to offer a safer, more reliable last-mile delivery solution to our customers in the Permian Basin and could represent a step change in logistics. Atlas has ordered the first two trucks equipped with the Kodiak Driver, which is Kodiak's industry-leading autonomous system, and we plan to launch commercial operations with those trucks in early 2025. While we do not expect this partnership to have a material impact on our 2024 financial results, we are excited about this partnership's long-term potential impact on our logistics operations and results. Moving to the broader market. 2024 has proven to be a much more challenging year for the oil field. Despite a relatively strong crude take, a combination of continued operator consolidation and weak natural gas prices has led to a decline in drilling and completion activities this year. The Permian rig count is down approximately 10% over the past 12 months and is expected to remain relatively stagnant through the back half of this year. The decline in activity levels, combined with the majority of service demand emanating from a shrinking pool of operators, has led to falling utilization rates for most service lines and a commensurate loosening of pricing behavior. The Permian proppant market remains one of the few, if not the only relative bright spots in terms of year-over-year demand growth, driven by longer laterals and continued growth in completion efficiencies. The continued adoption of both simul- and trimul-fracs, which are now estimated to comprise approximately 25% of the market, the accelerating deployment of efficient electric frack fleets, and the higher proppant intensity of new well designs are all combining to support the Permian proppant market. Despite a double-digit decline in rig activity, proppant demand is still expected to be up slightly year-over-year. To provide some quantitative feedback on this, the average amount of sand pumped by a fracture has increased from approximately 40,000 tons per month just a few years ago to more than 65,000 tons today, with many of the leading edge crews now pumping more than 100,000 tons. Nevertheless, with the recent industry supply additions over the past 12 months, the supply-demand balance in the Permian proppant market is notably looser now than it was this time last year. While several of our larger customers are using the recent pricing relief to lock up volume, return at attractive prices in the mid-20s, we have seen spot prices at levels we believe to be near breakeven gross margin levels for our less advantaged competition and negative fully loaded cash flow territory for several of them. It's in market conditions such as these that Atlas's advantaged reserves and operations really shine as we are still able to generate healthy margins and returns at pricing levels that cause some of our competition to struggle. While it is certainly a lot more fun to be riding the wave for lofty pricing, markets like today are ultimately healthy for the industry as they typically drive subpar operators out, incentivize continued consolidation, and ultimately lead to much healthier markets in the future. Relatedly, I wanted to briefly touch on the US Fish and Wildlife Services' June 20 decision to lift the dunes sagebrush lizard off the endangered species list. As many of you are aware, Atlas has been a member of the 2020 candidate conservation agreement with assurances for the CCAA. The 2020 CCAA was developed to provide a conservation strategy framework for companies operating in the Permian Basin by establishing certain guidelines, such as limiting annual surface disturbances to 60 acres among other requirements. In addition, the CCAA instituted an annual habitat conservation fee and permits companies to set aside acreage or take other conservation actions to offset the fee. As a member of the CCAA, we do not expect to see any disruptions in our operations due to the listing of the Dunes Sagebrush Lizard. However, we do believe that the listing will have both short-term and long-term impacts on overall industry supply over the coming years as it will likely become increasingly more difficult for mines with smaller acreage positions to remain in good standing with contribution measures while maintaining current production levels. A quick update on our OnCore operations. During the quarter, we launched OnCore #8 in the Midland Basin. OnCore #8 is a larger mobile mine than our prior deployments with a production capacity just north of one million tons annually. Additionally, we are currently in the early stages of deploying an additional OnCore unit in Loving County, near the New Mexico-Texas State line. Atlas' commitment to innovation continues to be on display throughout our organization, as exhibited by our partnership with Kodiak that we will look to pair with the Dune Express, mobile mining, and high-capacity multi-trailer operations. We strive to make the Permian a more efficient, safer, and more reliable basis for our employees, customers, and the communities in which we operate. I will now turn the call over to Blake to discuss our second quarter results and outlook.

