U.S. Well Services Inc. (USWS) Q2 2021 Earnings Conference Call August 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
John Daniel - Daniel Energy Partners
Stephen Gengaro - Stifel
Daniel Burke - Johnson Rice & Company

Operator

Hello, and welcome to U.S. Well Services Second Quarter Earnings Conference Call and Webcast. [Operator Instructions]. As a reminder, this conference is being recorded.

It’s now my pleasure to turn the call over to Josh Shapiro, Vice President of Finance and Investor Relations. Please go ahead.

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 second 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.

Yesterday afternoon, U.S. Well Services released its second quarter 2021 earnings. The earnings release can be found on the company’s website at www.uswellservices.com. The company also intends to file its Form 10-Q with the SEC this afternoon. Please note that the information reported on this call speaks only as of today, August 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.

And 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. I would like to thank the entire U.S. Well Services team for their dedication and focus during a period of great change. Because of them, we delivered strong results, generated adjusted EBITDA of $36.9 million. On a per fleet basis, our annualized adjusted EBITDA from hydraulic fracturing grew by 39% to $7.3 million. Kyle will provide additional detail on our financial performance in the second quarter. But first, I want to provide context around U.S. Well Services’ decision to exit the diesel market and become fully electric.

Throughout the process to become a public company in 2018, we told the market that U.S. Well Services fleet would someday be all electric. Since then, our team has worked hard to make this goal a reality. We have been studying the market and monitoring the regulatory environment, all while developing innovative technology to meet the needs of our customers.

Over the last several quarters, pressure on E&P companies to grow cash flow and reduce greenhouse gas emissions has intensified. And as a result, demand for next-generation fracturing solutions has surged. Meanwhile, the market for legacy conventional diesel fleet remains oversupplied with equipment and pricing has yet to recover to pre-COVID-19 levels.

We believe these trends are not cyclical but are permanent. Demand for older diesel equipment and higher emissions profiles is unlikely to recover. In response, we made the decision to accelerate our strategic transition to all electric frac services and technology company, and we continue to work tirelessly to execute this plan.

In May, we announced the introduction of our newest Clean Fleet pump design, the Nyx. Nyx is a 6,000 horsepower dual pump trailer that represents the highest spec pump the market has ever seen. This design was informed by 7 years of operating history and is custom tailored to deliver efficient, clean completions for our customers. We recently announced our plans to build 4 new Nyx Clean Fleets. Each fleet will consist of 10 dual pump trailers totaling 60,000 horsepower. We expect to take delivery of the first Nyx fleet in mid-Q1 2022.

In connection with our decision to exit the diesel frac business, U.S. Well Services is in the process of divesting of noncore assets, including conventional diesel-powered frac equipment and certain power generation assets. To date, we have completed over $21 million of asset sales using proceeds to repay borrowings on a senior secured term loan. We expect the pace of asset sales to pick up in the third quarter and that we will remain active in selling equipment throughout the remainder of the year.

Our strategy from here is simple. We’re going to continue to deploy the most advanced, cost-effective and low emissions fleets in the industry, deliver best-in-class service quality and reduce our debt load as we sell legacy assets.

Now I would like to turn the call over to Kyle to review our second quarter financial performance.

Kyle O’Neill

Thanks, Joel, and good morning. U.S. Well Services averaged 9.3 active fleets during the quarter, with a utilization rate of 85%, resulting in 7.9 fully utilized fleets. Revenue for the second quarter was $78.8 million, up 3% sequentially. Not included in this number, is a $22.5 million of income generated as ProFrac converted its license linked note purchase in our June 2021 offering into 3 $7.5 million options to license the Clean Fleet technology.

Looking at our service and equipment revenue. We saw a 5% increase quarter-over-quarter on revenue per fully utilized fleet. Revenue from our -- from the sale of materials, including sand, chemicals and trucking and sand storage grew over 80% sequentially as a greater share of our customers opted to source materials through U.S. Well Services. Cost of sales for the quarter was $59.3 million, down 5% from the first quarter cost of sales of $62.6 million.

While this sequential decrease was primarily related to lower fleet activity, I will note that repair and maintenance expense on a per pump hour basis declined 7% quarter-over-quarter as electric fleets made up a larger proportion of our total working fleet. During the second quarter, we continued to feel the impact of rising inflation across various points in our supply chain, most notably were the increases in trucking costs, fuel and lubricants.

We’re working with our suppliers to keep costs increase under control. In many cases, will pass some or all of the cost increase through to our customers. SG&A was $7.2 million for the second quarter, down 2% from the prior quarter. Excluding stock-based compensation, SG&A was approximately $5.5 million as compared to $5.9 million in the first quarter. Sequential decrease was driven mostly by a reduction in professional fees.

Adjusted EBITDA was $36.9 million for the second quarter. Included in this figure is $22.5 million of income attributable to the licensing of the Clean Fleet technologies and patents. Adjusted EBITDA from hydraulic fracturing operations was approximately $14.4 million for the second quarter, up 25% from the first quarter adjusted EBITDA of $11.5 million.

Annualized adjusted EBITDA per fully utilized fleet was $7.3 million, up from $5.2 million in the previous quarter. Maintenance capital expenditures on an accrual basis were $4.8 million for the second quarter. On an annualized basis, our adjusted EBITDA less maintenance CapEx per fleet was approximately $4.4 million.

Looking at our balance sheet. The company ended the quarter with total liquidity of $70.7 million, consisting of $12.6 million of availability under our ABL facility and $58.1 million of cash. I want to add some additional color on our plan to use asset sales to reduce our term loan balance.

At the end of the second quarter, our total principal balance on the senior secured term loan was $233.7 million. So far in the third quarter, U.S. Well Services has completed $19.2 million of asset sales. After applicable prepayment penalties, our principal balance was reduced by $18.9 million. We expect to repay an additional $14 million of borrowings in the near term as pending transactions close.

