U.S. Well Services Inc. (USWS) Q3 2021 Results Conference Call November 12, 2021 11:00 AM ET

Company Participants

Josh Shapiro - Vice President of Finance and Investor Relations
Joel Broussard - Chief Executive Officer
Kyle O'Neill - Chief Financial Officer

Conference Call Participants

Ian MacPherson - Piper Sandler
Stephen Gengaro - Stifel
Daniel Burke - Johnson Rice
Derek Podhaizer - Barclays

Operator

Greetings, and welcome to the U.S. Well Services Third Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce you to your host, Josh Shapiro, Vice President of Finance. Thank you. You may begin.

Josh Shapiro

Thank you, operator, and good morning, everyone. We appreciate you joining us for the U.S. Well Services conference call and webcast to review the third quarter 2021 results. Joining us on the call this morning are Joel Broussard, Chief Executive Officer; and Kyle O'Neill, Chief Financial Officer. Following their prepared remarks, the call will be open for Q&A.

Earlier this morning, U.S. Well Services released its third quarter 2021 earnings. The earnings release can be found on the Company's website at uswellservices.com. The Company also intends to file its Form 10-Q with the SEC this afternoon.

Please note that the information reported on the call speaks only as of today, November 12, 2021, and therefore, time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of U.S. Well Services management. However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to review today's earnings release and the Company's filings with the SEC to understand those risks, uncertainties and contingencies.

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.

Now I'd like to turn the call over to U.S. Well Services' CEO, Mr. Joel Broussard.

Joel Broussard

Thanks, Josh, and good morning, everyone. The third quarter 2021 marked the beginning of U.S. Well Services' transition to becoming a fully electric pressure pumping service provider. At the beginning of the second quarter, we were operating five active conventional fleets. And by the end of August, we retired the last of our active conventional fleets. Our results for the third quarter illustrates some of the difficulty we faced in undertaking the strategic transformation as well as the macroeconomic headwinds felt by the entire industry.

As we phase out conventional fleet operations, U.S. Well Services staffed fleet count decreased to 5 fleets from a peak of 11 fleets earlier this year. Although this resulted in reduced headcount for field employees, overall staffing levels remained elevated in order to ensure that we were able to ramp back up early next year when our new Nyx Clean Fleets are deployed. This challenge was amplified by rising labor costs across the industry. Not only did we have fewer fleets to absorb field and corporate personnel costs, but we also implemented a wage increase for employees in late Q3 in order to improve workforce retention. Additionally, U.S. Well Services spent nearly $2 million during the third quarter as we transition to outsourced power generation business model for certain fleets and to prepare legacy conventional diesel equipment for sale.

In early October, we sold three turbine generators for approximately $35 million used in proceeds to repay term loan borrowings. In connection with that sale, we entered to a service agreement, whereby labor and maintenance mobilization and other key costs related to the turbine generators will be borne by the buyers in exchange for a fixed monthly fee.

We also felt the impact of inflation across our supply chain during the third quarter. Rising input prices, along with cost for services like trucking and logistics, impact our results. Although we worked actively to mitigate inflation and pass cost increases along to our customers, it was difficult to track the pace of inflation for much of the quarter.

In spite of these challenges, we remain very optimistic about the future of U.S. Well Services. Over the last several quarters, the pressure pumping industry landscape has changed dramatically. What were once considered gimmicks by many E&P customers, electric fleets and dual fuel fleets have become the most sought-after technologies. Increasingly, we are seeing customers require a service company offer a next-generation solution such as electric or dual fuel in order to bid for work.

With this backdrop, U.S. Well Services is ideally positioned. We believe we have the most premium pressure pumping fleet in the market. Today, we have five all-electric fleets that offer industry-leading fuel cost savings and greenhouse gas emission reductions. As such, commands premium pricing relative to both conventional and dual fuel equipment.

In late Q1 of 2022, we will deliver the first Nyx Clean Fleets, a 60,000 horsepower consisting of 10 dual pumping units. By the beginning of Q3 2022, we expect to have taken delivery of our fourth Nyx fleet, bringing our total fleet to nine all-electric spreads.

