Earnings Call Transcript - PUMP Q1 2022

Operator, Operator

Good morning and welcome to the ProPetro Holding First Quarter 2022 Conference Call. All participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. Please note that this event is being recorded. I'd like to turn the conference over to Mr. Josh Jones, Director of Finance for ProPetro Holdings Corporation. Please go ahead.

Josh Jones, Director of Finance

Thank you, and good morning. We appreciate your participation in today's call. With me today is Chief Executive Officer, Samuel D. Sledge, Chief Financial Officer, David Schorlemer, and President and Chief Operating Officer, Adam Munoz. Yesterday afternoon, we released our earnings announcement for the first quarter of 2022. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Also, during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most direct comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question-and-answer session. With that, I would like to turn the call over to Sam.

Samuel D. Sledge, CEO

Thanks, Josh, and good morning, everyone. Our first quarter operating and financial results reflect the culmination of strategic preparation of the ProPetro team completed in the months leading into 2022. Momentum around our returns-focused strategy was achieved in the quarter and our pursuit of margin over market share led to improved capital efficiency across our asset base. Though no additional fleets were marketed in the first quarter, our team experienced a 15% increase in revenues and an 81% increase in adjusted EBITDA. These results not only provide proof that our capital-disciplined approach is paying off, but they also suggest that our team is focusing its efforts in the areas that maximize shareholder returns. Execution of our strategy in the first quarter was more difficult than the results may suggest. Weather and sand-related issues negatively impacted our operations in February and March, with downtime experienced by multiple fleets. These obstacles endured in the first quarter remind us of the volatility in operational risks we assume daily both on location and in the geopolitical realm, such as the heartbreaking war in Ukraine. Moreover, they remind us that it's vital to target economic returns that account for the risks that we bear on behalf of our shareholders. If not for our team's willingness and our customers' desire to go the extra mile to find a way to execute around logistical issues on a daily basis, our results would have certainly differed. That said, I would also like to thank all of the members of the ProPetro team for turning a very challenging quarter into one that reduced risk and limited downtime for our customers, while also generating strong financial results for ProPetro. As we look at how the geopolitical landscape has affected global crude oil markets in the first quarter, we see a tight energy market becoming tighter with a call on short-cycle production growing louder. The continued rising drilling rig count in North America, coupled with high-energy prices, suggests our initial estimates from earlier this year of 15 to 20 industry-wide fleet additions in North America into 2022 may prove to be too conservative. While also considering the equipment attrition rates in pressure pumping and continued supply chain issues, it's possible that demand will outpace effective horsepower supply well into next year. While we expect the backdrop to continue to be a positive tailwind for an effectively sold-out North American pressure-pumping market, failing to capture a proper return in a favorable macro environment is concerning. We remain steadfast in our belief that focusing on margin expansion, while simultaneously providing the highest level of service and efficiencies to our customers, is the optimal approach in the early stages of the cycle. Over the most recent quarters, we have successfully re-priced and repositioned a significant amount of our portfolio. As a result, we high-graded our operations, resulting in a more efficient and dedicated service offering with more reliable profitability. In addition, as part of our fleet transition program to lower emissions natural gas burning equipment, we began taking delivery of our Tier IV Dual-Fuel units and accordingly transitioned one of our operating Tier II fleets to a Tier IV Dual-Fuel fleet. We now have two Tier IV Dual-Fuel fleets operating in the field today, with the third fleet expected to be converted and in service by the end of the second quarter. As a reminder, those conversions support existing capacity and do not add effective horsepower to our fleet. With that, I'll turn it over to David to discuss our first-quarter financial performance and capital resources.

