Earnings Call Transcript - TUSK Q2 2022

Operator, Operator

Greetings, and welcome to Mammoth Energy Services Second Quarter Earnings Conference Call. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host Ken Dennard, Investor Relations.

Ken Dennard, Investor Relations

Thank you, Operator. Good afternoon, everyone. We appreciate you joining us for the Mammoth Energy conference call to review 2022 second quarter results. This call is also being webcast. It can be accessed through the audio link on the Events & Presentations page of the Investor Relations section at www.mammothenergy.com. Information recorded on this call speaks only as of today, July 28, 2022. So, please be advised that any time-sensitive information may no longer be accurate as of the date of any replay listening or transcript reading. I would also like to remind you that statements made in today's discussion that are not historical facts, including statements of expectations or future events or future financial performance, are forward-looking statements made pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995. We will be making forward-looking statements as part of today's call, and that, by their nature, are uncertain and outside of the company's control. Actual results may differ materially. Please refer to the earnings release that was issued today for a disclosure on forward-looking statements. These factors and other risk factors and uncertainties are described in detail in the company's filings with the Securities and Exchange Commission. Management may also refer to non-GAAP measures, including adjustments to net income and loss and adjusted EBITDA. Definitions of these non-GAAP measures and their reconciliations to the nearest GAAP measures can be found at the end of the earnings release and in the investor presentation, which can be found on the website. Mammoth Energy assumes no obligation to publicly update or revise any forward-looking statements. And now, with that behind me, I would like to turn the call over to Mammoth Energy's CEO, Arty Straehla. Arty?

Arty Straehla, CEO

Thank you, Ken, and good afternoon, everyone. I'll begin with a review of the second quarter followed by an overview of our businesses before turning the call over to Mark to review our financials in more detail. We are pleased with our second quarter results and the performance of each of our business segments. In addition, we believe that the trend lines look very positive for our business across the board as we enter the second half of 2022 and extending into 2023. Overall, second quarter results marked significant improvement, and we believe serve as a notable inflection point for Mammoth. Total revenue was $89.7 million, up 44% sequentially from our 2022 first quarter revenue. Net income was $1.7 million, a major positive swing compared to the net loss of $14.8 million we reported in the first quarter of 2022. And our second quarter adjusted EBITDA was $23 million, a sequential increase of 147% compared to $9.3 million for the first quarter of 2022. Our robust second quarter growth in revenue, net income, and adjusted EBITDA resulted from substantial gains in our infrastructure services, well completion services, and our sand business. Looking at our Infrastructure Services segment, we continue to grow and build upon our positive momentum in the first half of 2022 after becoming cash flow positive exiting 2021. Since the first quarter, we've been adding crews; currently, we have more than 100 crews, and we expect to add additional crews in the coming weeks in preparation for the seasonal storm restoration services anticipated in the third and fourth quarters. The overall infrastructure backdrop remains strong, and we believe the passage of the federal infrastructure bill last fall will provide opportunities in the infrastructure space for years to come. As we’ve said previously, we anticipate the federal spending to begin stimulating project lettings across the sector later this year and into 2023. I'm proud of our infrastructure team's commitment and hard work to mitigate the myriad of headwinds in today's challenging economic environment as we remain disciplined with our capital spending to continue to improve Mammoth's cost structure. Moving to our Well Completion Services segment, we posted the strongest quarter we've seen since mid-2019, resulting from the robust macro demand that the pressure pumping industry is experiencing. We currently have four pressure pumping fleets operating, which have full schedules through the end of the year, and we expect to activate a fifth fleet in the fourth quarter. Looking to 2023, we plan to activate our sixth fleet in the first quarter of 2023, and we’ve plans to acquire or build a new Tier 4 dual fuel system in 2023. We anticipate operating seven pressure pumping fleets by the end of 2023. At today’s pricing, we would expect seven operating fleets to generate between $63 million and $84 million in net income per year and between $105 million and $126 million in EBITDA per year. Our sand business is also experiencing strong demand as well as increased pricing, which we believe will continue to improve in the back half of the year and into 2023. Mark will provide details on our increasing tonnage produced and improving pricing metrics. I am very proud of our entire Mammoth team's continued commitment and hard work to push through the challenges we have faced over the last few years, and I'm confident that we are well equipped to build on the improvements we have made this quarter. We believe our diverse portfolio and ability to adapt quickly to changing environments positions us well in these segments. Moving forward, we continue to see improved macroeconomic trends that we believe will drive increased demand. Turning now to an update on PREPA. We continue our efforts to hold PREPA accountable for their contractual and financial obligations. Both FEMA and the Financial Oversight and Management Board for Puerto Rico have roles to play, and we continue our efforts to hold both of them accountable as well. The implications of this ongoing delay are enormous for both the people of Puerto Rico as well as the unsecured creditors of PREPA. Interest piles up on unpaid bills at more than $3.5 million each month, and our PREPA receivable now stands at $358 million. We are working diligently with congressional leaders to reach a fair resolution, and we remain confident that the successful work we performed during the time of crisis and national disaster recovery should be and will be paid to the company. Now let me turn the call over to Mark to take you through Mammoth's financial performance during the second quarter before we open the call to questions.

