Earnings Call Transcript - RNGR Q2 2021

Operator, Operator

Good day, and welcome to the Ranger Energy Services Second Quarter 2021 Conference Call. At this time, all participants will be in a listen-only mode. Please note, this event is being recorded. I would now like to turn the conference over to Bill Austin, Chief Executive Officer. Please go ahead.

Bill Austin, Interim CEO and Chairman

Thank you, operator. Good morning, and welcome to Ranger Energy Services Second Quarter 2021 Earnings Conference Call. This is Bill Austin, speaking to you this morning as Interim CEO and Chairman of the Ranger Board. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. As I noted in this quarter's press release, this quarter was a pivotal one for Ranger, both strategically and operationally. Our High Spec Rig segment showed strong sequential revenue growth and margin performance that matched historic peaks. Given the momentum built in quarter two, we expect further gains in revenue and margin for our rig business in the third and fourth quarters. Our wireline business experienced modest revenue growth in quarter two, yet margin performance continues to be challenged by industry-wide low completion pricing levels. We executed two acquisitions: Patriot and recently, PerfX, enhancing our wireline fleet with high-quality equipment, expanding our geographic presence, and strengthening our service offerings. We are currently integrating these companies into our existing business and already experiencing cost synergies and early cross-selling successes. We anticipate showcasing the earnings potential of our newly expanded fleet in the upcoming quarters and I will address that further in additional remarks. As our results begin to reflect the benefits of these acquisitions, we expect to receive further market recognition that Ranger's combination of low-cost, efficient operations and clean balance sheet is a solid foundation for further consolidation in the energy industry. I'll revisit this point and conclude my prepared comments today with an announcement regarding a pending corporate structure change. However, we have much to discuss today regarding our acquisitions, quarter results, and outlook. I'd like to address questions about our CEO transition right away. Most importantly, you should not expect any changes to Ranger's overall strategy. With the completion of the two wireline acquisitions, we are just starting to see the results of the past three years of strategic groundwork led by Darron, and we thank him for that. As a Board and management team, we plan to continue on the same strategic path regardless of who occupies the CEO position. Regarding the CEO search, the Board is evaluating both external and internal candidates. This process is progressing as planned, and I expect we will reach a conclusion within this current quarter. Now, let's clarify our strategy. To be as clear as possible, I want to outline what we are striving for with Ranger: First, a focus on long-term, sustainable cash flow, which guides all decisions related to capital allocation and operations. Second, we maintain an efficient low-cost G&A structure by optimizing systems, allocating personnel wisely, and designing processes to maximize the value of every dollar spent on SG&A. With our recent acquisitions, we now have approximately a $350 million revenue run rate, positioned against an $18 million forecasted 2021 G&A expense, resulting in about a 5% SG&A burden relative to revenue, which is half of what our peers incur. Third, we aim for a clean balance sheet. We acknowledge that an unlevered balance sheet theoretically incurs a higher cost of capital. However, we believe the practical risks of distress at the bottom of the market cycle far outweigh those concerns. Our target leverage remains zero net debt. Our acquisition strategy is straightforward, focused on targets with top-tier assets and a reputation for delivering best-in-class service quality. We are considering both bolt-ons to existing service lines and complementary service lines that enhance our core offerings. We have consistently stated our belief in opportunistic tactics, recognizing that the right timing for acquisitions often contradicts consensus thinking. Before I discuss the quarter's segment results, I'd like to focus on our recent acquisitions. The intent behind both acquisitions was to enhance the scale and scope of our wireline operations. Both Patriot and PerfX are known for their excellent service quality and top-tier assets. Additionally, we've gained two outstanding teams with deep technical expertise and innovative, agile cultures. We've previously mentioned the unsustainable low wireline pricing in the market. Some competitors bid work at virtually no margin to sustain their management structures, leading to opportunities for consolidation. Our Mallard business, with its proven operational success and efficient cost structure, has become a consolidation partner of choice for these companies. Our acquisitions enable us to add technology, scale, and geographic diversity to our efficient platform. We have also significantly expanded our customer base from around three in the Permian Basin to more than 27 across our spectrum. While I won't rehash all the details