David S. Schorlemer, CFO

Thanks, Sam, and good morning, everyone. During the first quarter, we generated $283 million of revenue, a 15% increase from the $246 million of revenue generated in the fourth quarter of last year. The increase was largely due to improved pricing and higher activity levels, including a company record 600 pumping hours for a simul-frac fleet in the month of March. Effective fleet utilization was above our prior guidance of 12 to 13 fleets, coming in at 13.7 fleets, which increased 9.6% from the 12.5 fleets during the prior quarter. As Sam noted, this was achieved without deploying additional fleets. We effectively scaled our business without adding operations overhead, and the investments we made in force ranking projects and fleet repositioning during the fourth quarter continue to compress white space and improve our price deck and fleet profitability. This requires discipline, and our team delivered in a big way. Our guidance for second-quarter average effective fleet utilization is a range of 13.5 to 14.5 fleets, which assumes no additional fleet deployments and accounts for impacts related to the continued repositioning of our currently operating fleets. Cost of services, excluding depreciation and amortization for the first quarter, was $197 million versus $187 million in the fourth quarter, with the increase driven by higher activity levels and inflationary impacts, including sand and logistics costs. First-quarter general and administrative expense was $32 million compared to $24 million in the fourth quarter. Adjusted G&A was within our prior guidance at $19 million and excludes $13 million relating to non-recurring and non-cash items, namely stock-based compensation of $11 million. Depreciation was $32 million in the first quarter. The company posted net income of $12 million, or $0.11 of income per diluted share, compared to a fourth-quarter net loss of $20 million and a $0.20 loss per diluted share. Included in those figures is a net benefit of $6 million from a non-recurring state tax refund of approximately $11 million offset by a one-time $5 million expense of non-cash stock compensation. Finally, as we described in our prior call, adjusted EBITDA margins expanded significantly with adjusted EBITDA coming in at $67 million, or 24% of revenues for the first quarter, which increased by 81% sequentially compared to $37 million for the fourth quarter. The sequential increase was primarily attributable to improved pricing, increased activity, and additional cost recovery on jobs, while also being partially offset by weather and sand-related issues. Adjusted EBITDA margins improved almost 900 basis points sequentially, and we experienced 82% sequential incremental margins. We achieved these more normalized margins well ahead of plan due to careful planning by the team late last year with strategic investments and through our disciplined fleet deployment strategy. I would like to congratulate the ProPetro team for its accomplishments in expanding margins in the pursuit of full-cycle cash-on-cash returns across our operating footprint. The improvements provide our company with momentum as we move into a strengthening up cycle. That said, it will not get any easier from this point forward. Our challenge will be to continue to stay ahead of supply chain constraints, inflation, and other issues that pose risks to our ability to further expand our margins and provide premium service to our customers. We expect these areas of our business to remain extremely volatile given the lagging impacts from the war on Ukraine and the continuing effects of the COVID-19 pandemic, particularly in China. We will not put further strain on our business by marketing any additional horsepower unless we believe we can achieve returns that compensate for these risks, particularly at this point in the cycle. During the quarter, we incurred $72 million of capital expenditures. Of that amount, $28 million was related to Tier IV dual-fuel conversions, with the remaining balance being predominantly related to other routine maintenance CapEx. We continue to redirect capital to support the transitioning of our fleet to lower emissions and natural gas-burning alternatives that not only further our ESG goals and the goals of our customers but also generate improved profitability. Actual cash used in investing activities, as shown on the statement of cash flows for capital expenditures in the first quarter, was $64 million, with negative cash flow of $39 million. This figure differs from our incurred CapEx due to differences in timing of receipts and disbursements. Based on our current plan and projected activity levels, our outlook for full-year CapEx spending remains unchanged, with the current bias toward the upper end of the range, given the pace of market improvement and compression of whitespace from our calendar. However, as you are aware, market conditions remain dynamic, and our full-year capital spending will ultimately depend on a number of factors including changes from our projected activity levels, the worsening of inflation or supply-chain impacts, or if we identify new opportunities to invest in next-generation equipment in a manner that meets our financial objectives. Notably, we have been investing in Tier IV dual-fuel conversions to support the strong demand and higher relative pricing from our customers. As of March 31, 2022, total cash was $71 million and the company remains debt-free. Total liquidity at the end of the first quarter of 2022 was $127 million, including cash and $56 million of available capacity under the company's revolving credit facility. While our cash position decreased by $41 million during the quarter, which is consistent with our prior guidance, this decrease was offset by a $43 million increase in working capital through an increase in our accounts receivable balances. We believe our accounts receivable balance and working capital will normalize in the coming quarters. And as noted in our recent press release, we extended the term of our ABL facility into 2027 and improved certain terms and pricing, which enhances availability. As of April 30, 2022, our liquidity was $145 million. As Sam alluded to in his opening comments, the commitment to capital discipline is critical to our success. And we're firmly committed to ensuring we maintain a solid financial position that provides maximum financial and operating flexibility. Pricing and fleet deployment discipline will also be critical in enhancing our earnings power going forward, as we continue to deliver top-tier pressure pumping services to the marketplace. With that, I'll turn the call back to Sam.

