Earnings Call Transcript - PUMP Q1 2021

Operator, Operator

Good morning. And welcome to the ProPetro Holding’s First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Sam Sledge, President. Please go ahead.

Sam Sledge, President

Thank you. Good morning, everyone. We appreciate your participation in today’s call. With me today is Chief Executive Officer, Phillip Gobe; Chief Financial Officer, David Schorlemer; and Chief Operating Officer, Adam Muñoz. Yesterday afternoon, we released our earnings announcement for the first quarter of 2021. 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 directly 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’d like to turn the call over to Phillip.

Phillip Gobe, CEO

Thanks, Sam, and good morning, everyone. We were pleased to see a continued steady increase in customer activity levels during the first quarter, as global oil demand continues to recover in support of an improving economic backdrop. We expect relative oil price stability while COVID-19 vaccines rollout, further allowing more people to resume the types of activities they were accustomed to prior to the onset of the pandemic. On that note, I want to once again thank the healthcare workers and first responders here in the Permian Basin for their tireless efforts over the past 14 months to help ensure the health and safety of the communities in the region. Partially offsetting the increase in customer activity levels we saw during the first quarter was the impact of the severe winter storm in February. The result was eight days of lost revenue and certain costs were unable to be passed through to customers, while our fleets were idle. Additionally, we incurred costs and expenditures related to fleet reactivations earlier than previously expected. While David will discuss the financial impact of the winter storm in more detail in his prepared comments, I want to commend the ProPetro team for remaining nimble and quickly and effectively responding to our customers’ needs and for protecting our competitiveness in the marketplace despite the challenges we faced. Operational efficiency and equipment readiness remain key differentiators in the oil field services, as customers focus on utilizing the highest quality crews with the most reliable equipment available in the industry. Our proven track record of quickly and effectively responding to the needs of our customers, albeit in a mutually beneficial manner, continues to differentiate ProPetro in the marketplace. During the first quarter, our best-in-class execution at the wellhead was on full display as we drove our efficiencies to new heights through close collaboration with our customers and other service providers. We increased our fleet count during the first quarter to an average of 10.3 effective utilized fleets from an average of 9.6 effective utilized fleets for the fourth quarter of 2020. Impact from the February extreme weather negatively impacted our effective utilization by approximately one fleet. Today, we have 13 fleets working in the field, of which two are engaged in Simul-Frac. Simul-Frac is an exciting completion technique that requires significant operating competencies and infrastructure planning. To make Simul-Frac attractive to an operator, the operator needs sufficient well inventory comprised of large multi-well pads, with four-well pads providing the best opportunity for maximum completion efficiencies. The operator needs an incredible degree of alignment between supply chain partners with seamless delivery of sand and water in a coordinated effort between wireline and pressure pumping. These just-in-time manufacturing techniques are required to achieve maximum efficiencies using the Simul-Frac technique. With these considerations in mind, Simul-Frac represents another exciting opportunity for the energy industry to further reduce the marginal cost of a barrel of American crude. That said, we perceive the rate at which this technique is adopted to be measured due to the complexity and size of these operations. As we move forward, our team will remain focused on disciplined deployment of our assets to ensure we only pursue profitable work. As we have discussed in the past, we will not reactivate equipment without adequate pricing, long-term visibility to a consistent work schedule, and expectations of high efficiency targets to deliver solid operating margin. This kind of discipline is critical to the success of our company and to the oil field service industry as a whole. We also continue to focus our efforts on working with customers that have a substantial presence in the Permian Basin and are looking to further expand their footprint of operations in the region. As you have recently seen, there’s been significant E&P consolidation and investment in the Permian, reinforcing our Permian focus. Through close collaboration with our blue-chip customer base, we are able to develop a longer view of their development plans, which allows us to plan for and invest in our business and necessary technologies. This in turn helps drive a more efficient and sustainable supply chain that results in improved margins and further generation of free cash flow for the long-term benefit of our shareholders. With that, I’d like to turn the call over to David to discuss our first quarter financial performance. David?