Thanks, John. For the second quarter of 2024, Atlas reported revenues of $288 million, up 49% sequentially from first-quarter levels due primarily to a full quarter impact from our acquisition of Hi-Crush. Adjusted EBITDA was down slightly to $72 million or 25% of revenue, and net income was $14.8 million or 5% of revenue. As I will detail shortly, the impact from the fire damage at one of our Kermit facilities proved to be more significant than we had initially expected at the time of our Q1 call. However, the vast majority of this incremental impact was offset by superb performance from both our other plant operations and our logistics business, allowing us to generate adjusted EBITDA that was roughly in line with that of the first-quarter results. Revenues from product sales were approximately $128 million on volumes of 4.9 million tons, yielding an average sales price of approximately $26.07 per ton for the second quarter. These figures do not include sand tonnage purchased from third parties in the open market to fulfill customer obligations due to the fire. Service revenues were approximately $159 million during the second quarter, approximately double the levels of the first quarter, due to a full quarter impact from the Hi-Crush acquisition and continued growth in our legacy business. Our logistics team set a quarterly record for loads delivered during the quarter, delivering more than 50% of our sand volumes utilizing our own last-mile crews. We had roughly 26 crews running during the quarter and believe that number will continue to grow modestly in the second half of the year as we approach the commercial in-service date of the Dune Express. The logistics business was running on all cylinders during the quarter. And while we do expect some normalization in results during the second half, the Atlas logistics team continues to position itself as a leader in the industry. Cost of sales excluding DD&A, were approximately $202 million. Plant operating expenses, excluding DD&A, were approximately $68 million or $13.84 per ton, significantly above our normalized levels. The increase in our plant operating expenses was largely due to costs associated with the temporary load-out at our Kermit facility, lower throughput, and a delay in the commissioning process of one of the dredges. The total financial impact from the fallout of the fire incident came out around the top end of the $20 million to $40 million range that we gave on our Q1 call. Our team on the ground has performed exceptionally throughout the rebuild process, with the construction process finishing by the June 30 target. The facility was ramping back up to normal operations over the course of July and has now returned to normal load-out operations. However, due to the ramp-up period, we do not expect our Q3 average OpEx per ton metrics to fully normalize but do expect them to return to normal levels by the end of the year. While the Kermit rebuild garnered the most attention during the quarter, I would be remiss if I did not mention the exceptional performance achieved by our other plant operations. Our Monahans and other Kermit facilities were quite simply humming over achieving on both the production and efficiency targets. Additionally, OnCore volumes were the second highest in company history despite two units being offline for relocation during the quarter. Our Q2 SG&A was approximately $27 million, a figure that was inflated by approximately $6 million of acquisition-related costs and approximately $5 million of stock-based compensation. Moving forward, we expect to realize incremental corporate synergies in the third quarter and expect SG&A to return to a more normal level in the $15 million range. Royalty expense was approximately $4 million. Cash interest expense was approximately $11 million, offset by approximately $2 million of interest income. We expect our net interest expense to rise slightly in coming quarters as we draw on our cash reserves to fund our key growth projects. Operating cash flow for the second quarter was $61 million and adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx, was $67 million, yielding an adjusted free cash flow margin of 23%. Capital expenditures during the quarter totaled approximately $132 million, $127 million towards growth and the rest for maintenance. Our growth CapEx consisted of $77 million spent on the construction of the Dune Express, $31 million for the additional OnCore deployments, and $19 million of spend associated with the rebuild of the feed system in Kermit. We have already been reimbursed for $10 million of the current spend and excluding a small deductible expect to be fully reimbursed by insurance for the remainder. Maintenance CapEx for the quarter was approximately $5 million. Cash and equivalents stood at $105 million against total debt of $480 million. Looking ahead to the third quarter, we expect production at our Kermit facility to steadily increase over the quarter after the ramp-up period in July, yielding an approximate 20% sequential improvement in total Atlas volumes. Combined with the continued strong execution from our other plants and our logistics business, we estimate Q3 EBITDA to be in the range of $90 million to $100 million, with the company exiting the quarter at a higher run rate. Due to the strong cash profile of our business, we are increasing our dividend to $0.23 per share, which represents a 5% increase over the prior period or $0.01 per share. We have elected to move away from the base plus variable dividend structure to a standalone ordinary dividend. Based on our closing share price of August 2, our annualized dividend yield is 4.9%. That concludes our prepared remarks. We will now let the operator open the line for questions.