Samuel D. Sledge, CEO

Thank you, David. As David mentioned, capital discipline and a focus on returns are pillars of our business strategy today and moving forward. Our team spent significant time in the down-cycle working to understand what variables will support the creation of a through-cycle return in pressure pumping during this cycle and in future cycles given the high-intensity manufacturing environment in which we now operate. We believe we are measuring our business properly. As a result of that endeavor and our strong profitability, this quarter validates our work. One of the most important changes noted by our team coming out of the pandemic was how the evolving needs of our customers were creating a wide range of equipment profiles on location, both in the form of capabilities and fleet configurations. This rapid change suggested that we could no longer simply look at EBITDA per fleet to determine if we were being profitable through the cycle. As a result, we began focusing on the replacement cost of all the assets required to support the customer's well site and the cost to maintain a high level of efficiency that our fleets create. We not only evaluated assets in frac services but also in our ancillary services such as pump down, cementing, and other asset-heavy operations. The rationale here is that those business units have their own respective replacement cost that need to be accounted for with their own return profiles. It's simply not reasonable to allow those services to subsidize the EBITDA of our working frac fleets. We also considered this for our cold-stacked equipment. Historically, decisions to activate and redeploy equipment have typically been based on the marginal investment to reactivate, rather than the full replacement cost of that equipment. Additionally, our sharpened focus on through-cycle returns requires us to address the realities that our equipment does not last forever and energy cycles always come and go. We began accounting for the new attrition rates and volatility impacts to determine the level of profitability required to operate in this business. So as we combine those factors and move forward into the early days of this returns-focused strategy, we've had to accept that our approach will at times result in missed opportunities with certain customers, as it already has. Although passing on work when the expected return profiles do not meet our threshold has tested our resolve, particularly as we saw peers deploy equipment more rapidly, the results we see in the first quarter only strengthened our resolve that we are on the right path.

Josh Jones, Director of Finance

A path that ultimately has driven a transformation of our asset base that has not only become more capital-efficient and supportive of higher margins but one that seemingly has runway to continue to improve. While our team is excited about the road ahead, we are not yet satisfied with our current profitability levels, particularly given that the pressure pumping markets are working at effectively sold-out levels. We applaud the rate of change in our company's financial performance, but the bar ProPetro measures itself against will not be set comparative to prior cycles or pandemic lows. We believe that it is not only acceptable but required for oilfield services companies to produce sustainable returns, particularly for those reducing risks and increasing uptime inefficiencies for our exploration and production customers. With that in mind, I'd like to once again thank all of my ProPetro teammates and our customers for another fantastic quarter with best-in-class safety and operational performance. We'd now like to open it up for questions and answers. Operator?

Operator, Operator

Thank you. We'll now begin the question-and-answer session. The first question comes from Stephen Gengaro of Stifel. Please go ahead, sir.

Stephen Gengaro, Analyst

Thanks, and good morning, everybody. Two things for me. If you don't mind, maybe I'll start with the pricing perspective. You talked about the impact of positive pricing in the first quarter. Could you give us a sense for where your fleet stands relative to leading-edge prices and how we should think about that in the impact on profitability over the next couple of quarters?