provided in the wireline press release, I want to add a few key points. We executed these transactions at exceptional value points. For instance, developing our Mallard plug-and-perf wireline business cost us $1.6 million per wireline truck, while the combined purchase price for Patriot and PerfX was approximately $500,000 per truck, roughly 30% of the cost to build new. The combined revenue for these two platforms was $260 million in 2019, currently running at $150 million. Although we need significant improvements in activity levels and pricing to return to 2019 revenue levels, we believe achieving a 20% segment-level margin is feasible through modest price increases and cost-saving measures heading into next year. We also anticipate revenue synergies from cross-selling opportunities among plug-and-perf and intervention work customers, rationalizing per-stage pricing and potentially increasing customer adoption of the lower-cost XConnect gun system. We did incur some additional debt with the PerfX acquisition, but this $11.4 million balance is fully collateralized by the PerfX asset base, so we do not view this as introducing additional risk to Ranger's balance sheet. The integration of both companies is progressing well. We have onboarded nearly 320 new field-level wireline employees, increasing our workforce by almost 40%, and we are actively combining systems and processes to create a unified, integrated multi-basin wireline platform. Turning to the second quarter, we had a busy period. In April, we completed a $13 million sale-leaseback transaction for our DJ Basin facility, as discussed in our first quarter earnings call. In May, we announced the acquisition of Patriot and shortly thereafter, in July, we announced the acquisition of PerfX. Regarding segment performance, our High Spec Rig business continues to experience increases in both hours and pricing, indicating that our growth is not based on undercutting competitor prices or compromising service quality. Rather, it reflects the groundwork we've laid by focusing on top-tier clients willing to pay for quality rather than simply seeking the lowest rate. Sustainable pricing that supports training, maintenance, and acceptable returns is beneficial for the entire industry, including both E&P and service providers. In terms of the quarter's activity, following weather disruptions in the first quarter, we saw resumed growth in quarter two, with a 34% sequential revenue increase. We deployed more rigs, worked more hours per rig, and saw gains in pricing. Our rig rates per hour reached their highest levels since our post-2017 IPO configuration. While rig-only rates have improved from last year's low, this record is more a result of increased ancillary equipment deployed at well sites than a dramatic rise in base rig rates. Although our full package rates are favorable, we see economic justification for continued increases in bare rig pricing, as current market rates offer minimal return on investment for the sector. Another key metric is the activity trend for our high-end 24-hour rigs. We began the year with five 24-hour rigs, increased to seven by the end of quarter one, and during quarter two, we operated between 13 and 15 rigs. On the expense side, we experienced increased costs due to ongoing activity, with make-ready expenses totaling $980,000 for the quarter, which occurred in April and May, while June saw no additional make-ready costs. Segment margins for the first quarter were a reasonable 17%, but in June, the absence of make-ready expenses produced a 23% gross margin, which we aim to replicate in the coming months. Moving on to the Completion and Other Services segment, our legacy Mallard wireline business saw little change in revenue. We averaged six trucks, slightly down from 6.3 in quarter one. However, these trucks were more productive, resulting in minimal sequential revenue change. We did see a drop in margins, primarily due to a 5% increase in per gun perforating expenses, attributable to inventory accounting rather than a structural price hike. Our reported results include 1.5 months of contribution from Patriot and no contribution from PerfX, since that closed post-quarter. However, combined, the businesses of PerfX and Patriot showed a 15% increase in revenue, rising from a quarter one run rate of $30 million to $34.5 million while maintaining a gross margin of around 13%. Our non-wireline businesses focus on the DJ Basin and have not seen the recovery experienced in other regions. As a result, quarter two's revenue and margins were similar to those in quarter one. In our Process Solutions business, revenue increased slightly for the quarter as we successfully renegotiated contracts for our gas cooler units, achieving a 94% utilization rate. Renewal rates are somewhat lower than in 2019. With our mechanical refrigeration units (MRU) fleet, we are continuing to pursue opportunities in the frac business, but this line of work has grown more slowly than anticipated. We did not see significant changes in revenue or margin quarter-over-quarter with our MRU fleet. I know that was a lot of information, so let me now turn the call over to Brandon. I have some closing remarks, including a discussion on the corporate structure change. Brandon?

