Earnings Call Transcript - PUMP Q3 2020

Operator, Operator

Good morning and welcome to ProPetro Holding Corp's Third Quarter 2020 Conference Call. This event is being recorded. I’d now like to turn the conference over to Sam Sledge, Chief Strategy and Administrative Officer. Please go ahead.

Sam Sledge, Chief Strategy and Administrative Officer

Thanks Brandon and good morning, everyone. We appreciate your participation in today’s call. With me today is Chief Executive Officer, Phillip Gobe; Chief Financial Officer, Darin Holderness; and Senior Vice President of Operations, Adam Muñoz. Yesterday afternoon, we released our earnings announcement for the third quarter 2020. 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. The past several months have been difficult for everyone given the impact of the global COVID-19 pandemic on our personal and professional lives. I want to first thank all of our employees for their continued efforts in following CDC guidelines and other governmental agencies to promote a healthy and safe work environment not only for themselves but for our customers, supply chain partners and other stakeholders. As important, I want to once again express how much we appreciate our medical workers and first responders here in the Permian Basin for the selfless sacrifices they make day in and day out to ensure our well-being. Before we begin to discuss our results of the third quarter, I'd like to take the opportunity to welcome David Schorlemer to ProPetro's team. David knows all about the field service space very well and most recently served as Executive Vice President, Chief Financial Officer, Treasurer and Secretary of Basic Energy Services. He brings with him more than 25 years of broad-based experience and senior-level positions in finance, technology, business process integration, strategic and organizational planning, M&A and capital markets transactions as well as a proven track record of ensuring strong corporate governance. We look forward to David's immediate and long-term contributions to ProPetro's success. I also want to take the opportunity to thank Darin Holderness for his dedication and hard work over the past year. Darin stepped in to provide critical leadership in our efforts to strengthen our finance and accounting operations, which has been essential in our abilities to successfully navigate the impact of the global pandemic to date. As important, Darin's many contributions including his guidance in the process that returned us to current filing status with the SEC have helped lay a strong financial foundation for ProPetro as we move toward an eventual market recovery. Turning attention to the third quarter, we were clearly pleased to see an increase in customer activity levels from the second quarter, more than doubling our average active fleet count. The thoughtful and decisive steps we took during the second quarter have allowed us to streamline our operations without sacrificing our ability to respond as market conditions improved, which we began to see in June and continued through the third quarter. In addition to safeguarding the long-term health of our balance sheet, a key factor in our decision-making process was to prioritize protecting the core competencies of our business and providing customers unmatched execution at the wellsite. The strategic benefit of these efforts was evident in the third quarter as we hired hundreds of teammates to support growing activity levels. Our ability to quickly redeploy crews at historically high performance levels with minimal downtime spent onboarding these re-hired teammates made a significant difference as activity ramped up in the third quarter. Our best-in-class operational and safety performance was on full display in the third quarter, and I want to thank all of our team members for their ongoing resilience. Customers remain squarely focused on utilizing the highest quality crews available in the industry. Our team's ability to stay nimble and effectively respond to the needs of our customers is a key point of differentiation in this business. Our customer-focused culture has allowed us to maintain market share at similar levels to the beginning of the year, which we expect to continue into 2021. To be clear, profitability is paramount, and we remain fully committed to improving margins and creating shareholder value. As evidenced during the third quarter, we are pleased to once again generate free cash flow from operations. Complementing our efforts to provide best-in-class execution at the wellsite, we will continue to promote the health of our balance sheet as it is vital for our success and will be a requirement in our sector to remain competitive. Our blue-chip customers are interested in working with companies that they can rely on for the long term, both operationally and commercially, and we view our solid financial position as a key differentiator for ProPetro. This is especially true as we navigate the ups and downs of the oil and gas industry as we move our way back to a much improved demand environment in the future. With that, I'll turn the call over to David to discuss our financial performance.