Samuel D. Sledge, CEO

Yeah, Stephen, this is Sam. Good morning. I'll take a shot at that. David might want to chime in as well. It's a range right now, and I think that's why you hear us continue to talk about analyzing where our fleet is and how it's priced. I think we do have a number of fleets that we would qualify as on the leading edge from a pricing and profitability standpoint. We have a number of fleets that are maybe lagging in what our current goals are. So near-term, our objective is to bring up the bottom end of our portfolio, whether it be through pricing, repositioning, or better cost controls internally. These are things that we've been doing here over the last number of months. We'll just take a continued effort to get into the through-cycle pricing and closer to leading edge with more and more of our fleet.

David S. Schorlemer, CFO

Yeah, I think this is David. Just to add to Sam's comments, when we look at pricing, we are also considering customer efficiency, which can have an impact. I would say that currently about 30% of our pricing reflects leading-edge numbers. Customer efficiency varies, and around half of our fleets are benefiting from improved pricing with high efficiency. So, it really is a combination of factors that affects overall profitability per fleet. However, as we've mentioned, our goal is to increase profitability levels across our fleets, regardless of pricing.

Stephen Gengaro, Analyst

Okay, great. Thank you for the information. I wanted to ask about your capital expenditures and the evolution of your fleet profile. Do you have the budget you set aside for this year, estimated at 250 to 300? By year-end, where do you anticipate your fleet profile will be?

David S. Schorlemer, CFO

I think the goal is to be pushing towards or be in excess of IV Dual-Fuel fleets, with the remainder being just the conventional Tier II fleets. We look to continue to push into the Dual-Fuel arena as we've seen, continue to see, and have seen differentiated pricing for those assets. But I'd say at least IV Dual-Fuel fleets by the end of the year.

Operator, Operator

Thank you. The next question comes from Taylor Zurcher, Tudor, Pickering, and Holt. Please go ahead.

Taylor Zurcher, Analyst

David and team, thank you for taking my question. My first one is on the strategy not to market any additional horsepower in Q2. Sam, I think you said it's testing your metal a little bit in having to pass on some customer opportunities. But at the same time, really strong margin improvement in Q1. So what I'm just curious on is how much incremental demand you see out there in the Permian, maybe over a six-month time horizon? What's the magnitude of opportunities you're having to pass up on? And where could we see demand in the Permian shakeout in the quarters ahead?

Samuel D. Sledge, CEO

Taylor, great question. I think maybe to give a little bit more context to the comment that it's kind of tested our metal or tested our resolve. In prior cycles like this, when you see demand increasing and capacity in the Permian Frac sector being virtually sold out, ProPetro and other companies like us have traditionally grown fleet capacity into that environment. For many reasons in prior cycles, it was probably a bit easier to do that. As we look at the circumstances that exist today, one, we're having to take into account what it takes to achieve what we're calling a through-cycle cash-on-cash return. And couple those opportunities with the right customers and the right timelines. So we are pretty confident that demand here pretty soon, if it hasn't already, will outstrip just overall frac supply, especially in the Permian market. I think we're looking at that as an opportunity to continue to high-grade our portfolio as it exists today, without pushing any more risk into the ProPetro system and really continuing to hang our hat on the operational execution that we feel like we've been known for and that we feel like is a competitive advantage of ours. Really, it is just a laser focus on maximizing returns through coupling our teams and our assets with the right people, the right customers, at the right pricing, and generating a return that is probably more incrementally influential to our profile than just adding fleets.

David S. Schorlemer, CFO

And Taylor, this is David, and Adam may want to add to this. But some of the anecdotes from the market that we're getting are things like, look, maybe this isn't a blank check, but just tell us what you need to come frac our well or things like, can you at least send over a bad crude? We'll take anything. So Adam may want to mention some of that, but in terms of just customer sensitivity and urgency, it continues to escalate, and I think that's consistent with what we're hearing from other folks in the market.

Taylor Zurcher, Analyst

I will just add and echo what David and Sam both said, I mean, just to make a comment on some of those customer requests. In the past, we probably would have jumped at opportunities like that. But as Sam said, we're really watching those more closely now. And if it's going to put risk in our business in what we're trying to do as far as accomplished in creating value in a return, then yeah, we're just having to say no to those opportunities. Yeah. Understood and good to hear. Thanks to all three of you for that. Follow-up just on margins. The last call, you pointed to a really strong start to January and then obviously you've dealt with some winter weather and supply chain constraints over the back half of the really final two months of Q1. So I'm curious, are we back to the profitability levels here in April or maybe exiting March on a run-rate basis that you saw in January or are you still having to fight through some of these supply chain challenges and not quite all the way back there yet?