Brandon Blossman, CFO

Thank you, Bill, and good morning to everyone on the call. Let's go over the details and numbers for the second quarter. For the consolidated figures, Q2's revenue reached $50 million, reflecting a 30% increase, or $11.7 million, compared to Q1's $38 million. Adjusted EBITDA stood at $2 million, an increase of $2.2 million from a loss of $200,000 in Q1. It's important to mention that, similar to Q1, this quarter's EBITDA is impacted by $980,000 in make-ready expenses related to high-spec rig reactivations and upgrades. In terms of revenue by segment, High Spec Rig revenue grew by 34%, or $7.3 million, from $21.7 million in Q1 to $29 million in Q2. This was driven by both increased rig hours and higher composite rig rates. Specifically, revenue hours rose from 43,200 in Q1 to 50,100 in Q2, showing a 16% increase. The average rig count for Q2 was 71 rigs, up 8% from 65 rigs in Q1. The average composite hourly rig rate increased by 19%, from $493 in Q1 to a record $587 per hour in Q2, marking a high point for Ranger since its inception. This increase was due to a mix shift towards larger rig packages rather than a rise in bare rig rates. As for the 24-hour work cadence, in Q4, this work comprised 26% of total rig hours, which fell to 19% in Q1 due to February's weather interruptions. However, by the end of Q1, the percentage of rig hours associated with 24-hour work rose to 35%, and this average further increased to 39% in Q2, a level we’re seeing now in July. Looking at the Completion and Other Services segment, revenue rose by 28%, or $4.3 million, to just under $20 million in Q2 from $15.5 million in Q1. Most of this increase was driven by the Patriot acquisition, which contributed $2.3 million in revenue. The remaining growth was shared between our non-wireline services and the legacy Mallard business, both of which saw modest increases. In the Processing Solutions segment, revenue increased slightly by $100,000, moving from $1.1 million to $1.2 million. For segment-level EBITDA and margins, overall adjusted EBITDA came in at $5.9 million, a jump of 40% or $1.7 million from $4.2 million in Q1. High Spec Rigs showed substantial gains, while the Completion and Other Services segment, along with Processing Solutions, experienced declines. In terms of margins, consolidated segment margins increased from 11% in Q1 to 12% in Q2. Adjusted G&A expenses decreased by $0.5 million, from $4.4 million in Q1 to $3.9 million in Q2, aligning with typical first-quarter expenses related to employment tax that don’t recur in Q2. Segment EBITDA for High Spec Rigs surged by 85%, or $2.3 million, reaching $5 million in Q2, compared to $2.7 million in Q1, with margins rising from 12% to 17%. This growth included significant spending related to customer-requested rig upgrades and associated make-ready costs, totaling $980,000 for the quarter. If we adjust for these make-ready costs, segment EBITDA would be $6 million, yielding a 21% segment margin, which is at the upper end of our historical range. In the Completion and Other Services segment, EBITDA declined by $300,000, from $0.9 million to $0.6 million, with margins dropping from 6% to 3% due to ongoing weak pricing. Finally, Processing Solutions EBITDA fell by $300,000 to $300,000 in Q2 from $600,000 in Q1, with segment margins decreasing to 30%. Switching to net income, Q2 reported a net loss of $9.1 million, which is an incremental loss of $800,000 compared to $8.3 million in Q1. This loss includes $900,000 of legal and other transaction fees associated with our two acquisitions. It's also worth noting that the Q1 loss was partially mitigated by a $1.4 million benefit from a 401(k) forfeiture recapture, which did not reoccur in the second quarter. Now, regarding balance sheet items, net term debt decreased by $2.8 million in Q2, from $30 million at the end of Q1 to $27 million. This reduction was primarily due to $12 million in net cash proceeds from our facility sale leaseback transaction, offset by a working capital build aligned with a 31% revenue increase. We also reduced our term debt by another $2.5 million during the quarter, leaving a Q2 ending balance of $12.7 million. On the capital expenditure front, maintenance CapEx rose significantly this quarter to $800,000 from a recent run rate of $200,000. This was mainly due to timing related to our High Spec Rig segment. As we move forward, we expect maintenance CapEx to increase in line with the higher utilization levels of our ancillary asset equipment fleet. On the growth CapEx side, we spent $1.1 million, mainly on downhole tools for wireline intervention, the Patriot acquisition, additional ancillary equipment, and new pickup trucks added to our fleet, which were acquired on a leased basis. Regarding liquidity, we finished the quarter with $16 million available, which consists of $13 million in revolver capacity and $3.4 million in cash. This reflects a $3 million increase from Q1. With that, I will conclude my remarks and turn the call back to Bill.