Thank you. We will now begin the question-and-answer session. Our first question comes from Jim Rollyson with Raymond James. Please go ahead.

Good morning, Gents, and congrats on getting Kermit back up and running in a timely fashion. Maybe Bud or John, there's been some press here over the last quarter regarding trucking rates being depressed in the Permian. I'm kind of curious how you view that as far as impacting your logistics business and how that might play into your margin outlook as the Dune Express ramps up into next year?

Hey, Jim, good morning. It's Blake here. I think this is a really good question for our newly minted COO, Chris Scholla, who is joining us here to answer. So he's the one with the most day-to-day real-time exposure to this phenomenon. So we'll pass it over to Chris.

Yes. Thanks for the question, Jim. So look, while truck rates in the Permian have fallen throughout 2024, our structural advantages are really starting to shine through, as you can see in the numbers. Let's think about this from a macro level to start. So while the sand demand continues to grow out there, innovations such as our Mobile Mini and Dune Express reduced the well-site haul distances by over 50%. So the shorter haul distances and higher associated truck churn ultimately decrease the number of trucks that are required to service the Permian. With trucking rates already at breakeven pricing, we don't anticipate a further decline in pricing, but we do anticipate inefficient trucking companies continuing to exit the Permian Basin. For us, it was never about just starting a trucking company; it was about executing a long-term strategy to be the lowest cost to operate and most efficient logistics provider in the Permian. I mean, let's just walk through and look at the steps we've taken to get there. We vertically integrated into trucking. We've launched our own digital platform to automate dispatch and gain efficiencies. We've executed multi-trailer operations, delivering four times the normal payload. We've delivered sand to a well site without a driver. Lastly, we've become the closest to the well site in the Midland by acquiring the Mobile Minis. Look, our margins will only be further enhanced with the launch of the Dune Express in Q4. While trucking prices have fallen in an order of magnitude, it's really only marginal compared to our structural cost differences and advantages. We are revolutionizing sand delivery in the industry and are really excited that we are just getting started.

Yes. And Jim, adding on to Chris there, we get a lot of questions about trucking pricing impact on potential Dune margin contribution. I think it's important to remember that when Atlas management underwrote the decision to build the Dune Express, it was stress-tested every which way. Our base case assumptions are very much in line with today's market conditions, not with the frothy conditions we were seeing 18 to 24 months ago. So needless to say, we remain very confident about the financial impact of the Dune Express moving forward into 2025.

Appreciate all the detail and look forward to that. And maybe following up, Blake, you talked about third quarter volumes kind of ramping 20% sequentially. You guys also earlier in the call discussed the rig count and some of the offsets that have actually kept Permian sand demand flat to up marginally this year despite that. Maybe just provide some color. As you're ramping into Kermit being back up and running and OnCore number eight and to non-Core number nine, just kind of how you're seeing customer demand on your end? Are you guys relatively sold out? Just trying to think about how we should look at volumes even beyond just the third quarter as you see it today?

Well, I think that our sales team has been making great progress on the contracting front recently. As I mentioned in the prepared remarks, we've already secured more than 9 million tons for delivery next year in the Delaware. We think we've got a strong line of sight on some incremental contracts in the coming weeks. All in all, we're feeling pretty good about how we're positioned for next year, especially based on where we are in the calendar right now. Obviously, we're watching the market. We'd love to see this slow trickle of rig count decline find its footing. But sand will continue to be a critical component of all the well activity out there. And so we're seeing positive secular trends.