David Schorlemer, CFO

Thanks Phillip. I want to first say how excited I am to join the ProPetro team. I've seen the team operate in the field, and it is an impressive organization. ProPetro is well recognized as an industry leader that is respected by all parties in the value chain, and I look forward to working closely with our Board, Phillip, other members of executive management, and the entire ProPetro team as we continue to strive for excellence. Turning attention to the financial results of the third quarter, we were pleased to post higher revenue sequentially and generate free cash flow for the third quarter. More specifically, effective utilization for the third quarter was 8.5 fleets compared to four fleets in this year's second quarter. We currently expect fourth-quarter effective utilization levels to remain flat with our third quarter exit rate, therefore, yielding effective utilization in the fourth quarter between nine and ten fleets. Total revenue was $133.7 million versus $106.1 million for the second quarter, with the increase primarily attributable to increased activity levels. Partially offsetting the overall increase was increased direct sourcing of select consumables by certain customers. In addition, we saw a $25.7 million decrease in idle fee revenue as we recorded $6.9 million in fees in the third quarter compared to $32.6 million in the preceding quarter. Excluding idle fees, our revenues increased 73% sequentially on improved fleet utilization. We expect fourth-quarter idle fee revenue will be fairly flat with the third quarter based on our current view of fourth-quarter effective fleet utilization levels. Cost of services, excluding depreciation and amortization for the third quarter, was $99.6 million versus $68.2 million in the second quarter, with the increase driven by higher activity levels in the third quarter. Third quarter general and administrative expenses amounted to $20.8 million compared to $20.3 million for the second quarter. Excluding nonrecurring and non-cash stock-based compensation in both periods, G&A increased only slightly from $16.4 million for the second quarter to $16.8 million in the third quarter. Our net loss for the third quarter was $29.2 million or $0.29 loss per diluted share versus the second quarter net loss of $25.9 million or $0.26 loss per diluted share. Finally, adjusted EBITDA was $17.4 million for the third quarter compared to $25.4 million for the second quarter. The sequential decline in adjusted EBITDA was primarily due to our revenue mix normalizing from a heavier weighting of idle fees in the second quarter. However, if we exclude the impact of idle fees, adjusted EBITDA improved sequentially by nearly $18 million driven by a sharp improvement in incremental EBITDA margins of 32%, highlighting our operating leverage coming off the weak second quarter. During the third quarter, we incurred $7.9 million in capital expenditures, all related to maintenance. Capital expenditures incurred for the nine months ended September 30 were $59.9 million, including $8.4 million spent on growth projects in the first half of 2020. As noted in our press release, we have lowered our outlook for the full year 2020 capital spending to below $85 million versus our previous expectations of below $100 million. This guidance would equate to CapEx spend in the fourth quarter of approximately $25 million, higher than our capital spending in the second and third quarters. This increase is primarily attributable to increased activity, our equipment rotation program, as well as being prepared for potential 2021 activity increases. Looking at the balance sheet, as of September 30, we had total cash of $54 million versus $37 million as of June 30. At the end of the third quarter, we remained debt-free and have liquidity of $86 million, including cash and $32 million of available capacity on our revolving credit facility. Finally, I would note that our total liquidity as of October 31 was approximately $111 million, comprised of $67 million in cash and $44 million of available capacity on the revolver. As Phillip mentioned in his opening comments, the strength of our balance sheet is critical to our success, and in my new role as CFO, I'm firmly committed to ensuring we maintain a solid financial position that provides maximum flexibility. Being debt-free and generating free cash flow is a key differentiator for ProPetro, especially in this environment. We look forward to further leveraging our unique position in the marketplace as we continue to provide our customers unsurpassed quality and service in the Permian Basin, the most prolific producing region in the U.S. market. Results during the third quarter reflect the unique positioning of the company that remains intact after the COVID-19 crisis: first, strong capital discipline and cash flow performance with a zero debt balance sheet and strong liquidity; second, a portfolio of some of the strongest customers in our industry, some of which have actively participated in the EMP industry consolidation, including a unique partnership with Pioneer Natural Resources, a leading Permian operator; and three, a passionate pursuit of industry-leading operational performance in the field with impressive pumping productivity in Q3 post-reactivations leading to strong sequential margin improvement. All of these attributes contributed to our impressive recovery from the prior quarter and we believe will position us for continued success in the future. With that, I'll turn it back to Phillip.