Bill Austin, Interim CEO and Chairman

Okay. Thanks, Brandon. I do want to talk a little bit more about the high-spec rigs and trajectories in the quarter. So there was an incremental positive to the High Spec Rig segment in their quarter two performance. It's a revenue and margin trajectory across the quarter. While quarter revenue and average margin was $29 million and 17%, respectively, the June exit run rate had revenues of 11% over the quarter two average, with margins expanding to above 20%. It's important to note here that while we are running currently approximately just 75 of our 136 high-spec rigs with an additional net five rigs deployed in quarter two, we are essentially utilizing all of our high-spec ancillary full equipment packages. The deployment of those full packages of equipment is the primary driver of our incremental gains on rates and margins. Moving forward, assuming the ongoing activity growth and the market share gains, which we believe are both in the cards, we will likely be sending out smaller set of ancillary packages, which we have, and spending some modest CapEx on additional full packages. Incremental to this dynamic is the need for base bare rig pricing to move up, which we are seeing. Net-net for our High Spec Rig segment, we expect gains in utilization and pricing to drive revenue growth, but not both without some modest CapEx spend. As a final note on this topic, with two wireline acquisitions behind us, it would be reasonable to expect us to turn our attention to service rig M&A as our primary near-term focus on the transaction front. Moving on to wireline quickly. With our recent acquisitions, we are seeing some early successes in cross-selling incremental work, and we do expect revenue growth over time. Our primary near-term objective is driving margin expansion. Our largest near-term lever here is pricing. Completion pricing has started to move off the bottom with some mid-single-digit moves up with select customers. But with per-stage prices just at 50% of the 2019 levels, there's much more that needs to be done. As we continue to point out, at current pricing levels, small- to medium-sized stand-alone service providers are cash flow negative and must see higher pricing to survive. Our acquisitions will further drive down our relative overhead costs, enhancing our individual competitiveness. But philosophically, we will not chase market share at the expense of price and margin, preferring to have demand drive our activity levels while pushing to sector-appropriate pricing levels. As I noted earlier, we are looking forward to reporting full quarters of a new, larger wireline footprint, showing modest revenue growth along with at least a partial return to the 20% margin this sector has seen historically. On the Processing Solutions side, we continue to expect our customers' ESG mandate to drive an uptick in both the traditional flare gas capture use and newer fracturing dual-fuel and e-fleet generation fuel supply. We continue to have pilot program success on fuel supply projects, but have yet to sign that elusive long-term contract. Stay tuned here as stronger commodity pricing, incremental flare gas, emission regulation and the build-out and adoption of dual fuel and electric frac fleet are all tailwinds for our Processing Solutions segment. On the M&A, as I alluded to in my opening comments, we continue to do work on the M&A front. We, of course, do not have anything to announce at the moment. And I can't reasonably handicap the outcomes of what we are currently working on. But I wouldn't be surprised if the team has one or two more significant announcements this year in the second half of the year. Finally, on corporate structure. I teased this in my opening comments, but to conclude my prepared comments, I have a somewhat technical, but nevertheless, exciting comment to share regarding our equity structure. As you know, Ranger has two classes of stock: A shares and B shares, with the B shares being associated with a tax receivable agreement, or a TRA, which was put in place at our IPO. We are currently in discussions and expect to have a final agreement within days to terminate the TRA and to convert the outstanding B shares to A share common shares. Importantly to note, this is not driven by any desire of our largest shareholders to reduce their position, but rather by our joint desire to simplify our equity structure and to better position ourselves for further consolidation. I know I've been a little bit long-winded, but with that, I'll close my prepared remarks and hand it over to the operator for any questions.

Operator, Operator

The first question comes from Jason Bandel with Evercore ISI.

Jason Bandel, Analyst

Thanks for all the detailed commentary in your prepared remarks. That was really helpful. Let me start on the wireline side. Just following your two acquisitions here, you obviously have a much larger presence now in the market with 55 wireline trucks and exposure to multiple basins. Can you talk about how you see the competitive landscape evolving for the industry and the role you hope to play? And also, can you touch on kind of the strategy here to improve margins in the business in case pricing remains at the competitive levels it's at today?