The next question comes from Doug Becker with Capital One. Please proceed.

Thank you. Maybe just expanding on the logistics outlook in the near term, very strong 2Q. Just any color on 3Q into the back half of the year? Certainly appreciate that it sounds like it would come off a little bit from last quarter's results?

Yeah. When we think about Q2 logistics results, they were like really hitting on all cylinders, and it was one where they threw a perfect game. While I think that we have the absolute best team in the business, betting on somebody continuing to throw a perfect game every quarter seems daring. So, there's perhaps some natural conservatism built into our guidance there just because it's a complicated business and there's a lot of moving parts. But we don't see any real degradation in market conditions versus what we saw in the second quarter.

Okay. And then maybe hopping over to the proppant side. Maybe just one more color on the supply and demand. Are there any indications that competitors might be taking supply off the market? And then just from a demand standpoint, or maybe more specifically a pricing standpoint, are there any cost price adjustments we need to be thinking about going forward?

Yes. This is John. Coming into this year, we expected the sand supply-demand balance to be looser than we witnessed due to the rig count decline we are witnessing has continued. Like Blake said, continue to slowly trickle down throughout 2024, and that sand pricing faces headwinds. There are two important things to remember when you think about sand pricing for Atlas as we move forward. First, we believe spot price for soft sand volume pricing is currently at prices where mines at the high end of the cost curve are faced with the question of selling sand at breakeven or negative margins, or even if they should shutter. We are hearing more anecdotes of shifting cuts in potential mines. While this is painful for the industry and our competitors, this is positive for pricing dynamics in the long run. Obviously, sand plants are complicated operations; you just don't flip the switch and turn it back on. Second, with the distressed state of some of our competition, we are seeing some bifurcation in the sand market based on reliability. We completely understand our customers' procurement teams are looking to grab as much price as they can, but they also understand reliability of supply is paramount over securing the cheapest ton of sand. It's a lot more expensive for a frac crew to be sitting around waiting for sand than it is to pay a couple of more dollars per ton. Atlas' reputation for being a true service partner who's been able to ensure we deliver the sand and have it on the well site will always be there. This is a reputation that we've earned, going all the way back to the pandemic when most of our competition was shutting down a mine or two, we stayed open and continued to supply while generating positive EBITDA through that period. I think from our competition standpoint, we are getting close to where companies that don't perform will not be able to financially sustain due to their cost structure. In fact, Atlas was designed to be the lowest cost producer of sand, it flourishes in markets like today. Our assets are at the low end of the cost curve, and combined with our market-leading logistics business, it allows us to generate returns well beyond our cost of capital at these current prices and gain incremental market share. This position will even be strengthened further as we bring on the Dune Express early next year. I might just add, I mean, a couple of related trends that are really important is our cost structure is trending down over the subsequent quarters, and together with that, of course, our CapEx is also ramping down very substantially. So it's a really exciting time, particularly as you look forward to 2025 for us.

Yeah. Sounds encouraging. Thank you.

The next question comes from Derek Podhaizer with Barclays. Please proceed.

Hey, good morning. I want to ask a question on the state of the market in the Delaware Basin as the Dune Express will be servicing it. Can you maybe just talk about some of the customers out there, some of the frack equipment out there, really the overall demand of the Delaware? Do you expect to have any competition for mobile minis, market share from the Dune Express, simul- and trimul concentration? Just your overall view of the Delaware to help quantify the actual demand pull and how much the Dune Express will be servicing. Lastly, will the Kermit Mine Legacy Atlas be able to handle all the volumes going out there, or will you be pulling from Legacy Hi-Crush Kermit?