Mark Layton, CFO

Thank you, Arty, and hello, everyone. As I usually do, I'm going to take this time to provide additional details on some meaningful metrics and several key highlights. A detailed breakdown of our results can be found in our earnings release and in our 10-Q. Mammoth's total revenue during the second quarter of 2022 came in at $89.7 million as compared to $47.4 million during the second quarter of 2021 and $62.3 million during the first quarter of 2022. The 44% sequential increase in revenue is primarily attributable to the more favorable macroeconomic environment surrounding our key business segments, most notably, well completion services, which posted the strongest quarter since mid-2019. We are also seeing increased demand and pricing across our sand and infrastructure businesses, which we believe will continue into the back half of the year and into 2023. We intend to continue leveraging our differentiated service offerings to build upon the earnings growth that we realized in the second quarter. During the second quarter of 2022, we pumped 1,716 stages with approximately 3.5 fleets utilized on average. This average compares to an average utilization of 0.9 fleets during the same quarter last year and 1.6 fleets during the first quarter of 2022. Our sand division sold approximately 350,000 tons of sand during the second quarter of 2022 compared to 255,000 tons of sand during the same quarter last year, and 329,000 tons of sand during the first quarter of 2022. The average price for the sand sold during the second quarter of 2022 was approximately $26.86 per ton as compared to $21.44 per ton during the first quarter of 2022. Our Infrastructure Services division contributed revenue of $25.6 million in the second quarter of 2022 compared to $18.4 million in the second quarter of 2021 and $23 million for the first quarter of 2022. The increase in revenue versus the prior year period is primarily attributable to the increase in storm-related activity, resulting in higher storm restoration revenue. Net income for the second quarter of 2022 was $1.7 million as compared to a net loss of $34.8 million for the second quarter of 2021 and a net loss of $14.8 million for the first quarter of 2022. Adjusted EBITDA, as defined and reconciled in our earnings release, was $23 million for the second quarter of 2022 as compared to a negative $3.3 million for the second quarter of 2021 and $9.3 million for the first quarter of 2022. CapEx for the second quarter of 2022 was approximately $2.8 million. This was up from the $1.2 million of CapEx that we incurred during the first quarter. The sequential increase in CapEx was related to the increase in pressure pumping fleet utilization within our well completion services division, which we anticipated and guided towards last quarter. We expect CapEx for 2022 to be approximately $20 million, an $8 million increase from our previously announced CapEx guidance for 2022. We intend to fund our 2022 CapEx with cash flow from operations, cash on hand, and borrowings under our revolving credit facility. As of June 30, 2022, we had cash on hand of $12.7 million and debt of approximately $85.5 million. Our total liquidity was approximately $27 million. In conclusion, we would like to thank our nearly 1,000 employees throughout the company for their hard work, dedication, and commitment to maintaining safe and sustainable work sites for themselves and their teammates. As we look ahead to the second half of the year, we believe that the strong macroeconomic backdrop surrounding industrials and oil and gas gives us significant opportunity to capture additional market share. As always, we will maintain our emphasis on operational excellence and efficient execution, which we believe will drive meaningful shareholder value. Operator, we would now like to open the call up for questions.

Operator, Operator

Our first question is from John Daniel with Daniel Energy Partners. Please go ahead.

John Daniel, Analyst

Hey, guys. Good afternoon and thank you for letting me get in the queue.

Arty Straehla, CEO

Hey, John.

John Daniel, Analyst

Hey, there. I didn't get a chance to read the press release because I'm driving. But in thinking about your frac business, you have done an impressive job. You weren't quick to reactivate when margins were low, and now you're reactivating at a very opportune time. So congratulations on that. I'm interested to know what other assets you have from the legacy that you might be able to replicate, such as coil or other things.

Arty Straehla, CEO

We are trying to be as entrepreneurial as possible. It's good to talk to you; it feels like old times. However, we don't believe it's the right time to reinvest in coiled tubing. We have our equipment ready at one location, and we will consider re-engaging if the pricing aligns with our goals. We're discussing the number of rigs in the market and evaluating the situation continuously. Our rental equipment is essentially sold out, and our water transfer services are performing well. We're optimistic about our other equipment and are closely monitoring rig counts, which are on the rise. We're aware that once we reach around 800 rigs, we need to analyze the situation carefully, as pricing will likely increase.

John Daniel, Analyst

Right. So it's on the table as an opportunity?

Arty Straehla, CEO

It is.

John Daniel, Analyst

Fair enough. You have a lot of experience with equipment assembly, and supply chain issues have been significant recently. I'm wondering if you could share your thoughts on the market, particularly regarding spare parts for major components like engines and transmissions, and how that might be affecting the business.