Bill Austin, Interim CEO and Chairman

That's an interesting perspective. There are still numerous competitors in the wireline market, both small and a few larger ones. As mentioned in our prepared remarks, many of the smaller operators have relied heavily on the PPP to survive, pricing their services to stay afloat. We believe that signaling consolidation will encourage others to pursue similar strategies. We believe our current size is appropriate, allowing for a solid return on investment. Our cost efficiencies could pressure some smaller players and even some larger competitors on pricing. While we aren't here to provide support to all operators, we see a positive shift in activity levels and the necessity to expand our workforce. With the quality hiring we've done, we anticipate this will enhance our pricing strategies. On the cost side, our SG&A figures will benefit from our simpler systems compared to more expensive ERP systems. We aim to operate this company like a small local business, as that is manageable and suits industry demands. We expect both our wireline and high-spec rig segments to yield returns. However, we don’t foresee wireline or high-spec rig pricing returning to levels that would encourage new developments. We believe they can still provide adequate returns based on our current equipment. Although this may not fully answer your question, we are trying to convey that there’s a need for better pricing in this market, which applies similarly to the high-spec rig market. We have sizable packages that offer great value to our customers. We’ve noted that smaller rig packages are seeing improved pricing, and bare rig pricing is also increasing, which allows for fair returns on existing assets. However, we do not expect a return to pricing levels that would support new construction or margins. Brandon, I know I’ve taken a while. Would you like to add anything?

Brandon Blossman, CFO

You make it a longer answer, but I'll hit a couple of things. One, Jason, I mean, I think we've been pretty vocal about we think that, structurally, the pricing in the industry does not support our smaller competitors and, therefore, they will either go away through attrition or will get pricing so that we can actually support a reasonable-sized wireline fleet here for the E&P industry. So...

Bill Austin, Interim CEO and Chairman

And we make money here now.

Brandon Blossman, CFO

Yes.

Bill Austin, Interim CEO and Chairman

It's just not enough.

Brandon Blossman, CFO

We are profitable at this point. Our profitability post-acquisitions is due to our SG&A structure being much lower than that of a smaller wireline company. You mentioned 55 trucks; that's our incremental count, bringing our total to 68 trucks available for fieldwork. The main considerations here are our management structure, the SG&A costs that are allocated across the fleet, labor costs, equipment costs, and pricing. We have already addressed two of these aspects by giving ourselves an option for a more affordable gun system, which we will implement if necessary. Ideally, we won't need to roll out this gun system across our entire fleet, but it's a possibility. We have tackled the management structure and SG&A costs, while labor costs will be influenced by pricing. Currently, labor costs have not fully recovered to the levels seen in Q1 2020 for the wireline business because pricing remains low. Therefore, labor costs will directly relate to pricing, and the final element we need to work on is setting the pricing.

Bill Austin, Interim CEO and Chairman

I would like to emphasize that we are committed to continuing our efforts. You raised a topic that we discuss frequently. We have already seen improvements in our trucks and personnel due to our diverse exposure to various basins and types of work. We've relocated some of our equipment, trucks, and workforce. Previously, our operations in Mallard were performing well, but they were too limited as we focused solely on the Permian and had a small customer base. As I mentioned earlier, we now have a larger number of customers and more opportunities to deploy our staff. We've experienced some successes in cross-selling. While we aim to maximize our utilization, that's not our primary goal. The flexibility to move personnel, trucks, and equipment across the basins will provide us with a significant advantage moving forward. Is that sufficient for you, Jason?

Jason Bandel, Analyst

I appreciate all the detail, Bill and Brandon. Let me rephrase my question. You've mentioned in this quarter and the last that you're seeing indications of pricing bottoming out. In instances where you've observed mid-single-digit pricing improvements with certain customers, what factors contributed to that? Was it related to the work in the basin we're operating in? What led to that improvement?

Brandon Blossman, CFO

Jason, are you asking about wireline or just overall?

Jason Bandel, Analyst

About wireline, yes.

Bill Austin, Interim CEO and Chairman

Well first, you got to...

Brandon Blossman, CFO

Try asking for price.

Bill Austin, Interim CEO and Chairman

First, you have to ask. On the rigs side, I think we can attract people due to the activity levels across the region. We believe we can bring in talent because we are a stable company with a strong balance sheet. People in the field appreciate knowing they will receive their paycheck consistently. We believe we offer an appealing workplace. Additionally, we have attracted many skilled individuals in the wireline sector. We think that justifies our pricing request.