David Schorlemer, CFO

Thanks, Phillip, and good morning, everyone. We generated $161 million of revenue during the first quarter, a 5% increase from the $154 million of revenue generated in the fourth quarter. The sequential quarterly increase was primarily attributable to increased activity levels. As Phillip mentioned, effective utilization was 10.3 fleets versus 9.6 fleets for the fourth quarter of 2020. Our effective fleet utilization for the first quarter would have been higher had we not incurred the approximately eight days of downtime due to the extreme winter weather event in February. In summary, we estimate that our sequential revenue growth could have been closer to 15% or approximately $177 million for Q1 had we not experienced the severe weather interruption. We currently have 13 fleets working, two of which are Simul-Frac, and our guidance for second quarter average effective fleet utilization is 12 to 13 fleets, up from 10.3 in Q1, which implies a 20% increase at the midpoint of our range, driven by anticipated highly efficient pumping activity and Simul-Frac operations. Cost of services excluding depreciation and amortization for the first quarter was $123 million versus $116 million in the fourth quarter, with the increase driven by higher activity levels in the first quarter, as well as certain costs of services including labor and other fixed operational costs that were not passed through to customers primarily as a result of downtime from the winter storm and the accelerated pace of fleet reactivations. First quarter general and administrative expense of $20 million was flat with the fourth quarter. Excluding non-recurring and non-cash stock-based compensation, first quarter G&A increased to $18 million from $15 million in the fourth quarter. Contributing to the increase was higher insurance, payroll taxes, and other expenses. Depreciation was $33 million for the first quarter, as compared to $35 million in Q4. Other income of $1.8 million included a one-time state tax refund of $2.1 million from periods during 2015 through 2018. Our net loss for the first quarter was $20 million or a $0.20 loss per diluted share compared to a fourth quarter net loss of $44 million or $0.44 loss per diluted share. As a reminder, in the fourth quarter of 2020, we incurred impairment expense of $21 million related to the retirement of approximately $150,000 of hydraulic horsepower of Tier II diesel pumping equipment. Finally, adjusted EBITDA was $20 million for the first quarter, compared to $24 million for the fourth quarter. The sequential decrease was primarily attributable to lost profitability during the winter storm and accelerated fleet reactivation costs. We believe extreme weather impacts and fleet reactivation costs adversely impacted adjusted EBITDA by approximately $5 million. Fleet reactivations in the first quarter did meet our reinvestment criteria for reactivations and were deployed to existing customers with whom we have visibility to strong utilization, efficiencies, and pricing adequate to generate positive free cash flow. Moving forward, our team is focused on capital discipline and delivering lower emission solutions, which is an ongoing challenge given current market conditions and limited capital availability. Our customers recognize that a mutually beneficial economic relationship is critical to long-term success. Taking a partnership approach over time should provide us with the ability to reinvest in equipment and technology that delivers more efficient and lower emissions completion solutions for the benefit of all stakeholders. However, this migration from today to an environment with better reinvestment rate economics will require improved pricing in the future along with more efficient solutions, and we continue to incorporate this reality in our conversations with our partners. Turning to capital expenditures, we incurred $32 million of spending during the first quarter, which included $18 million for maintenance, of which less than 50% was for Fluid Energy. CapEx for Tier IV DGB dual fuel purchases and conversions was approximately $12 million, and our customers are now incorporating these units into their operations. Actual cash used in investing activities as shown on the statement of cash flows for capital expenditures in the first quarter was $22 million, with negative cash flow of $5 million, largely related to our Q1 investments and lower emissions equipment. However, we continue to expect to generate free cash flow for the full year 2021. Our outlook for full year CapEx spending remains $115 million to $130 million, including approximately $37 million for Tier IV DGB dual fuel equipment, with the remainder related to maintenance. Looking at the balance sheet, on March 31, we had total cash of $56 million and remained debt-free. Total liquidity was $114 million, including cash and $58 million of availability under the company’s revolving credit facility. As a further update, on May 3rd, our total liquidity was $111 million, comprised of $51 million in cash and $60 million of availability. As Phillip mentioned in his opening comments, the strength of our balance sheet and commitment to capital discipline is critical to our success and we are firmly committed to ensuring we maintain a solid financial position that provides maximum flexibility while we strive to deliver lower emissions solutions to the market, while remaining our customers' most trusted option for high productivity completions. Being debt-free and generating free cash flow is a key differentiator for ProPetro and will continue to serve us well in this very competitive environment. With that, I will turn the call back to Phillip.