Phillip Gobe, CEO

Thanks David. While we've seen a meaningful recovery in activity from the low levels seen in the second quarter of the year, our expectations of volatility and uncertainty remain unchanged until there is some material increase in oil demand. We are encouraged to see continued substantial progress in both COVID-19 treatment programs and vaccine development, both of which are critical to returning to a more normal environment that will substantially stimulate oil consumption. This in turn will hopefully drive crude prices higher and promote increased development by E&P companies both here in the U.S. and abroad. As we navigate our course until that time, we will remain laser-focused on what we can control. This includes retaining a cost structure that does not depend on price increases from customers to maintain or increase our returns. Over the years, we've taken pride in running a lean organization and will continue to do exactly that. Faced with the onset of the pandemic in the first half of the year, we escalated our efforts to ensure we not only survived but also positioned ourselves to thrive as activity levels improved over time. ProPetro is clearly recognized for its ability to provide customers with unmatched execution at the wellsite. Key to our success remains close communication with our customers to better understand and anticipate their needs by helping them solve their technical problems at the wellsite. This approach has served us well over the past 15 years and we believe is now more important than ever. As we've discussed in the past, pressure pumping services and the equipment used to execute these services must continue to evolve for the industry to remain globally competitive. Because we fully expect to operate in a price environment that will continue to be challenged, it will require further improvement in process efficiency and we will continue to work closely with our customers to develop cost-effective solutions to support our mutual, long-term success. Regardless of the price environment, our customers expect further minimization of the environmental impact of wellsite operations through reduced greenhouse emissions and other considerations. As evidence of our commitment, we've made a significant investment in DuraStim Electric Fleet technology. During the third quarter, we continued to test and develop the technology alongside our partner AFGlobal and plan to be in the field with a larger deployment in the coming days. I'd note that our blue-chip customer base remains extremely interested and excited about the prospects of DuraStim, and we are currently targeting to be in the market with a full electric DuraStim product offering in 2021. Looking at the fourth quarter, we will continue to remain very selective in redeploying assets and crews and will only proceed with projects that meet our economic targets. Over the past several weeks, there have been several M&A announcements concerning further E&P consolidation in the Permian. Since going public in early 2017, we've continually discussed that the Permian is transitioning to a full manufacturing mode environment. Industry consolidation, especially by larger customers operating in the region, materially accelerates this process. Bottom line, we believe this will be a net positive for ProPetro, given our Permian-centric focus and clear reputation for providing unsurpassed execution at the wellsite. With that, I'd like to turn it over to Brandon for questions.

Operator, Operator

Thank you. We will now begin the question-and-answer session. Our first question comes from Sean Meakim with JPMorgan, please go ahead.

Sean Meakim, Analyst

To start off, given the idle fees in the fourth quarter, it will be comparable to 3Q. Active fleets look comparable. So it sounds like margins should be fairly comparable as well. So is that fair and can you maybe just elaborate on October's activity levels versus the 4Q average and how you see the monthly cadence in November and December?

Sam Sledge, Chief Strategy and Administrative Officer

Hey Sean, this is Sam. I'll take that one. Activity exit out of 3Q is right around 10 fleets. So we expect to work those 10 fleets basically totally through the fourth quarter. The guidance of 9 to 10 effectively utilized fleets is probably calculating in a little bit of what we're seeing is just holiday seasonality around Thanksgiving and Christmas, which will, to your margin comment, likely provide a slight drag to profitability margins. We're still working through some of that with a few of our customers to see exactly what that's going to look like, but right now we're expecting to be taking a few days off around each holiday that will affect margin and utilization.

Sean Meakim, Analyst

And then looking ahead to '21, your customers are aiming to stabilize production off of 4Q '20 levels. It looks like there will be no need to ramp activity off of where they're going to exit the year. Do you broadly agree with that assessment, and just curious within the visibility you have on activity from your customers early in '21?

Phillip Gobe, CEO

I'll start and maybe pass it over to Adam. I do believe that customer activity will continue at least stable, maybe with a slight nod towards increasing. Obviously, a lot depends on pricing right now given the quality of customers that we deal with. I believe most of them are primarily hedged. So if they view it as a short-term downtick in pricing, it won't affect the activity at all. So bottom line, we see steady to maybe slightly increasing activity going into '21. Adam?

Adam Muñoz, Senior Vice President of Operations

Yeah, I'd just add to Phillip's comments that we have a number of RFPs out with different operators and we feel very positive about winning a couple of those. So that could lead to a slight increase.

Operator, Operator

Our next question comes from George O'Leary with Tudor Pickering Holt & Company. Please go ahead.