Josh Jones, Director of Finance

First of all, I want to mention the headwinds we encountered specifically in February. I cannot emphasize enough how well our team managed through that period, as well as how many of our customers did as well. Being excellent executors on location is a collaborative effort, involving not just us but our customers too. It’s truly impressive how we worked together with our customers during February and part of March, and I want to commend our Operations and Logistics team along with our customers for navigating that challenge in a distinctive way. With that being said, you are correct. We highlighted the January EBITDA margin and numbers during our Q4 call intentionally because we believed that could represent a sustainable level of profitability and something we could build upon. Therefore, I can say that as we move into April and May, we are back in that range, if not exceeding it.

David S. Schorlemer, CFO

Taylor, and this is David, just to give you a little bit of color during the quarter, we actually saw EBITDA performance drop off about 40% month over month before recovering. That just gives you a sense at how strong the overall pace of what was going on on a normalized basis, excluding the weather impacts and similar logistics impact. We're seeing good market activity and beginning to see some normalizing of supply chain activity as well. We're hopeful that we see that play out through the rest of the quarter and the rest of the year.

Taylor Zurcher, Analyst

Awesome. Thanks for the answers.

David S. Schorlemer, CFO

Thanks, Taylor.

Operator, Operator

Thank you. Next question will be from John Daniel Simmons. Please go ahead.

John Daniel, Analyst

Hey, guys. Good morning. Impressive quarter. To Adam, with engine lead times continuing to extend, can you say when you would place the next order for Tier IV DGB engines? And assuming you placed it today, if you haven't already placed it, when would you realistically be able to have that fleet deployed?

Samuel D. Sledge, CEO

John, from a quantitative perspective, that's a bit of competitive information because part of our competition and the quality of service we provide relies on our ability, as well as our competitors', to access supply chains efficiently and cost-effectively. We initiated the DGB conversion program roughly a year ago and conducted a thorough analysis to ensure we collaborate with the right partners and suppliers for this program. Despite encountering challenges, we are satisfied with our execution capabilities and those of our supply chain partners in this area. While I won't disclose specific numbers, we are confident in our current supply chain position and our ability to fulfill the conversions we’ve committed to our customers, as well as to continue delivering the products and services they expect from us in the near future. Looking beyond the four to five fleets of dual-fuel conversions previously mentioned, it's uncertain if there will be more at this time. We can confirm that lead times for DGB engines are not decreasing, so the competitive advantages for companies like ours, which have good supply chain access, are likely to increase as these lead times extend.

John Daniel, Analyst

Would you say that your customers are asking for it more frequently today than three or four months ago?

Adam Munoz, President and COO

No doubt about it.

John Daniel, Analyst

Okay.

Adam Munoz, President and COO

John, this is Adam. I will just add to that what Sam said. We delivered roughly 90,000 hydraulic horsepower at the end of 2021, which is already in the field working at the higher relative pricing. Then we plan on an additional 120,000 hydraulic horsepower to hit us in our fleet and get to work in the first half of 2022. So yes, it's definitely going to be a priority for us to continue that fleet conversion of our diesel-burning equipment to more gas-burning.

Josh Jones, Director of Finance

And just to clarify what Adam said right there, all of that horsepower he's talking about is Dual-Fuel, Tier IV Dual-Fuel horsepower. That is conversion, no net addition to our fleet capacity.

John Daniel, Analyst

Fair enough. The last one for me, I think in the prepared remarks you mentioned that you view frac crew activity would rise 15 to 20 crews over the course of the year, that would be, I'm assuming, across the US, not just the Permian, but that higher. Let's assume that plays out. If you wanted to reactivate your 15 fleet, whether it's Tier IV Dual-Fuel, I don't care what it is, but just how long would it take you to bring that back to market?