Phillip Gobe, CEO

All right. Thanks, David. As we have mentioned on today’s call, our customer activity levels have continued to modestly increase, given the improved commodity price environment. Assuming no other disruptions like we saw in February due to the severe weather or other external issues, we expect this level of activity to be consistent. While the outlook for customer activity levels remains healthy, it remains challenging to increase pricing for our services, given the level of excess pressure pumping equipment capacity currently in the marketplace. During the first quarter, we experienced isolated shortages in our supply chain, although our team was able to efficiently minimize operational disruptions. Moving forward, as we have done in the past, we will work with all of our customers to mitigate cost inflation that may come from supply chain tightness. We do expect true pricing increases in the future, although the timing remains uncertain, as we are in the early innings of what we view as a multiyear recovery. In short, while customers recognize a clear benefit of our industry-leading service offering, our entire sector is on average pricing their work at unsustainable levels. In this environment, we remain squarely focused on working with customers that are interested in partnering with a service provider that best understands their needs and develops creative solutions for their requirements at the well site. This collaboration drives critical efficiencies to maximize their return on investment. In support of the needs of our blue-chip customer base committed to substantial future operations in the Permian Basin, we will continue to make target investments that promote our collective future success. Most importantly, this includes analyzing and investing in technologies that best position ProPetro for the impending equipment transition to gas-burning power sources to drive lower emissions with equipment such as Tier IV DGB and electric pumping units. We are fully committed to evolving our equipment offering to more environmentally friendly and relevant to our customers’ demands, and remain convinced that pressure pumping equipment needs to evolve for the jobs of today and the future. Given our industry-leading execution and strong financial footing, we believe we are in a leadership position to participate in this transition, which will benefit all of our stakeholders, including our shareholders. We know that there will be changes from today’s market conditions, but one constant will continue to be the need for innovation. Our team leaves no stone unturned in pursuit of creative answers to the challenges presented to the demands of our customers. In support of these efforts, we continue to work with AFGlobal as we take steps to improve the performance of DuraStim equipment. Our customers remain interested in the DuraStim electric offering, and we continue to expect to deploy a full DuraStim fleet in the second half of this year. As mentioned numerous times, pressure pumping services must continue to evolve, and we expect increased demand for further improvements and process efficiencies. We discussed on our last call that we committed two of our fleets to Simul-Frac operation. While it is still early to tell what effect this could potentially have for us from a financial perspective, the overall well site performance of Simul-Frac is promising. I want to congratulate our operations team for effectively planning and executing along two of our strategic customers. As we discussed on our last call, with the downturn of 2020 now transitioning to a recovery, we believe the impending reinvestment cycle will further separate winners and losers in the U.S. pressure pumping industry. We believe that only the highest quality service providers working with the most efficient operators will be able to reinvest in next-generation equipment and lower emissions equipment as well. Our debt-free balance sheet, ample liquidity and rigorous capital discipline serve us well through the unprecedented challenges our industry faced in 2020 and place us in an even stronger position for success as the market continues to steadily improve well into 2022 and beyond. Our obligation to remain disciplined is not limited to fleet deployments. The culture in our shop requires discipline from every member of the team to deliver on commitments to each other, our community, and our customers. Commitment to safety is a responsibility we all share, and we encourage every employee to be a safety person. That ethos is built person by person, day by day, over the long run. Our teammates have grown to expect a strong safety culture, enthusiastic community involvement, and operational excellence when they come to work, and it shows in their performance on location and in the shop. Cycles are implicit in the energy business. However, we serve all stakeholders by making responsible financial decisions. Commitment to sustainability is another collective responsibility that our team undertakes for the benefit of our broader ProPetro family. We are making good on our commitments by investing in lower emissions technology and vigorously evaluating sustainable solutions for the benefit of all stakeholders. Just as a lean cost structure underpins the prospect of a pressure pumper, a commitment to improving the environment, societal issues, and governance is essential to long-term success. In conclusion, we will continue to rely on key attributes and strategies that have historically positioned our company as a preferred oil service provider in the Permian Basin. This includes close collaboration with customers to provide creative solutions to meet their current and long-term needs. Most importantly, we will remain squarely focused on acquiring, developing, and retaining the best team in the industry. Our team-oriented culture is core to our DNA; our employees have been and will continue to be the key to our future success. With that, I’d like to turn it over to the Operator for questions.