George O'Leary, Analyst

The free cash flow generation during the quarter was impressive and it seems like October has been a good month for you all as well. I wondered if given the higher CapEx level, if you expect cash flow to be positive in the fourth quarter and maybe you can walk us just through some of the moving pieces, working capital, CapEx those items to help us kind of think about how free cash flow can settle out for the fourth?

David Schorlemer, CFO

Yeah, I think when you look into the fourth quarter, we think, as we've spoke about our fleet utilization being essentially flat from the exit of the third quarter, that working capital should be pretty neutral. I think we also spoke about the CapEx increasing in the fourth quarter, and that's going to be in anticipation of what Adam referred to as some potential increases as we move into the first quarter. So I think that it's going to be below where we had seen the third quarter free cash flow, but I think we're going to try to continue to be neutral as we make those investments, and it's going to be dependent on our customer's performance and activity levels expected going into the first quarter.

George O'Leary, Analyst

And then Sam, just following up on Sean's question. Sean mentioned in your response indicated that profitability could be flattish. I appreciate that there will be some holiday downtime, and you potentially carrying costs as you added fleets back during the quarter, but I just want to make sure I understood the response right. Given the higher fleet out and you likely get some fixed absorption plus you should have higher revenues if you have more fleets active, and pricing kind of flatlined at the bottom here, is there the potential for annualized EBITDA to preferably increase quarter-on-quarter? Or when you were talking about margins being flattish, was that flattish with the September level? Just frame that profitability for us a little bit more; I think that would be helpful.

Sam Sledge, Chief Strategy and Administrative Officer

George, this is Sam. I think quite simply, it's going to be a little bit of a challenge to hold or beat Q3 EBITDA levels, and it's not really in particular due to any one thing; it's kind of a mix of a few things. Holiday seasonality is obviously a drag on profitability whenever that happens. As we are pretty confident that we'll have the opportunity to add a fleet or two sometime in Q1 depending on the timing of those potential 2021 fleets, you could have some of that preparation work bleed into the back half of Q4, which could prove to be another drag from a CapEx standpoint that David talked about and from an OpEx standpoint. So our goal would be to beat or exceed the same EBITDA levels on a per fleet basis, but it's going to be challenging; I think we have some headwinds around that.

George O'Leary, Analyst

I want to just sneak in one more if I could. Just on that bidding behavior front, it seems like you're seeing a lot of bids in and around a similar number from the competition, and you have a few bad actors that would come in well below that tight spread of bids. Is that still the case or has some of that bad bidding behavior abated at all? How would you describe what that bidding landscape looks like?

Adam Muñoz, Senior Vice President of Operations

I would say, yeah, you probably still have some of that going on; some of that bad bidding behavior is just given the market dynamics we're in right now as far as work available and being bid out for. But we stay pretty confident on bid numbers; operators still value the high-performance factors that we can offer and the safety and efficiency that we've been providing to our current customers.

Operator, Operator

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

Ian Macpherson, Analyst

Thank you. Good morning, the PXE Parsley in theory should be accretive for your shareholder. Could you remind us of some work you’ve done with Parsley in the past? I don't think we're talking large adds based on why for 2021, but what do you think your opportunity is to grow share as you're aligned with at least more than one operator who is consolidating the basin?

Sam Sledge, Chief Strategy and Administrative Officer

Yeah Ian, this is Sam. Interestingly enough, we probably have a longer operating history with Parsley than we do with Pioneer. Our relationship with Parsley dates back quite a ways. We are not currently working for Parsley today, but if we continue to satisfy Pioneer's needs, we think that might be an opportunity to work on that acreage moving forward, but that remains to be seen; we feel confident about it. Obviously, we are very confident in our ability to operate under the kind of Pioneer planning and day-to-day operations; that's been a great partnership for us as Pioneer has provided a lot of value in their ability to be very efficient, and I think that we've been efficient as well. It’s been a true win-win for the last couple of years.

Ian Macpherson, Analyst

And I assume if and when activity does resume on acquired assets, that activity is not defined by your current or minimum volume agreement with Pioneer on a legacy basis that would be incremental? Is that not necessarily the case?

Sam Sledge, Chief Strategy and Administrative Officer

I don't know if there's a minimum threshold. It's just a number of fleets that we are required to provide to Pioneer at any given time. So it will be mostly just dependent on their activity as it moves up and down underneath the acreage that they're operating.