Yeah. This is Bud. I'll start, but some of these guys may want to add to my comments. The two basins, the Delaware versus Midland, are very different, both in terms of the customers and in terms of the sand supply. We purchased Hi-Crush because the Encore Mines in the Midland Basin were very attractive logistically to Midland operators, and thus it brought a very complimentary customer base to us. The Delaware is very different. There aren't many smaller sand deposits and mines providing the supply. We are very much advantaged in the Delaware with our high-capacity trucking and with the Dune Express coming online. So there's nothing that can match the Dune Express in terms of the cost structure, reliability, dependability, and of course, the environmental benefits that it provides. We see a substantial majority, a substantial portion of our sand sales in the Delaware will be supplied by the Dune Express. You guys may want to add to that.

I mean, if you look at it, sand demand is roughly 70-something million tons, you know, roughly half of that is in the Delaware Basin. So that means that we're going to be able to push 12 million tons down the Dune Express. Obviously, there's a significant amount of supply that's not supplied off the Dune Express. We think we're going to be fully utilized off the Dune Express once it's up and running. A large part of the Delaware Basin is in New Mexico, and so you do have to consider the regulatory environment there. So obviously, I think our Kermit mines do serve most of the Delaware Basin, and I expect the Kermit mines that we currently have, like the Atlas mines, to be serving on the Dune Express. We don't necessarily currently expect to pull anything off of the Hi-Crush mines.

I might add one thing, I think everyone on this call appreciates this fact, that the northern Delaware Basin is the best-producing province in the entire country. It's got the deepest inventory and the highest rate of return drilling in the United States. So we're very well positioned to serve that market.

That's really helpful. And then maybe just on the type of frac equipment that's out there. Do you see a lot of simul- and trimuls concentrated in the Delaware versus the Midland or E-Fleets, looking at it from that level?

Yes, I think from my perspective, we continue to see adoption of simul- and trimuls, E-Fleet across the board not only in the Delaware but also in the Midland. We don't see any major trend differences between the two, but really operators are looking to get more efficient. And as it gets more efficient, that’s really where our value proposition comes to play by removing that sand bottleneck of logistics sand on the well site so that our operators and customers can continue down the road of efficiency.

The next question comes from Sean Mitchell with Daniel Energy Partners. Please proceed.

Good morning, guys. Thanks for taking my question. Maybe to follow up on Doug's question around simul-frac and frac design, if you think about the evolution of frac designs, you went from zipper fracs to simul-fracs. It took a while for guys that were doing zippers to adopt simul-fracs because they wanted to see the results of other guys doing it. It feels like more people are picking up simul-fracs. Are you seeing that in particular? I'm thinking simul-frac to trimul-frac. Are you seeing that more today than you were a quarter ago? Because it seems like in the calls, we're seeing more people at least testing it.

Yes, we're definitely seeing increases. I mean, it's a joke around here that we're going to get to the octo-frac soon. All in all, we're going to continue to see that trend move upward.

The pace of the evolution of the industry has certainly come a long way over the last half-decade, where, like I said, different zipper fracs took a number of years to really saturate the market. It seems like the next new innovation takes a matter of weeks, not months.

Yes. I mean, that trend should continue. When you look at operators, it relates to the reason operators are consolidating. They need more scale. They need stronger balance sheets. The throughput on capital and sand is up and to the right. Atlas is the one profit and logistic provider that can match up and provide that throughput that these operators need for those operations.

And then, Bud, maybe one more for me. Just you mentioned the cost structure moving lower. Can you provide any more color around that, particularly for 2025 or Blake?

Yes, first of all, in the second half of the year, we are just getting back to normal operations. We have always maintained the lowest cost structure, which was temporarily elevated due to the rebuilding process and the amount of heavy equipment and rental machinery we had on site this past quarter. Throughout July, we were reducing that inventory, which significantly boosted our mobilization as we progress through the third quarter. As for our next steps, we are continually looking for ways to lower costs in our daily operations, whether through automation or electric dredging. Recently, we announced an exciting partnership with Kodiak for Autonomous Trucking, which is another avenue for us to progressively reduce our cost structure. Atlas performs best when it comes to driving down costs.