Operator, Operator

Our first question comes from George O'Leary with TPH & Company. Please go ahead.

George O'Leary, Analyst

Good morning, guys.

Sam Sledge, President

Good morning.

Phillip Gobe, CEO

Good morning.

George O'Leary, Analyst

I think you alluded to discussions with customers, the duration of the work they are willing to discuss with you extending, and I thought that was an interesting point that needed to touch on. So can you talk about maybe six months ago, how far customers were willing to look out versus over the last quarter, even the last few weeks, how far out they are willing to look on the calendar?

Sam Sledge, President

Yeah. George, this is Sam. I think that more forward planning began late last year; obviously, in 2020, everyone’s plan was significantly disrupted on both sides of the table. And as the recovery began late last year, I believe that the theme of capital discipline and just operational discipline, in general, started to show as we started to go back to work with many of our customers. They began at more long-term planning probably late last year and that has persisted into the first part of this year. I think it’s a healthy sign for not only us but the entire space to be able to think a little bit more in advance.

Phillip Gobe, CEO

And George, I would add to that. That’s not really new for this year. That’s been going on for some time where we have had a longer view of many of the operators that we worked for in terms of their development plans. And I’d say, even at the downturn, one of the things that became pretty clear was operators started worrying about the quality of crews coming back to work and the quality of the equipment. So, we saw a number of customers engage us for work programs at least for a year, provided we could provide the crews that they were used to having. So, I don’t think it’s new; it may sound new, but I think we have had that long view range of customer’s plans for a while.

George O'Leary, Analyst

Great. And then just an extension of that question, as customer dialogue has increased and you guys have gotten busier. As you think out about the back half of the year, one of the big things investors seem to be wrestling with is completions activity cadence; are we plateauing at these levels? That seems to be one of the biggest questions investors have. So, just curious how you think activity progresses broadly, not looking for any specific guidance for pressure pumpers and completions activity in the back half of the year, Q3, Q4; are we putting out here or is there more work on the horizon?

Sam Sledge, President

I think it’s hard to say anything definitive across the board. There will be an opportunity for activity adds in the back half of the year, but I think they will be a bit more isolated than they have been in the first half of the year. I think you have seen almost everybody across the board in the E&P space participate in the activity recovery up to this point this year. I think any activity adds will probably be more measured in the back half of the year and isolated to specific customers that may have specific plans or economics that allow them to make those adds.

Phillip Gobe, CEO

Yeah. I think I would also add that as the strip price moves forward, operators see their cash flows increase. If I don’t have balance sheet issues where they need to turn that cash to repair the balance sheet, the amount of money that they are going to reinvest will grow along with even though they are going to only invest 70% to 80% of the cash flow. That number is getting bigger with prices as they move forward. So, I would think that activity would modestly continue to increase; of course, a lot depends on India, Europe, and all the other external factors that play into the price going forward.

George O'Leary, Analyst

Okay. I will sneak in one more if I could, just on that final point that you hit at, Phil. The pricing discussion at least qualitatively feels like it's improving; it just feels less combative. Our realized prices are rising at this point, which makes sense, given the supply/demand picture and calling the timing when prices rise is always challenging. But can you just talk about the nature of discussions with customers and whether that truly has become less combative? How are those discussions going, and what’s the receptivity when you broach the topic of pricing increases with your customers?

Adam Muñoz, COO

Yeah. George, this is Adam. As we maintain open communication with our customers and partners, we are consistently updating them on our cost structures and any short-term or long-term inflation we are experiencing. We inform them that various factors are affecting the industry, including rising trucking rates and increases in other supply chains like chemicals or acid. Additionally, we remind them that in order to keep investing in new technology and next-gen equipment, which they have shown interest in as bids for pricing come in, we will need to adjust our pricing. We've been clear that pricing will have to change, and our immediate focus has been on increasing activity early this year, with plans to concentrate more on price increases in the second half of the year.