We also believe we are the leading technology innovator in our industry. Our expanding intellectual property portfolio has considerable value and demonstrated by our recent license agreement with ProFrac. We are the only pressure pumper to successfully power full fleets using electricity transmitted over high lines, and our proprietary Azure-based industrial IoT platform enables advanced automation and data capture that lowers our cost, improves operating efficiency and provides enhanced insights and transparency for our customers.

Our value proposition is undeniable, and it drives the demand for the premium pricing for our fleets relative to alternative technologies. Take, for instance, our recent project with a customer operating in West Virginia. Over the course of two pads, we displaced approximately 1.5 million gallons of diesel fuel, saving roughly 3.6 million, and cut the customer's CO2 equivalent emissions by 25% for its conventional diesel technology.

Finally, I would like to comment on our balance sheet transformation. Since the beginning of the year, U.S. Well Services repaid nearly $90 million of our senior secured term loan and fully converted our Series B convertible preferred stock into common equity, reducing our debt load and simplifying our capital structure are critical elements to our strategy. We believe ongoing debt reductions will be a key source of value creation for our shareholders.

Before I turn it over to Kyle, I want to thank the U.S. Well Services team for their hard work during such an important time in the Company's history. The sacrifice and efforts our team continues to make is what separates us as an operator and enables us to be on the forefront of pressure pumping technology innovation.

Kyle O'Neill

Thanks, Joel, and good morning, everyone. We averaged 5.7 active fleets during the quarter with a utilization rate of 89%, which equates to five fully utilized fleets. U.S. Well Services reported total revenue of $56.5 million for the third quarter, which is down 28% from the second quarter revenue of $78.8 million, driven by the reduction in our active fleet count.

However, I would point out that our revenue per fully utilized fleet was actually 13% higher in the third quarter than in the second quarter and that our service and equipment revenue per pump hour was higher -- was at its highest level in a year. The improvement in our fleet's revenue-generating potential is fully attributable to the fact that the next-generation pressure pumping equipment garners higher utilization and premium pricing relative to conventional diesel fleets.

Cost of sales in the third quarter was $58.1 million, down 2% sequentially. The reduction in cost of sales was related to the lower active fleet count was partially offset by labor and material cost inflations, onetime operating costs as well as noncash charges related to equity compensation.

During the third quarter, U.S. Well Services felt the impact of widespread inflation. In September, we implemented a wage increase for field employees raising hourly pay rates by approximately 15%. Because our fleets were working under fixed pricing agreements at the time, our increased labor cost was not passed along to customers immediately. Going forward, new contracts and pricing agreements will reflect our higher labor cost and protect us against future labor cost inflation.

Labor cost was not the only area where we faced inflationary headwinds. We saw a significant increase for costs related to trucking, logistics and fuel. Additionally, we incurred approximately $5.5 million of onetime cost in the third quarter, including $1 million of noncash charges related to the write-down in the value of spare parts inventory related to conventional diesel-powered equipment, $1.8 million for third-party labor and repair and maintenance costs related to our exit from the conventional diesel market and transition to outsource power generation for our fleets, $2.3 million for rental equipment and third-party services to replace equipment damaged during the course of a job. We've included these costs in an insurance claim and believe a portion will be reimbursed. And finally, $400,000 spent to mobilize a turbine generator to provide power in Houma, Louisiana following Hurricane Ida.

U.S. Well Services also recognized $1 million in equity compensation expense related to share-based awards granted during the quarter, of which $700,000 was attributable to the first half of 2021 due to a January 1, 2021 vesting date.

SG&A for the third quarter was $11.1 million compared to $7.2 million for the second quarter. Excluding share-based compensation, SG&A was $6.5 million for the third quarter versus $5.5 million in the second quarter. The sequential increase was primarily related to increased professional fees associated with the Smart Sand litigation and ongoing IP litigation.

Adjusted EBITDA was a loss of $465,000 for the third quarter of 2021, and we incurred approximately $1.2 million of maintenance capital expenditures on an accrual basis. During the third quarter, U.S. Well Services spent approximately $22.6 million of growth capital expenditures related to the four new build Nyx Clean Fleets and additional long lead items. We expect to spend between $5 million and $10 million in growth CapEx during the fourth quarter. The majority of the capital expenditures for these new fleets will be incurred closer to when the fleets are delivered beginning in late Q1 of 2022.