Brandon Blossman, CFO

And you've heard this a couple of times, I think, on this quarter's calls across the industry. But we are struggling a little bit on the wireline side in terms of pricing increases we ask. But for the dedicated fleets, there is a lag between the agreement on a price increase and when it actually gets implemented per the contractual terms.

Bill Austin, Interim CEO and Chairman

We're working on it.

Operator, Operator

Our next question comes from Daniel Burke with Johnson Rice.

Daniel Burke, Analyst

Let's see. It's encouraging to see what's happening in the rig business for you. I want to ask about the rig packages, which have high returns and are sold out. What kind of capital commitments do you expect to make over the next 12 months to enhance your capacity there?

Brandon Blossman, CFO

I'm happy to answer that. The honest answer is that we don't know yet. This problem arose fairly quickly. I don't think we anticipated this level of 24-hour activity three months ago. The fact that we're sold out on our high-spec full wrap packages is somewhat surprising to us. Therefore, we don't have a fully vetted answer to that. We're considering two variables, and we can put out incremental rigs with...

Bill Austin, Interim CEO and Chairman

In modest numbers.

Brandon Blossman, CFO

Skinnier, yes, skinnier packages and...

Bill Austin, Interim CEO and Chairman

And do quite well on that based on what's out there.

Brandon Blossman, CFO

Yes, absolutely. We still have reasonable returns on those packages. This would lower our composite per-hour rig rate and ultimately reduce our gross margins in a market where labor continues to be a constraint. That's not an easy decision to make. To specifically answer your question, if we decide to add incremental, full wrap, high-spec packages, we're looking at an investment of about $500,000 per rig. If we go that route, we will likely be going to auctions to find near-new equipment at low prices, which is our preferred path over purchasing brand new equipment from manufacturers. As everyone is aware, there is a good amount of decent equipment available at auction houses seeking a new home.

Bill Austin, Interim CEO and Chairman

We are indeed taking steps in that direction. Your question has certainly piqued the interest of our head of High Spec Rigs, who is eager to place more purchase orders. We will pursue that, but currently, we still have some flexibility with the modest-sized packages. Additionally, if bare rig prices move as we anticipate, we can also explore that option.

Daniel Burke, Analyst

Got it. That makes sense. I guess the other question is for Brandon. I just wanted to ensure I’m accurately connecting the acquisitions with the existing completion business as you integrate them. I heard you mention gross margins of about 13 percent on the acquired companies in Q2. Is that comfortable? In Q2, the Completion and Other Services at Ranger were in the low single digits. Is that a fair comparison? I’m just trying to confirm my understanding of what kind of margins might flow through in the near term without expecting a significant price change compared to the current market.

Brandon Blossman, CFO

Yes, it's a fair question, and it's somewhat of an apples and oranges comparison. The 13% gross margin is a figure from the field that doesn't account for any overhead from the two acquired businesses. Additionally, the Mallard business's EBITDA margin does factor in regional and field-level administrative costs. Therefore, comparing our reported Completion and Other Services businesses to the gross margins of the acquisitions isn't entirely straightforward. However, you could make your own estimates regarding the overhead needs of those two acquired businesses and incorporate that into your model. The 13% gross margin likely reflects what those businesses could have contributed if they were part of Ranger in the first and second quarters. We aim to provide results in the third and fourth quarters that align with this perspective.

Bill Austin, Interim CEO and Chairman

And some of that speak is, we're not bringing much SG&A over so...

Brandon Blossman, CFO

He's subtle here.

Bill Austin, Interim CEO and Chairman

His subtlety is even lost on me. So we're not bringing a lot of SG&A.

Daniel Burke, Analyst

Look, guys, I appreciate those comments. And I should say congrats on closing those deals. Those are certainly meaningful for the Company.

Operator, Operator

The next question comes from William Kim with CDS Asset Management.

Unidentified Analyst, Analyst

Congrats on the deal closes in the past couple of quarters here. My question's more related to those acquisitions actually. So is it fair to say that those acquisitions are viewed more as a deleveraging transaction, given that they were mostly paid for by stock?