Adam Muñoz, Senior Vice President of Operations

Follow-up for me. I was going to ask also; there's a well-reasoned thesis for pressure pumping that pricing will move when warm stack capacity is exhausted, and we move into more expensive deployments of cold stacked equipment that will require higher pricing. Do you have a view on where we are in that regard, and how much wellsite capacity needs to be absorbed for you guys to get a pricing catalyst whether that's middle of next year or plus or minus around that timeframe?

Ian Macpherson, Analyst

As far as active fleet counts getting up and people are not redeploying unused equipment, I can't give you an exact number of what each of our competitors still have sitting on their potential warm stacks. We're just going to continue to attack that just by being sound on our performance and continue to attract work that provides us a return at the current pricing we have and just see where that leads us.

Sam Sledge, Chief Strategy and Administrative Officer

Ian, this is Sam. I'll just add to that: I think what's hard to pinpoint an accurate answer to that question as we sit here today is because we watch our competitors and our peers employ various techniques to keep costs down and maintain efficiencies high. You see deferred maintenance; you see cannibalization, and on the other end of the spectrum, you see players that are continually reinvesting and keeping their equipment ready at all times, and you're usually bidding against a different competitor with every customer. So it's a little bit of a mixed bag. But no news to you: the more activity there is, the more utilization there is, the more of a potential tailwind that is for pricing overall.

Phillip Gobe, CEO

Little note is the RFQs that we are participating in right now do not have a shortage of bidders seeking work. I don't believe we're at that point yet, but hopefully, we're getting there soon.

Operator, Operator

Understood. Our next question comes from Cameron Lochridge with Stephens, Inc. Please go ahead.

Cameron Lochridge, Analyst

So I was hoping we could circle back and talk about DuraStim and the EST related movement call for EST related equipment at the wellsite. Great to hear the plans you guys have in place for DuraStim going forward. I think we're all happy to hear about that. How should we think about ProPetro's equipment as it stands today, excluding DuraStim, and in order to stay competitive going forward, do you think any further investments in whether it's efrac or dual-fuel will be necessary just given where the market is headed?

Phillip Gobe, CEO

Cameron, this is Phillip. We are observing an increasing number of requests for quotes related to our electric and environmentally friendly fleet. There will be investments made, but the key question is when those investments will occur. Currently, we feel confident that most of our equipment is fully utilized, indicating that new equipment will be needed. We are in a strong position to invest, and we may do so, but it's a challenging environment for pressure pumpers to escalate their operations in the current pricing climate without some form of contractual assurance to cover costs or relief on pricing. However, I want to clarify that ESD is indeed present and on the rise; the investment is purely a matter of timing, and at this moment, it seems that the timing is not favorable for anyone to make those investments.

Sam Sledge, Chief Strategy and Administrative Officer

Cameron, this is Sam. The only thing I'll add on top of that is just from a competitive perspective: having a debt-free balance sheet and the ability to generate free cash flow even in these depressed activity levels is going to be vital to having the opportunity to reinvest in the future. We are firm believers that equipment offerings are changing today, and they'll continue to change as we move forward for ESG reasons, for cost reasons, efficiency reasons, and for a multitude of factors. So we think that it's going to be almost your ticket to admission to be able to reinvest and having the ability to generate cash flow with a debt-free balance sheet.

Cameron Lochridge, Analyst

Okay. And then for my next question, I just wanted to ask maybe going back to the commentary around E&P consolidation that all the news that have been announced this past quarter. I think it begs the question, what happens at the service level particularly in pressure pumping with supply and demand where it's at right now? Whether or not ProPetro participate, I guess that's part of my question. But really just in general, how do you guys see that playing out going forward? Do you see a commensurate increase in M&A at the service level, or will it be more muted? Just how do you see that going forward?

Phillip Gobe, CEO

I think consolidation or just taking capacity out of the market is important. How that happens, consolidation isn't the only way that happens. We're seeing a flood of bankruptcies and distressed assets; that's one way to thin the market. I think, from my perspective, the most difficult thing as ProPetro looks at whether consolidation makes sense for us is there just aren't that many healthy pumpers out there, and for us to consolidate just for the sake of consolidation does not make sense. Somewhere along the way, our shareholders have to benefit from that. Having said that, there are some things that can make sense. We have looked at a number of things that we'll continue to look at, but at the end of the day, I don't think it feels the same to me as E&P. There are a lot more distressed companies in the oilfield service side.