Now turning to our balance sheet. The Company ended the third quarter with $47.5 million of total liquidity, consisting of $30.6 million of cash and $16.9 million of availability under our ABL. As of September 30, we had approximately $201.4 million of outstanding principal on our senior secured term loan. To date in the fourth quarter, U.S. Well Services has repaid an additional $44.6 million, bringing the balance on our term loan down to $156.8 million.

As a reminder, if we're able to reduce the outstanding principal balance below $132 million by the end of 2021, the interest rate on the term loan will be at 0% for Q1 of 2022. Moreover, if we reduce the balance below 110 by the end of the year or below 103 by the end of Q1 2022, the interest rate for Q2 through Q4 of 2022 will be 2% or 1%, respectively.

We are continuing to market the sale of our legacy conventional fracturing assets as well as our remaining fleet of turbine generators. We believe the value of these assets exceeds the amount required to be sold in order to continue enjoying interest relief from our senior secured term loan.

With that, I'll turn it back over to Joel for closing remarks.

Joel Broussard

Thanks, Kyle. Since we introduced the first all-electric fleet in 2014, U.S. Well Services has been vocal advocates of electric pressure pumping technology. No other technology offers the same combination of economics, ESG and HSSE benefits, which is why electric fleets continue to grow as a share of the overall U.S. pressure pumping fleet. U.S. Well Services has the fleet technology, expertise and personnel to deliver for its customers and create value for its shareholders, and we continue to believe that the future is very bright for this company.

I'll turn it over to operator for questions. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first questions come from the line of Ian MacPherson with Piper Sandler.

Ian MacPherson

I was going to ask a few. I'll just tee them all up upfront. First, I wanted to ask about visibility into the back half of Q4 for typical seasonal slowdown and what that might mean for your expected utilization rates on your four to five active fleets this quarter. Kyle, you mentioned you'll be recovering some of your 15% wage increases in the fourth quarter. So I just wanted to get a framework for how to think about EBITDA recovery with some of the nonrecurring items trailing off from Q3 and then also more wage recovery in your contracts. And then the last one I'm going to ask about is just maybe more color on the palette with regard to potential disposals that you could close before the end of the year.

Joel Broussard

Thank you, Ian. I'll start off with the last question first. While the challenging quarter to date, we've paid down $1.69 of outstanding debt on an outstanding share basis, and we potentially have another $0.78 per share on outstanding share basis. So we have a little bit more equipment left to sell. Most -- all of it was idle assets, pretty much the majority of that quarter. And getting back to the future, we're keeping our key people in place going from 11 to 10 fleets -- I'm sorry, 11 to 4 fleets, 4 or 5, 4.5. The labor market is tight. We have our key people in place to expand our growth through the first quarter and second quarter. And we feel this transition period, the Company has gone through from exiting all our diesel equipment to growing our electric fleets back to 8 or 9 fleets. We're expecting it to be challenging until we deliver those fleets and deploy those first half of next year.

Kyle, do you want to take the remainder question?

Kyle O'Neill

Sure. Yes. Ian, I think on the recouping of the labor cost, it's going to be 2022 before we see a material movement on that front, largely due to a combination of carrying extra headcount like Joel just mentioned in anticipation of staffing up those fleets and rolling over from existing contracts to new contracts. Most of our existing contracts go through the end of the year. So we won't see some of that recoup of expense until 2022.

Ian MacPherson

Okay. I know that part of your early tranche of, of course, power disposal ended up ultimately in the hands of a competitive public player, but I would imagine that's more the exception than the rule for the rest of what you have that you'd like to sell. I would imagine you -- there are a lot of opportunistic buyers given the current tightness of the conventional market that could make a good bootstrap business out of secondhand horsepower as opposed to what we would think of as a durable, long-standing business plan out of it. So can you speak to how you think the economics for -- I don't know if you want to call it blowdown, but just sort of short-term cash-on-cash economics for the conventional horsepower given the tighter market that we have now relative to the summertime?