Phillip Gobe, CEO

And George, I’d say, I would sum it up in one word: inevitable. They see the allocation of cement, they see the inflationary pressures, they have seen the disruptions. So, I would say now there’s more a resignation that pricing is going to improve. The question is how much and how fast, and that’s what we can’t really answer.

George O'Leary, Analyst

Got it. Thank you all for the color.

Operator, Operator

Our next question comes from Stephen Gengaro with Stifel. Please go ahead.

Stephen Gengaro, Analyst

Thanks. Good morning, gentlemen.

Phillip Gobe, CEO

Good morning.

Stephen Gengaro, Analyst

You mentioned that the economics are favorable for bringing fleets back. Are you referring to profitability on a fleet level when considering deployment? Additionally, regarding your current fleet size, at what stage in deploying essential assets do you begin to see significant cost increases for reactivation?

David Schorlemer, CFO

Yes, Stephen, this is David. I wanted to clarify the cost involved in reactivating a fleet. We believe we can recover these costs relatively quickly compared to the expenses associated with reinvestment or new builds, where we still have some way to go. This is how we are approaching reactivation. We need to consider that there will be some expenses and capital expenditures involved. We have a clear view that the reactivation costs will lead to a recovery in pricing. Additionally, as we bring each incremental fleet back, the costs will gradually rise, which also poses a limitation. These are definitely factors we are taking into account as we evaluate reinvesting in the fleet.

Stephen Gengaro, Analyst

Great. Thank you. Did you happen to mention idle fees for the quarter and their outlook going forward?

David Schorlemer, CFO

We did not, but we had about $4.5 million of idle fleets during the quarter.

Stephen Gengaro, Analyst

Okay. Great. And then just one other follow-up to that, as you think about your EBITDA per fleet is running probably $10 million to $11 million in the last couple of quarters excluding idle fees, do you think on utilization that number can get back to the mid-teens, and do you think you need some pricing behind it to get yourself back there, so I am assuming maybe sometime next year?

Phillip Gobe, CEO

Well, keep in mind, the quarter was significantly impacted by the weather event. We had eight days of near-zero revenues, and when you are running 11 fleets pre-freeze event going to zero for a couple of weeks or liver a week, it’s a significant impact. So, I think that you got to consider that for the quarter. I think that as we exited the quarter we were back at a good level. As we mentioned, we have got 13 fleets operating today, two of which are Simul-Frac and so we will be continuing to evaluate that performance. But we should see some operating leverage play out, given that we would expect, as is normal, better weather conditions in the second quarter.

Sam Sledge, President

Yeah. Stephen, this is Sam. I will just add on to that. I don’t perceive the effective efficiencies, say, daily throughput on location to be as big of a contributor to increased profitability as much as pricing and operating leverage moving forward probably are. So, you mentioned the mid-teens annualized EBITDA per fleet number. We think we can get there. We are not sure when exactly. But pricing definitely helps in that aspect of which Phillip alluded to the fact that we believe it’s inevitable. We will treat that on a customer-by-customer basis, and the timing will be very calculated depending on economics.

Stephen Gengaro, Analyst

And it seems like if you add back the $5 million, you are kind of at the $12.5 million range already. So, you are right...

Sam Sledge, President

Right. So $12.5 million to say $15 million, we call it mid-teens; we don’t think it’s too much of a jump. We think pricing is probably the biggest contributor to get us there.

Stephen Gengaro, Analyst

Right. Thank you for the color, gentlemen.

Operator, Operator

Our next question comes from Ian Macpherson with Simmons. Please go ahead.

Ian Macpherson, Analyst

Thanks. Thanks. Good morning. I was frankly surprised that the weather impact was only $5 million given the concentration of your exposure there to the weather for whatever it was 10 days. So, but be that as it may, it seems like you have at a minimum that plus healthy incrementals on the organic activity growth from Q1 into Q2. So I just wanted to sanity check my thinking on EBITDA, the EBITDA walk from Q1 into Q2, should probably be a healthy incremental margin on the 20% topline, as well as some or all of the recovery that $5 million. Is that a fair way to think about it?