David Schorlemer, CFO

Cameron, this is David. Just to add to that, we're definitely seeing consolidation on the E&P side, and the conversation has been about the relevance of companies with certain market caps greater than $10 billion, and they do have benefits of scale. There is no question about it, but they also want to have options. So there's a little bit of a different dynamic that's in play for service companies. We are currently a service company that, in our position, we're a very strong operator in the Permian basin with very strong customer relationships, and we're generating free cash flow. So we're going to protect that position. We're going to protect our balance sheet, but we're also going to take a look at opportunities as they arise that meet those conditions.

Operator, Operator

Our next question comes from John Daniel with Daniel Energy Partners. Please go ahead.

John Daniel, Analyst

Question for Adam. You mentioned that you're participating in some RFQs now, which could be for incremental work. Not trying to pretend this a lot, but I will; can you say if the quoting that you're providing for those bids is below, at, or above spot pricing outside of your Pioneer work?

Adam Muñoz, Senior Vice President of Operations

It's probably just kind of stayed the same. Stayed flat across all our levels; definitely amongst all the crews that we have just to know that we can generate the return that we need to probably deploy that best fleet or the additional fleet and hire additional personnel. So definitely not chasing anything out there at spot type pricing; that doesn't put us in a win-win situation.

John Daniel, Analyst

Let's assume you guys are blessed and have another, call it a two-fleet opportunity in Q1. What type of fleet make-ready expenses, whatever we want to call them, would you anticipate that being on a per-fleet basis? That's all I got.

David Schorlemer, CFO

John, this is David. We've spoken in the past about annual maintenance CapEx for fleets of between $6 million and $8 million on an annualized basis. The number that we referenced regarding fourth quarter CapEx of about $25 million does have some anticipation of the potential of being awarded some of these RFPs. So I think that it anticipates the potential opportunity there.

Operator, Operator

Our next question comes from Marc Bianchi with Cowen. Please go ahead.

Marc Bianchi, Analyst

Thanks. Following on to John's question about a couple of fleet increases in the first quarter, if that is indeed the opportunity you guys have, how sensitive are those RFPs to their current commodity price? We've seen a lot of swings in futures here in the last couple of weeks, and I'm getting some questions from investors if some of the guidance that companies have put out there and some of the plans that some of the E&Ps have in terms of getting to maintaining fourth quarter production levels works with where the commodity is. So can you talk to how you guys see that just in terms of sensitivity?

Phillip Gobe, CEO

The way I would look at that more is what your customer base looks like. As for ours, I understand your question, whether operators will start to become tentative about sustaining the activity levels we’re at given that pricing doesn't seem to stabilize at 40 or above, but again I'll say, I think if the operators we're working for view it as a short-term issue, I wouldn't expect any changes in activity at all, and it might actually ramp up mainly because they're hedged through that period of time. However, if they view it as a long-term trend that prices will not get back to the 40s or if the European shutdown due to the pandemic will lead to a further slowing of the U.S., then I think we'll see some activity start to drop off, but it is premature to tell you either way on that right now. I don't think we're getting indications from any of our customers that there is a potential downturn in activity.

Marc Bianchi, Analyst

I guess maybe related to that, the rig count increase that we've seen lately in the Permian has been largely among privates. Is the opportunity set you're looking at skewed more towards privates or public, and do you see any difference in the way either of those cohorts would behave?

Sam Sledge, Chief Strategy and Administrative Officer

Marc, this is Sam. I think it's probably a little bit of a mix of both. We've had a healthy mix of both for the last few years, probably a little more tilted towards the public just from a scale standpoint, but many of the privates that we work for are larger than a lot of publics in the Permian in terms of acreage positions and activity levels. So they are operating very similar to public companies. So I wouldn't say it's necessarily more one or the other at this point from our perspective.

Operator, Operator

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

Chris Voie, Analyst

So just to checkbox here, but obviously you're very committed to the Permian, especially the Midland, but just want to check: do you have any pull from customers or maybe pull related to M&A for expansion outside of the Permian or maybe more so in the Delaware? Just curious if there's any shift in strategy and focus, especially considering that growth in fleet in '21 doesn't look like it's going to be too huge. Just curious if you would shift and entertain entry into different basins?