Joel Broussard

Yes. I'll take that question. On the -- on selling it to a competitor, we don't feel that we sell any of the diesel horsepower we sell is going to compete with us because most of the customers want electric fleets, that's who we're dealing with. So -- and I wouldn't say that we're not going to sell to another strategic any of our diesel equipment because people are still strategic and newcomers of both actively pursuing the rest of our horsepower.

Operator

Our next questions come from the line of Stephen Gengaro with Stifel.

Stephen Gengaro

So two things for me. What I'd start with is you -- given what's going on with diesel prices, are you seeing a increased premium on the bids for electric horsepower?

Joel Broussard

We're -- we haven't seen that yet and simply because gas prices has gone up with diesel. So we think it's pretty much the same economics as it was in the past.

Stephen Gengaro

Okay. Okay. And as we think about the cost structure that's in place -- and obviously, you're going to be burdened with higher costs near term. As the e-fleets deliver -- and if you could just kind of remind me the exact timing of the four new builds. I think you said that'll all be in place by the middle of next year. Do you think in the second half of next year, I mean, when you think about the pricing you're seeing and how the costs evolve, that you'll be doing sort of a mid-teens EBITDA per fleet number in the second half of next year?

Joel Broussard

Yes, sir.

Stephen Gengaro

Okay. And then just one other one for me. When we -- when you think about the CapEx required in 2022, can you just remind us what's left in '22 on the new builds?

Joel Broussard

On the four fleets we have building, it's approximately -- Josh, help me out.

Josh Shapiro

Yes. Sure. So it's about between $85 million to $90 million for those fleets that we're building. And we're -- we've been in discussions with various equipment lenders, so actively going down that road to get financing to help support that CapEx.

Joel Broussard

And we would do that with a combination of licensing, sales, financing and equity.

Operator

Our next questions come from the line of Daniel Burke with Johnson Rice.

Daniel Burke

Let's see, among the factors listed for the challenges or the higher costs at least on a per-fleet basis in the third quarter was elevated repair and maintenance costs. And I was just wondering if you could talk a little more about that given the ongoing transition in the fleet towards the electric side.

Joel Broussard

Josh, take that one.

Josh Shapiro

Yes. Sure. So some of that, Daniel, was simply as we've phased out fleets from diesel fleets from conventional operations and brought them in, prepare them to sell, we have elected to make some repairs. And any time you're rebuilding an engine or a transmission, it's going to add up pretty quickly, which is part of our reason for getting out of the diesel market in the first place. But we wanted to prepare those to have better value for potential buyers, and I think we've done that thus far. As we've been monetizing these, I think we've gotten a pretty nice premium to what other equipment and asset sales you've seen in the market is and simply because our stuff has been better maintained and really ready to go to work. And so that's been part of why repair and maintenance has been so elevated.

Daniel Burke

Okay. That's helpful to hear. It's more related to the...

Joel Broussard

Repair and maintenance expense, right, Josh?

Josh Shapiro

Yes. That's correct.

Daniel Burke

Obviously, shifting maybe over to the balance sheet and the debt load. You guys are certainly incented to get that term loan balance down. Can you remind me if there's any covenants regarding -- or any operational levels you need to consider in terms of what cash balance needs to be at year-end?

Kyle O'Neill

No, there aren't any covenants related to our cash balance. The agreement does not include any financial covenants of any kind. We have the standard limitations on distributions, name change, M&A, et cetera. But there aren't any metrics that we need to hit with regards to cash. Our primary focus and the main milestones really are those -- the debt levels to achieve the continued interest relief.

Daniel Burke

Got it. And then I guess the last one just to follow up on Ian's question. I don't mean to focus too much on near termism here. But with regard to Q4, it didn't sound like there was much reason to expect the quarter to look a lot different than the adjusted EBITDA performance we saw in Q3. Is that fair? Or there, if anything, maybe it could be a touch light if your end seasonality is a little more pronounced. But are there any factors I'm not thinking about starting from that adjusted EBITDA figure?