Phillip Gobe, CEO

Yeah. I think that’s fair. Ian, I don’t think there’s anything magic changing in our cost structure or anything like that. We talked about the fact that we are collaborating up and down the value chain to try and mitigate cost pressures that have presented themselves within our cost structure. But kind of going back to our most recent comments around operating leverage in just the near-term, Q1 to Q2, then there is some modest upside to say the EBITDA margin because of that.

Ian Macpherson, Analyst

Okay. And then on free cash generation, again, if we add back $5 million of weather impacts in Q1, you would have been free cash flow neutral in the first quarter and with rising EBITDA and like you kind of level set on your CapEx cadence, flat-to-positive free cash flow for the rest of the year, does that jibe with your modeling?

David Schorlemer, CFO

Yeah. That’s right. Ian, this is David. We believe we will be free cash flow positive for the year.

Ian Macpherson, Analyst

Excellent. And then last one for me, you said you are at two Simul-Fracs out of 13 total fleets today, so about 15% of your activity. Do you think that that’s indicative of the broader Permian penetration? How do you see that total penetration rate plateauing over the next few quarters?

Sam Sledge, President

Yeah. Ian, this is Sam. You broke up there at the end, but I think you are asking about how much Simul-Frac is currently in the market. Our most recent estimate is around 10%. If there are about 100 fleets working in the Permian today, we believe maybe 10 to 15 fleets are using Simul-Frac, somewhere in that range. We don’t expect that number to change significantly in the near term, but going into next year, it could increase as more operators start planning for these types of operations.

Phillip Gobe, CEO

Yeah. The one thing I will mention, Ian. This is Phillip. Just talking to a couple of operators, Simul-Frac seems like the way to go. But I think at least two customers we have talked to are not convinced that that’s necessarily getting the savings that they think that they expected to get out of it. So I think it will take a little bit longer to shake out to see if it’s going to be an expanding part of the service offering, or it’s going to kind of stay at a low 20% or less of the operations, we will see. But it is kind of very contradictory when you talk to two different operators on how Simul-Frac works for them.

Ian Macpherson, Analyst

Yeah. Certainly very idiosyncratic, I am sure. All right. Well, thank you. I appreciate all the insights today.

Sam Sledge, President

Thanks.

Phillip Gobe, CEO

Thanks, Ian.

Operator, Operator

The next question comes from Chris Voie with Wells Fargo. Please go ahead.

Chris Voie, Analyst

Thanks. Good morning. Maybe first on kind of the ESG fleet market, so it sounds like they are mostly sold out across in all the pumpers. As additional Tier IV fleets come to market, how do you handicap the risk of customers switching away from your offerings to take those fleets, and do you think you are going to have to invest in addition to your current CapEx guidance if that starts to happen?

Sam Sledge, President

Yeah. Chris, that’s a great question. I think our entire sector is in an interesting place right now in trying to make sense of adding more of this type of equipment to the market, yet facing economics that don’t support those investment decisions. It is a demand. We have seen a good strong demand for things like dual gas equipment, evidenced by our investments this year. If economics continue to improve, I think you could very easily see us continue to go down the path of converting more of our Tier II equipment to Tier IV. But right now, at any more accelerated rate than you are already seeing us reinvest, is tough; it goes back to some of the pricing conversations we have talked about earlier and the continued improvement we need to see around our profitability overall to continue to make these investments. I will also mention that, Phillip mentioned a couple of different places in his scripted remarks that efficiencies on location and the ability to keep costs low for our customers and value high via those efficiencies still remains of the utmost priority for us, and definitely for our customers. So, there could across the sector be some movement of assets for customers that are placing a higher priority on this lower emission equipment. But we see today still leading the way as efficiencies and throughput at the well site. We think that we are very well-positioned, if not best positioned in the Permian Basin, to provide that. So we think we will remain very competitive and will pick our spots to make investments to continue to evolve our equipment offering.