Phillip Gobe, CEO

Well, Delaware is part of the Permian; we have worked there. But Delaware's not off our radar for where we want to operate. We have occasionally done work outside the Permian Basin, down in South Texas, but that's highly dependent on what the customer is willing to do in terms of commitment to activity and pricing. We're not opposed to taking work out of the Permian, but if you're talking about trying to establish a presence in a new basin at this point in time, I think that's a heavy lift to try to go in, spend incremental dollars, and wrestle work away from established players in that basin in this pricing environment. I don't view it as productive for us to do that at this time. However, if we had a customer that operated in one of the basins that had a large acreage position and had work that made sense to establish a base of operations up there, we would definitely consider it. But at this point, I don’t think we have any plans to go outside of the Permian basin.

Chris Voie, Analyst

And then my follow-up being on the CapEx side. I guess you called out the $58 million for fleet and then technology and SG type investment. Depending on demand and visibility, just curious if we think that in 2021, should we just take the fleet count that we have in mind, and multiply it by the $6 million to $8 million, or do you have visibility for an additional chunk of CapEx related to corporate or other projects that you already have planned of some kind?

Sam Sledge, Chief Strategy and Administrative Officer

Chris, this is Sam. I would probably just plug $8 million on maintenance CapEx times your activity assumptions just like you mentioned. Until we see the market shift in a way where our economics change and it makes sense for us to make some of these different equipment investments, that's really all that we can plan for at this time.

David Schorlemer, CFO

And Chris, this is David. Just to add to that, just keep in mind the significant investment that we've already made in DuraStim. As we mentioned, we're testing those units, and assuming those tests prove out, we're going to have a significant amount of capacity of ESG equipment that we'll be able to utilize with customers. So just want to make sure we remind everybody of the potential capacity that we would have there to access ESG customers.

Operator, Operator

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

Stephen Gengaro, Analyst

Two quick ones. One you may have touched on a bit, but first one, you mentioned the increased outsourcing in the quarter of some of the consumables. Is that a trend or do you think that is a one-off issue in the fourth quarter?

Sam Sledge, Chief Strategy and Administrative Officer

Stephen, this is Sam. It was probably in the third quarter more of just a customer mix as activity ramped back up between customers that we have sourced for traditionally and customers that have been sourcing something like sand for themselves. As everyone is well aware, the sand market nationwide has been very depressed, and you have spot prices that have moved well below contract pricing in most instances, not just for us but for many of our peers as well, and we see a lot of our customers and operators in the Permian taking advantage of this depressed spot pricing environment in the Permian regional sand market. There is probably some of that could persist over the medium term, but as activity comes back up and spot sand prices just start to grind a little higher, we will probably have the opportunity to begin to source a little bit more sand. So it's hard to say if it's just a short-term blip or a long-term trend. I can tell you that as we communicate and collaborate with our customers, our goal is to preserve the bottom line on a fleet level basis. So our customers are well aware as we stay in front of them when sourcing changes, whether it's more sourcing going our way or our customer's way; we still have a return to make on our people and our equipment and other consumables that we are sourcing. So although it is something to navigate, I think our operations and sales teams have done a great job educating the customer in terms of what we require on the bottom line.

David Schorlemer, CFO

The other thing I might add on that is in terms of customer self-sourcing is, think with the pressure on for cost for the operators, quite often they look to their supply chain, they look at that, and they look at the price of sand and what they can get it for, and then they make that decision to self-source. But the critical part of that is the logistics of it. We have seen customers go down that path and find out that the sand itself is not really the critical element of the self-sourcing. It's whether you can get it to location on time when it's ready, and whether or not companies factor that into their equation when they decide to self-source is kind of a critical issue. So is it a trend? Yeah, I think it's a trend, but is it a long-term trend? That I don't know?

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

All right, Brandon, thank you, and thanks again, everyone. We appreciate you joining us this morning. Despite a continued challenging backdrop driven by the impact of COVID-19, ProPetro remains very focused on ensuring we stay ideally positioned for the current environment as oil demand materially recovers in the future. Given this backdrop, as in the past, we will leverage the best team in the industry as we continue to work closely with our customers, supply chain partners, and other stakeholders to ensure our collective long-term success. And finally, in the spirit of Election Day, we encourage all of you to get out and vote if you haven’t already done so. Thanks again for joining us, and we look forward to speaking with everybody again at the fourth quarter call. Thank you.

Operator, Operator

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