David S. Schorlemer, CFO

That's a good question, John. I'm not sure if I'm ready to answer that right now. I would emphasize that our current focus and strategy is to elevate all of our fleets to a mid-cycle or through-cycle cash-on-cash return. We're not there yet. In my prepared remarks, I mentioned that we're not satisfied with our profitability position. However, some of our fleets are performing significantly well. This is something we continue to analyze, but I don't have a timeline to share at the moment, as it is a lower priority for us.

John Daniel, Analyst

Okay. Fair enough. Thanks, guys.

David S. Schorlemer, CFO

Thanks, John.

Operator, Operator

Thank you. Our next question will be from Ian MacPherson of Simmons. Please go ahead.

Ian MacPherson, Analyst

Thanks. Good morning, everyone.

Samuel D. Sledge, CEO

Morning.

Ian MacPherson, Analyst

You've been pretty purposeful in clarifying we're not out of the woods yet with all the operational challenges, even if you're not trying to grow activity fast, you're not necessarily seeing total relief in all of your pinch points. So I wanted to dig in on that a little bit and ask, are you seeing this play out more with regard to the high churn components on your fleets, your power and influence and things like that? Are you speaking more toward the labor side, or maybe your customers' consumables and sand and chemicals, etc. or is it just everything? And do you still have prescribed fixes coming on the way that could help you elevate your margin improvement as you sort through these?

Josh Jones, Director of Finance

Ian, fantastic questions. Sam, again, I'll take a shot at talking about your question in a little bit more of a holistic manner. I don't think I can appropriately answer your question without reiterating how hard this business is. This is the frontlines of fuel and gas operations today. Labor, materials, operational challenges. This business is tough. That said, we think we have the best team to execute in the best basin. I think it's a bit of a combination of excitement about our ability to continue to differentiate competitively because of our team, our asset base, and our customers. But also an appreciation for the headwinds and crosswinds that still exist in the system. So we're trying to be as realistic as possible about how we're looking at the future. That said, are there going to be opportunities for continued pricing relief? Yes. At the same time, are there going to continue to be cost inflation pressures? Yes. So it's quite a broad-sweeping set of circumstances that have to be balanced and managed all the time.

Samuel D. Sledge, CEO

We think there's upside to go from here. We just want to be realistic about how hard this business is and also, I don't think I can say all that without saying we think we're a little bit ahead of the curve as well. We're traditionally at the top end of the pricing scale, and I think from a profitability-per-fleet perspective, you could actually say that we're a quarter if not two quarters ahead of some of our competition from a trend standpoint.

Ian MacPherson, Analyst

Okay. That's helpful. Thanks, Sam. And then with that, and maybe following in a little bit more pointedly on a prior question, for Q2, it seems to me that it would not be out of bounds. I think that you could, again, get to mid-teens revenue growth over Q1, and I would have assumed that based on the EBITDA margin here that you experienced with the transit factors in Q1 getting towards mid-20s margin, EBITDA margin in Q2 would not be beyond possible. Would you agree with that?

David S. Schorlemer, CFO

No. I think that given our what I would call differentiated strategy around fleet deployment, I think that we're not looking so much at the top line as we are at margin expansion and improvement. So I think that I might be more a bit more biased to a number inside what you mentioned regarding the top line. I think as far as margin expansion, I think that we do have some room to run there as we reposition fleets, as we continue to see the price deck lead and increase, we have much of our business still has price openers where we can go back and recapture some inflationary impacts. So I think that we've got some room to run there.

Waqar Syed, Analyst

Thank you. Good morning. Sam, you’re pumping up productivity is about 70% to 76%, I think Q4 was 76% higher than Q1 '19. Are we going to start flatlining around that level? You think there's a lot more still to gain from productivity? Could you maybe comment on that?

Samuel D. Sledge, CEO

Great question Waqar, we've been asked this, I don't know how many times in the past, and it sounds just like approach and record as soon as I personally I think. We can't push it any higher; our operations team in combination with our customers versus me wrong yet again. So are there opportunities to continue to increase pumping productivity? Sure. I think it's more along in the zip code of the bottom end of our operating portfolio. I think the top end of our operating portfolio is best in class. I think there will be continued gains Waqar; I think it will be at a slower rate. I hesitate to call that a plateau because I've been proven wrong by our teams so many times before. But I think it will continue to grind higher.