All right. Thanks, guys. Congrats on getting Kermit back online.

Thanks.

The next call comes from Don Crist with Johnson Rice. Please proceed.

Good morning, guys. I wanted to ask, since you bought Hi-Crush, you've kind of juggled the numbers around a little bit. But looking towards next year, how should we be thinking about maintenance CapEx? And what should that number be going forward? And obviously, your growth CapEx is going to fall significantly once you finish Dune Express. But how should we look at those two numbers as a complete kind of CapEx number for next year?

Hi, Don, it's a little too early for us to talk hard numbers around 2025 CapEx. Obviously, with the Dune Express coming online at the end of the year, 2025 CapEx is going down pretty hard year-over-year. We do have some exciting growth opportunities in front of us that will justify some incremental capital. But there's certainly nothing compared to the size of the scope of the Dune Express or the Kermit plant expansion that we had recently.

Okay. And Bud, maybe or John, one for you. Obviously, spot prices are pretty low right now. How are you thinking about contracting for next year? And how is that kind of push-pull dynamic going amongst your customers? I'm assuming they want to lock up super low pricing and you don't want to. Is that the right way to think about it?

I mean, they want to lock up super low pricing. I guess one thing to remember is that Atlas has a much lower cost structure than our competition. We can generate returns, as we said earlier, at this time our cost of capital at these prices, and we're still generating a great return. We are currently in the middle of the RFP season. So we're starting contracting, and I think a lot of our customers are looking for reliability as well. A lot of them are looking to source from the Dune Express. We're too early to talk about what we'll be doing on contracting next year since we're just getting into those conversations.

But is it safe to say that you're bundling both logistics and sand price in those contracts?

For sure. Yes, that's the change. I mean we made that change about two years ago; we were just a pure sand contracting company. We started changing that strategy to be more of a delivered price to the well site.

The fact that the compounding of our low cost structure, both on the production side and on the logistics side, is unique for Atlas.

Yes. And locating our mines closer to the well site, as Blake mentioned earlier, and Chris mentioned earlier, talking about the mini mobile and Dune Express, that’s just going to lower our delivery costs to the well site.

I appreciate the color. I'll turn it back. Thanks, guys.

Thank you.

The next question comes from Neil Mehta with Goldman Sachs. Please proceed.

Yes. Good morning, team. The first question is around return of capital, and you made the decision to bump the dividend and have a more fixed dividend structure versus more of a variable. Bud and team, I just love your perspective on why you think that's the optimal way to return capital to shareholders and your perspective on the dividend growth from here?

Hey, Neil, good to hear from you. It's a good question. So, the decision to move from the base plus variable model to a straight ordinary dividend was a little bit one of messaging. In our view, we want our investors to know that the dividend is something that we stress-test severely. I feel very confident about paying out through all kinds of market conditions. With Q2 representing the peak of our CapEx spending for the Dune Express, we felt it was fitting to convert the dividend completely. Looking ahead, once the Dune Express is complete and operational, our cash flow profile changes considerably to the positive. At that time, management and the Board will discuss how we optimally want to return incremental capital to shareholders. I think we are all very excited about sharing that in the coming quarters.

Yes. Shareholders come first with us, and we're really excited about entering 2025 and the opportunity we have to return capital to our investors. It's going to be a very exciting year in that regard.

Yes. Thank you, both. I think it's a good signaling mechanism for sure. So, we appreciate that. And then the follow-up is Dune Express; the video is awesome as always. It does look like it's coming together well. Can you get us on-the-ground updates on getting this into completion and any critical path areas that you're focused on?