David Schorlemer, CFO

Yeah. Chris, this is David. Just to add on to what Sam said, we have brought on some new customers this quarter and we have existing customers. And when we look at the comparison of the competition, we believe that they are getting a significant productivity differential with ProPetro. And so when customers are talking about different fleet options and emissions, they have to think about what they are going to give up if they move away from ProPetro in terms of overall productivity. So what we are trying to do is execute a strategy that has capital discipline and continue to build those relationships with our customers, deliver that operational top-tier performance while also making some moves toward integrating Tier IV DGB and other equipment into our product offering over time, but doing it on a gradual and disciplined basis.

Chris Voie, Analyst

Okay. That makes sense. Thanks. And for my follow-up, I guess we have been talking around it on a per fleet basis, but maybe I can shortcut this. If run rate activity from April continues for the remainder of the quarter, do you think consensus of $35 million EBITDA is achievable?

David Schorlemer, CFO

Yeah. I think it’s achievable, Chris. I think we are still going to be measured in how much this operating leverage that we have spoken of brings us in the next quarter. We are not expecting pricing to move in the second quarter. That’s probably second half of the year. So, I’d say it’s achievable. But we would probably like to remain a little conservative.

Operator, Operator

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

Sean Mitchell, Analyst

Good morning, guys. Thanks for taking my question. Just a kind of a quick one for me; we have heard a lot of issues in the field over the conference call season here about labor issues in North America. You have mentioned trucking earlier being tight. Are there any other areas where you guys are seeing labor issues in your operation?

Adam Muñoz, COO

Sure. Sean, this is Adam. Labor is always a challenge, especially as activity increases, particularly after the downturn we experienced. Some workers have completely left the energy sector, while others are waiting for rates and pricing to improve to attract them back to the oil fields. Currently, we are struggling to provide our customers and partners with highly skilled and efficient personnel. Trucking seems to be the most affected area due to a combination of factors. It’s primarily an owner-operator business, and those drivers are requesting better rates for their equipment. Additionally, with rising diesel prices, this is where we are seeing the most significant tightening.

Phillip Gobe, CEO

And Sean, I will add to that. I believe our focus on being very single basin Permian oriented enhances our competitive position. Our longstanding relationships with our customer base provide significant reassurance to both our employees and the supply chain partners we collaborate with. This consistency is incredibly valuable, and while it may not resolve all the challenges we face in the labor market, it certainly gives us a competitive edge when sourcing new employees or supply chain partners. They recognize that collaborating with ProPetro will offer greater consistency and predictability, which is beneficial as we look to bring additional personnel on board throughout the value chain.

Sean Mitchell, Analyst

That's helpful. Maybe one more question from me as we consider the recent discussions about steel cost inflation. Reflecting on the remarks regarding Tier IV DGB upgrades, if you upgrade from Tier II to Tier IV, do you have any insight into the current costs compared to six months ago? Steel prices have significantly increased. Where do we stand on the cost of upgrading a fleet from Tier II to Tier IV?

Phillip Gobe, CEO

I think it’s safe to say it’s going up. We are trying to keep track of that on a real-time basis. The economics that we got with the approximately 90,000 horsepower that we have either built new or converted are probably not sustainable, which is why you hear us continuing to go back to needing to see our profitability continue to improve because the costs for those items, specifically engines and other components that are very steel-based, we perceive will continue to grind higher throughout the year.

Operator, Operator

This concludes our question-and-answer session. I would like to turn the conference back over to Phillip Gobe for any closing remarks.

Phillip Gobe, CEO

Okay. Thank you, everyone, for joining us on today’s call. Although we are in the early stages of a multiyear recovery, the American entrepreneurial spirit is alive and well in Midland Texas. So, presently, we are bringing a safe alternative to hydrochloric acid on location through a new partnership and deploying and evaluating next-generation equipment. But the diligent work continues as we progress on our sustainability journey. We are proud to play a part in an innovative industry and look forward to the exciting improvements that will come from the unique experience we have gained in the past year. Thank you again, everyone, and we will look forward to talking with you on the second quarter.

Operator, Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.