Kyle O'Neill

No, I think that's right. We did get hit by a decent amount of standby and NPT time in Q3, which is unusual for this time of the year. And I think that's usually stuff that we see more in Q4 given the seasonality. So I think that Q4 is probably going to look pretty similar to Q3.

Operator

Our next questions come from the line of Derek Podhaizer with Barclays.

Derek Podhaizer

I was hoping you can maybe spend some time on expanding around your conversations with your customers. I think one of the big pushbacks around this recapitalization cycle towards electric that we're seeing unfold is that it's all going to rest on the shoulders of the service companies, and it's not going to be shared economics with your customers. So can you just maybe spend a little time talking to us about what you're seeing with the customers, how those conversations are going? Are all these fleets coming out backed by contracts? What did the paybacks look like? How many years? And you pointed to a double-digit EBITDA per fleet happening sometime mid next year. I think that's [indiscernible]. But just maybe help -- spend some -- help us walk us through why this isn't the service company in the past where they would take on all the costs where this is actually a true shared economics recapitalization cycle.

Joel Broussard

Kyle, you want to take that one?

Kyle O'Neill

Yes, sure. So, yes, I mean I think the way we look at our business model and deploying this capital is that we need to achieve a reasonable payback, and we kind of target 2 to 2.5 years. And it's kind of the mid-teens EBITDA level per fleet and the fleet cost that we've been able to get these electric fleets down to we're able to achieve those goals. Our business plan really has been focused on coming out with a price that is -- it works for both the E&P and for U.S. Well Services. I think that's what we've been able to do historically. If you look at our finance results over time, you'll see that kind of we're almost countercyclical, right? I mean we -- because of our contracts, we try to mellow out the peaks and troughs in financial results, and we've been pretty successful with that.

So I think that once we get back to scale and we're able to absorb a lot of our fixed costs, you'll really start to see that incremental cash flow come in from the new fleets, and the economics will prove themselves out.

Derek Podhaizer

So you said you targeted that $2 million, $2.5 million. Is that the payback you're getting? Should we assume that's kind of the length of the contracts that you're signing that you're not taking recontracting risks with these new assets that are coming out that you achieve your payback within that first contract?

Kyle O'Neill

So most of the contracts that we're going out with right now are for a one-year term with multiple extensions usually at the election of the E&P. So we are not getting full payback just on the initial face term. But when you look at our recontracting rate historically, we haven't had a -- we've had renewals in almost all of our fleets where we've been able to put them to work with another client almost immediately.

Derek Podhaizer

Got it. Okay. That's helpful. And then I just want to switch over to the power gen market. I know you sold a few turbines to a third party. Can you just remind us how many more you have left? And then maybe spend some time -- so I know the Nyx fleet is more power agnostic. Just talk to us about how you've seen that market evolve over the past few months. And any color into what you see unfolding into next year? Obviously, there have been a lot of new market entrants, a lot of different types of power. It'd just be helpful to spend a little time around that and what you're seeing from your seat.

Joel Broussard

Yes. Again, when we first started this, there was nobody in the power generation business for frac, right? We were the first electric fleet. So we -- power generators now that, like as you mentioned, there's a bunch of entrants into the market. We currently have two more turbines to sell, and we have one that was damaged to be an insurance claim. So we have actually three to sell or once -- one is fixed or total. We feel that we leave it up to the client, whether they want a turbine or a reciprocating engine or whatever they would like, that's what we're going to source for the. We know for the first two fleets coming out, the customers want turbines. So if the third and fourth people we're talking to and are currently talking to decide they want reciprocating engines, we'll do what they want to do.

Derek Podhaizer

Got it. And then for -- just on the recip side, would you still be staying more capital-light and working a third party as far as these recips? Or would you be open to going out and purchasing those recips and owning the power?

Joel Broussard

No. Some of our -- a lot of our costs in the third quarter was due to power generation people and outside people. We sold three of them. We're operating two of them. So we're trying to get out of it totally. As soon as we sell these next two, we'll be out of the power generation business, and we'll be able cut costs. So no, we're going to third-party all power generation.

Operator

Thank you. There are no further questions at this time. Ladies and gentlemen, we appreciate your participation. This does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day.

Joel Broussard

Thank you.