The real critical path involves execution right now. Everything has been ordered, all the equipment’s arriving, and everything has been coming in as expected. I mean, we just need to execute. There are no real hurdles. We’ve made most of the major road crossings, and we’ve got most of the crossings installed. We’re still looking good at the Dune Express being commercially operational by the end of this year. From a management change perspective, we’re focused more on the launch than construction. We’re getting close to the goal line here.

Thanks, John.

Next question comes from Michael Scialla with Stephens. Please proceed.

Hi, good morning. You mentioned the Kermit damage was more than expected or at least it impacted the second quarter more than you originally thought. Can you provide a little more detail there on what issues might have surprised you?

Yes. I think Chris has been overseeing that, so I will let him comment on it.

Yes. Look, as we got into the production, just dealing with some of the space limitations that we have out there, we couldn't use our silos, and we started a temporary mobile load out. The cycle times that we had anticipated on trucks running through the facility on those mobile load-outs versus where they actually were were a little bit slower than expected and really impacted our throughput there. We did divert them over to the legacy Hi-Crush facilities to help out.

So yes, not as much on the plant itself being repaired is just the ability to...

It was a combination of throughput limitations and then incremental rental equipment expenses. The amount of yellow iron that we had on site during the quarter created congestion, along with the equipment being rented.

We transitioned from a process that had very little human interaction to one that was very intensive concerning human interaction. So there was just a lot more focus on our location.

Got it. And I guess, just some high-level thoughts on M&A. Hi-Crush has obviously worked nicely for you. You have 30% market share in the Permian sand market. Would you consider acquiring more assets in that market? Or are you looking for more diversification at this point?

Good question. When we look at the current landscape of proppant providers in the Permian and elsewhere, the market is still too fragmented and needs further consolidation. However, I don't think that necessarily means Atlas needs to be the consolidator. Our assets put us at the low end of the cost curve, and we just acquired a competitor adjacent to us on the curve. So if we do any further consolidation, we have to be very picky about exactly what assets we're going to acquire, as we absolutely do not want to lose our current position. That being said, there's a price for everything. It's a very unique situation in the oilfield as there are a lot of sellers and not a whole lot of buyers, alongside a complete third of capital. So it's an attractive setting for companies that actually have currency. However, we're in a position where we don't need to do anything. So, we're going to be really picky on both asset quality and valuation. Any deal that we do will enhance our line of sight on growing our cash flow to shareholders, both near and long term.

Appreciate that. Thanks, guys.

And we're going to take one more question. We've got a market that's fairly generic, and we've got other earnings calls today. So we'll limit it to one more question.

The next question comes from Jeff LeBlanc with TPH. Please proceed.

Good morning, and thanks for taking my question. For the question, I wanted to ask is could you give any more color on how we should be thinking about ramping the volumes for last-mile deliveries ahead of the Dune Express? Are there any constraints that we should be aware of? On the one hand, your investment material pointed towards adding two incremental crews in Q3. But on the other hand, it seems like the Drop Depot deployment seems to be facing some headwinds, and you're evaluating additional locations. Thank you.

Sorry, you're breaking up there on me. Can you repeat the question?

Sure. For my question, I wanted to see if you could provide any more color on how we should be thinking about ramping volumes for last-mile deliveries ahead of the Dune Express. Are there any constraints we need to be aware of? I know your investment material pointed toward adding two informal crews. But on the other hand, it seems like the Drop Depot deployment seems to be facing delays or headwinds.

Yes. From a commercial approach, as we discussed, we have line of sight to some additional crews. We continue to see customers engage as the Dune Express has transitioned from construction to a very real and impactful solution. We continue to have those customer conversations and look to move our last-mile contracts over from last-mile to supplying that directly off the Dune Express. We know our targets in the Delaware and the major players out there, and we continue to expand our partnership with those customers.

Thank you. I'll hand the call back to the operator.

Thank you.

At this time, I'd like to turn the call back to management for closing comments.

Thank you, everybody, for joining us. We look forward to reporting our third-quarter results next quarter. Thanks.

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.