Bill Austin, Interim CEO and Chairman

Well, I wouldn't classify it as deleveraging. Our leverage is quite modest, as we've taken on around $11 million in debt. This move really expands our foundation, providing us with two strong pillars to support our business. We also have a growing Process Solution segment that we expect to return to its historic performance. In terms of wireline and rigs, we now have two solid segments to work with. Previously, our wireline business was a bit too narrow, generating good profits in certain areas but lacking the breadth and flexibility we now possess. Therefore, I wouldn't call it deleveraging. This will contribute significantly to EBITDA, and from an EBITDA perspective, we should see lower EBITDA leverage. But...

Brandon Blossman, CFO

Yes. I would say, it's a push in terms of leverage as we sit here today. I'll note to Bill's point that as we move forward, the wireline business is particularly maintenance CapEx-light and, therefore, a lot of that, if not almost all of that EBITDA drops down to the cash flow line. And therefore, over time, it will be, we think, very aggressively deleveraging in terms of the ability to deliver cash flow back into the organization.

Bill Austin, Interim CEO and Chairman

Look, that's right.

Unidentified Analyst, Analyst

Yes, that makes sense. And as far as the pro forma capital structure for these transactions, I wanted to make sure I'm looking at this correctly. Could you provide what your share count would be pro forma for the transaction, inclusive of the A and B shares? And what the pro forma debt looks like?

Brandon Blossman, CFO

Yes. So the total share count is just under 18 million currently, approximately 17.89 million shares. The pro forma debt, compared to what we exited Q2 at, will be an additional $11.4 million.

Bill Austin, Interim CEO and Chairman

And there'll be some incremental share count when we terminate this TRA and convert the Bs to As. But it's pretty small. It'll push us over 18 million.

Unidentified Analyst, Analyst

Okay. Okay. And is that from options being exercised? Or what would be the cause of that?

Bill Austin, Interim CEO and Chairman

Yes. Essentially, while we are in discussions to terminate the TRA early, we have reached a preliminary agreement. We need to finalize it, but we will be issuing some shares as part of that process. I haven't specified the amount, but it will be a relatively modest figure.

Unidentified Analyst, Analyst

Okay. And I want to make sure, Bill, I heard you correctly. Earlier, you are seeing a current run rate of $350 million of revenue annualized. Is that right?

Bill Austin, Interim CEO and Chairman

That's correct.

Unidentified Analyst, Analyst

So if we would look at that as a combined business with the recent acquisitions and kind of flow through to a free cash flow number, you mentioned in your press release with the acquisitions a target margin of 20%. Is that something that's still in mind? Because I just wanted to make sure, based on the previous questioning and that statement, that they seemed a little bit different there.

Bill Austin, Interim CEO and Chairman

I mentioned a target for the high-spec rig, but I'm not certain I specifically used that term. We're actually exiting the second quarter with a higher margin than expected for the high-spec rig. Over the next several quarters, we should see some margin improvements across both segments. This won't all occur in the third quarter, but I anticipate good performance for the rigs in that quarter. The wireline segment will begin to show improvements in the third and fourth quarters.

Unidentified Analyst, Analyst

Got it. I guess a final question for you. On the XConnect gun system, so you have a warrant structure to own 30% of the business. How do you guys look at that business? And what do you think that's worth? Who is the other owner in that business?

Brandon Blossman, CFO

The owner of the XConnect gun manufacturing business is also the seller of the PerfX business, which primarily supplies guns for the acquired PerfX operations. We expect this to continue in the future. We have the option to increase our market share or consumption of those guns based on customer acceptance as we proceed. While it's not a joint venture, we are fully aligned in seeking success from them regarding their manufacturing process and the market acceptance of their guns. They view us as a significant partner for driving sales.

Bill Austin, Interim CEO and Chairman

But basically, we have access to three guns. How are we doing, operator?

Operator, Operator

Yes. I think we're done with all questions. I would like to turn the conference back over to Bill Austin for any closing remarks.

Bill Austin, Interim CEO and Chairman

I think I've said enough on this call. I want to thank you all for participating. I look forward to putting somebody else in this chair for the next call, but I'm actually having some fun. We're doing all sorts of good things at this company. And my wife will shoot me for saying that, but I'm actually having a little bit of fun here. All right. Talk to you soon. Thanks. Bye.

Brandon Blossman, CFO

Thank you.

Operator, Operator

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