David S. Schorlemer, CFO

Yeah, and Waqar, this is David. I want to highlight one of our earnings releases where we mentioned one of our simul-frac fleets reached 600 pumping hours in a month. This is not something our competitors have been discussing. I believe this reflects our ongoing improvements, even as recently as March. Sam makes a valid point that we've observed significant advancements, and we should consider how much more we can achieve. However, we continue to surprise ourselves each month.

Waqar Syed, Analyst

Great. Sam, another question. We hear from some of your competitors that there are some kits to upgrade Tier II equipment into Dual-Fuel but that system may have the same emissions profile if not better than Tier IV DGB. Have you heard anything to that effect? Do you think there is some merit to that?

Samuel D. Sledge, CEO

I think that may be a little bit debatable, Waqar. Through testing that we've done directly and what a lot of that engine manufacturers would say, Tier IV is a better emissions profile. I think that's why it was government mandated. Also, a big part of this is the diesel displacement. These Tier IV DGB engines were purposefully designed to displace more diesel. We are seeing with our own fleet, and I think again, some of the anecdotes we're hearing from customers and competitors that these Caterpillar Tier IV DGB Dual-Fuel engines have quite a bit higher displacement rate, and we've been really pushing the envelope with some of these new units we have, which is an emissions improvement as well as a significant cost savings to us and our customers.

David S. Schorlemer, CFO

We're seeing, I think in the neighborhood of 50% to 60% displacement on the Tier II DGB kits, whereas we're getting, in some cases, in excess of 70%, even upwards of 80% displacement.

Samuel D. Sledge, CEO

Adjust to add one more thing, I think it's fair to note that all of these conversions also have an effect on engine life or asset life. So you have to maximize the trade-offs of how much diesel can we displace and how long will that conversion or modification last? And could it be detrimental to a large component of our fleet?

Waqar Syed, Analyst

Yeah. Good point. David, just one last question. Could you maybe talk about what the working capital cash inflow, outflow could be for Q2 and then for the remainder of the year? And then any comments on free cash flow for the year?

David S. Schorlemer, CFO

Sure. Working capital increased during the quarter due to some delays in signing tickets. We resolved that quickly, so I anticipate some improvement as we move into the second quarter. Overall, we have managed to keep working capital changes relatively flat. Remember, we are focusing on being more capital-efficient rather than aiming for top-line growth, which means we don't expect significant fluctuations in revenue and working capital. Regarding free cash flow, we had indicated last quarter that we would experience some negative cash flow in the near term as we invested in our fleet and conversions. This should start to stabilize throughout the year, although we spent less than planned in the first quarter due to supply chain issues. We hope to see some of that addressed in the second quarter to obtain the necessary equipment. Looking ahead to 2023, we will evaluate our spending profile for the latter half of the year. It's still uncertain, but I would lean towards a neutral or even negative outlook for the year, depending on market conditions.

Waqar Syed, Analyst

Great. Thank you very much. Appreciate the answers.

David S. Schorlemer, CFO

Sure. Thanks, Waqar.

Operator, Operator

Thank you. Next question comes from Arun Jayaram, JP Morgan. Please go ahead.

Arun Jayaram, Analyst

Yeah. Good morning. Arun Jayaram with JP Morgan. Sam, I had a bigger strategic question for you. As you're aware, your primary peers are pursuing a bit more of a vertical integrated strategy regarding stimulation. And you guys have generally held firm to just being a pure pressure pumping company. So I wanted to get your thoughts on some of the pros and cons of a more integrated or vertically integrated offering to customers, if that makes sense, just given how we're seeing a much higher mix of privates in the market, who maybe could benefit from that more integrated offering. So I was wondering if you could talk a little about that and any future plans that you may have to do some things outside of just pure frac, may it be in terms of sand logistics, wireline, etc.