Arty Straehla, CEO

Yes, that's a great question. We recently launched our Duncan facility, initially focused on refurbishing T&D equipment. However, this team has a successful history of producing $70 million to $80 million worth of frac equipment annually. We still have the same manufacturing capabilities and are actively refurbishing frac equipment. This has been extremely beneficial as Caterpillar and other suppliers are currently facing significant backlogs. Our team often receives calls from Caterpillar seeking parts that are commonly used in the 3512 Cs and TH55 transmissions, indicating that sourcing parts is quite challenging right now. Despite this, we are working on 20 dual fuel frac pumps and are planning to add another 20, which will enhance our dual fuel capabilities. Additionally, our goal for next year is to either acquire or introduce a dual-fuel Tier 4 fleet.

John Daniel, Analyst

I'm going to squeeze one more and then turn it over because you said something I think my interest, you said, Cat is calling you every other day. I mean, is that unusual that they would be calling you looking for help when they should be calling you to sell you stuff?

Arty Straehla, CEO

Well, it's unusual that they'd be calling for parts.

John Daniel, Analyst

Yes, okay.

Arty Straehla, CEO

I don't think they require the expertise. They also seem to have labor constraints, or at least that's the information we have. Additionally, the lead time for introducing new items is longer than ever before. This was one of the reasons we decided to bring our manufacturing back into that area to assist with engine changes and get them up and running.

John Daniel, Analyst

Okay. Thank you very much. Good quarter and I hope PREPA sees the right thing that it is to pay their obligations and I will leave at that. Thanks, guys.

Arty Straehla, CEO

Thank you, John.

Ken Dennard, Investor Relations

Arty, we received a few questions from investors who couldn't join the call, and I thought I would share those questions with you so you can respond to them for the transcript and for the replay.

Arty Straehla, CEO

Sure.

Ken Dennard, Investor Relations

Regarding the sand business, given the strong market conditions, please tell us about your current sand capacity and your ability to expand with timing and cost.

Arty Straehla, CEO

We are optimistic about our sand business. Currently, we are producing about 120,000 tons per month, with the potential to increase that to approximately 150,000 tons later in the third quarter or in the fourth quarter. At the same time, we are seeing favorable pricing, which reflects a robust market for us. We have weekly meetings with our leadership team, and last week our average sales price was noteworthy, especially since we offer a range of grades. An average sales price exceeding $31 during that period is a strong signal of positive trends ahead. However, we do face significant challenges, such as rail turnarounds, which impacted us in the first quarter, improved slightly in the second, and are showing further strength now. Additionally, we have encountered situations where customers have been storing sand, leading us to implement new policies. Overall, we plan to expand our capacity and increase tonnage at our plants in the third and fourth quarters.

Ken Dennard, Investor Relations

Thanks. And the same investor asked about your frac business. Can you discuss current market conditions in pressure pumping, and that I think he's going to have a second question after that.

Arty Straehla, CEO

Sure. We have addressed many of these questions through our earlier discussions. The frac operations are performing well. Our four fleets are fully booked for the rest of the year, and we are bringing in a fifth fleet in the fourth quarter, which is also sold out. We plan to add a sixth fleet and potentially a seventh, depending on supply chain conditions and other variables. As with any business, we face challenges, particularly with labor and turnaround rates. I've mentioned issues with procuring parts, but our vertical integration strategy, which includes manufacturing capabilities that allow us to switch from T&D equipment to refurbishing, has significantly improved our output. We are refurbishing frac equipment and getting it ready for deployment, which has accelerated our delivery times by 5 to 10 weeks for some equipment that would have otherwise been delayed. In certain basins, water supply is a notable concern. Our vertical integration in the frac business has been beneficial; we have our own trucking and last-mile logistics that support our operations significantly. We also have our own sand supply, which helped us during the tight supply conditions in Q1 and early Q2. Overall, we are optimistic about the future of our frac business and believe we can achieve substantial growth.

Ken Dennard, Investor Relations

Thanks. Moving to infrastructure, could you provide an update on that business and the deployment of crews?

Arty Straehla, CEO

Yes, sure. Since the end of last year, we have grown by 20 crews, continue to grow that business. We are up over 103 crews. The significance is that we are also building transmission, which everybody knows that follows that business; between transmission and distribution, transmission is a better margin of business. So we continue to build that business to continue to add crews. We continue to build our fiber business. It's growing significantly with about six projects going now and more on the board, and we think that there is a significant way to make some pretty good money. We've been building our street lighting groups as well. And then again, the vertical integration model, we have our own engineering. We have grown our engineers by 33% since the end of last year and continue to build that business. That business is doing close to $1 million a month in revenues. So we feel good about the infrastructure business. We feel good about the pivot we made in '17 to offset a little bit of the oilfield, and now the oilfield has come back. And we just feel good about the direction of where TUSK is going.

Ken Dennard, Investor Relations

Thanks. Operator, if you want to queue one more time to see if there's any questions from the field. And otherwise, we'll wrap up this quarter.

Operator, Operator

Thank you.

Ken Dennard, Investor Relations

Looks like nobody is queued up. So Arty, turn it back to you for closing comments.

Arty Straehla, CEO

Yes, thank you, Ken. Appreciate it. Certainly, I want to thank our team for all they've done this quarter to make us successful. We believe the future is bright for us and our team as we continue to strategically develop our service offerings to grow and deliver stockholder value in the years to come. This concludes our conference call. Thank you all for joining.

Operator, Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for participation.