Samuel D. Sledge, CEO

Sure, that's a great question. We often discuss this internally as we evaluate market opportunities to enhance our service and product offerings, while also considering our customers' needs and maintaining focus on our core business. From my view, a few of our competitors that are more integrated, particularly in wireline, are providing a more cohesive well site service. However, like us, their primary focus remains on pressure pumping from a profitability and spending standpoint. We assess whether adding additional services would better integrate us into the well site completions and whether these services could compete for capital as effectively as our core business. We aim for those services to generate through-cycle cash-on-cash returns that align with our targets. While we don't have all the answers yet, I want to provide context on our approach. We continuously analyze opportunities and maintain a high standard, ensuring that any new offerings we consider are additive, not dilutive, to our current business. It's crucial that any new service line we might introduce allows us to be the best operationally in the Permian Basin, as delivering a high-quality, differentiated service to our customers is our top priority. While such opportunities have been rare over the years, we remain vigilant and open to exploring ongoing opportunities that meet the criteria I mentioned.

Arun Jayaram, Analyst

Got it, got it. Thank you.

Operator, Operator

Next question comes from Don Chris. Please go ahead.

Unidentified Analyst, Analyst

Good morning, gentlemen. I just wanted to ask you a couple of questions about simul-frac. I know that's moving towards the future of the industry and wanted to know what your thoughts are or where you see your fleet moving from a simul-frac perspective versus one pad completion going forward.

Adam Munoz, President and COO

Yes. This is Adam. I would just comment on that simul-frac. We would, I think collectively as a management team, what we've had to experience all of last year coming into this year is it makes a lot of sense for both sides, as long as the terms are correct as far as pricing and the operation of the E and P as well. I mean, that's a tough job. I think Sam noted earlier how tough this business is just simply on the zipper-frac side. But as you throw simul-frac into the picture and the amount of equipment and personnel and logistics that needs to be hitting on all cylinders to make that operation meaningful to both sides is far more intense. I would just say that there's definitely, just like in the pressure pumping, there are people that do it better than others. Aligning ourselves with those that have the infrastructure and the logistics capability to continue an operation like that is probably what we would focus on as we look to more simul-frac for the business.

Samuel D. Sledge, CEO

And Don, just to add one piece of information on top of that, my personal belief is that heading into 2023 sector-wide, there will be more simul-frac, not less. That said, I don't think we are of the belief that it's going to be much more. It's going to be very marginal growth. This type of operation is not for everybody. You have to have a very sizable acreage position, and you have to have very good water infrastructure and the ability to move that water around. We're happy to work with some customers that do that very well, but it won't be for everybody, and I think more growth in the simul-frac will be very slow.

Unidentified Analyst, Analyst

Okay. And just one follow-up on that. How do you account for the fleet that you have doing simul-fracs now? Were they counted as one fleet or 1.5 fleets or 2 fleets? How do you normally do that when you're reporting?

Samuel D. Sledge, CEO

Today, they're still counted as one fleet. When we quote utilization, it's on a working day measure. So one working day for a simul-frac fleet is measured similarly as one working day for a Midland Basin standard zipper job. That said, how we account for it financially is quite different because the replacement cost of the equipment on location for something like a simul-frac operation is far different than say a Midland Basin standard zipper job. So the returns profile needed to meet that replacement cost and that intensive operation is significantly different. So similar on the utilization, when we're quoting these things like effectively utilized fleets are quite a bit different as we measure our economics for that type of operation.

Unidentified Analyst, Analyst

All right. I appreciate the color. Thank you. I'll turn it back.

Operator, Operator

Thank you. This concludes our question-and-answer session. I'd like to turn the conference back over to Mr. Samuel D. Sledge for closing remarks. Please go ahead.

Samuel D. Sledge, CEO

Thank you. And thank you, everyone, for joining us on today's call. We here at ProPetro are proud to play a part in an innovative energy industry where oil and gas remains critical to everyday life across the globe. We hope to talk to you soon and we hope that you join us for our next quarterly call. Have a great day.

Operator, Operator

Conference has now concluded. Thank you for attending today's presentation. You may now disconnect.