If we are successful in reducing our term loan balance to $110 million by the end of 2021, U.S. Well Services will pay 0% interest on our term loan for the first quarter of 2021 and 2% interest on the remaining 3 quarters of the year. Additionally, the loan balance is less than $103 million by April 1, 2022, our interest rate on the entire term loan will be 1% for Q2 through year-end.

Before Joel offers some final remarks, I’d like to provide details on the transaction we completed at the end of June and how we anticipate our capital structure will evolve over the next several quarters. The initial transaction, we issued $125.5 million of 16% convertible senior secured third-lien PIK notes and received $86.5 million of gross proceeds. $22.5 million of the notes were license-linked notes, convertible into 3 $7.5 million licenses to build and operate Clean Fleets.

Prior to the end of the quarter, the license-linked notes were converted in full and U.S. recognized -- U.S. Well Services recognized $22.5 million of income. $103 million of the notes are convertible into U.S. Well Services common stock at a weighted average price of $1.42 per share. $39 million of $103 million of the equity-linked notes represents an exchange of our Series A convertible preferred stock into convertible senior notes, reducing the outstanding balance of our preferred As to $25.2 million from $62.2 million.

Since the end of the quarter, U.S. Well Services has issued an additional $11 million of notes convertible into common stock at a weighted average price of $1.13. The convertible notes automatically convert to common equity once our preferred shares are converted or redeemed in our 20-day volume-weighted average share price exceeds $2 for 10 out of 20 consecutive trading days.

This offering not only helps us fund our upcoming growth capital expenditures for our new Clean Fleets, but also when combined with our asset sales discussed earlier, is a huge first step for the goal of delevering the balance sheet and simplifying our capital structure. With that, I’ll turn the call back over to Joel.

Joel Broussard

Thanks, Kyle. U.S. Well Services has always been on the leading edge of hydraulic fraction technology and solutions. I’m excited for what this team will deliver over the next several quarters as we continue to execute our strategic plan and transition towards full electrification. Operator, please open up the call for questions and answers. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question today is coming from Ian MacPherson from Piper Sandler.

Ian MacPherson

It’s great to see the value of your IP validated here and monetized in a really strong way. So congratulations on that.

Joel Broussard

Thank you.

Ian MacPherson

When we cascade down from where you are to where you will be, call it, 3 quarters from now, fully disposed from diesel and up and running with probably the first Nyx. How much of -- can you help us think about the glide path of your EBITDA? In other words, was conventional horsepower a meaningful contributor to the EBITDA we saw in Q2?

If so, how much of that do you need to sell away immediately? Or can you accomplish some of your second half asset sale objectives without immediately selling away your remaining EBITDA contribution from your last maybe couple of working conventional fleets? Can you talk to that at all?

Joel Broussard

Yes, sure. The EBITDA contribution from the diesel fleet for the first half of the year was minimal due to diesel pricing not recovering as quick as we thought. We currently -- I think, June, we had 1.5 diesel fleets working. We currently have 1 left today that is going to be finished on the 26th. So we’ll be wrapped up with diesel on 26th of August. Josh, do you want to elaborate on that a little bit?

Josh Shapiro

Yes, sure. I mean I think what Joel said there is right that the contribution from diesel fleets was fairly minimal throughout the first half, and we would expect to see at least fleet-level profitability stay where it has been and then improve as we start deploying the Nyx fleets and absorbing more overhead.

Joel Broussard

SG&A would drag down the profitability until we get back to 10 electric fleets.

Ian MacPherson

Yes. Yes. Got that.

Joel Broussard

We’re transforming the company, and that’s just part of the transformation process.

Ian MacPherson

Yes. Yes. We have some transitional quarters ahead, for sure, with absorption, I get it. When you’re -- you’ve announced several new customer trials, and I know that you’ve got probably a pretty significant upgrade to your offering with Nyx. Can you talk about the perspective economics and really the return objectives that you have for your next new builds and how they compare to the EBITDA per fleet you’re earning on your earlier generation Clean Fleets today.

Joel Broussard

Yes. We -- on the new fleet economics, we expect a 24-month payback on the first we’re building, and that’s on a cash basis. The trials that we’ve done, every person we trial for so far is interested in going electric or -- and we feel that the 4 fleets we’re building will have more -- we have more demand than equipment for our new generation electric fleets.

Ian MacPherson

Not surprisingly. I have a few more I can take up with you guys off-line.

Operator

Our next question today is coming from John Daniel from Daniel Energy Partners.

John Daniel

I guess the first one will go to you, Joel. Just clearly, the demand for this equipment is on the rise, but we’re seeing sort of 2 paths, right, that people going electric and then some others opting for Tier IV DGB. What do you think is driving the customer preference between the 2 at this point?

Joel Broussard

Josh, do you want to take that one?

Josh Shapiro

Yes, sure. So John, I think what we’re seeing here is customers are gravitating towards next-generation solutions, whether that’s electric or Tier IV DGB and the reason is twofold; it’s the fuel cost savings and then emission reductions. And from our view, really the Tier IV DGB offers a partial solution on both of these.

As far as fuel cost goes, the higher the fuel -- the rate of diesel substitution, the more cost savings customers will enjoy with the dual fuel. But no dual fuel fleet really eliminates diesel entirely and most are using CNG when they are operating burning natural gas.

So there’s some fuel cost savings versus a conventional diesel fleet, but not nearly to the same degree as a customer would enjoy if they’re using one of our electric fleets and burning field gas. And really, the same thing goes on emissions. Tier IV DGB engine is a Tier IV engine. And those engines were not designed to reduce carbon dioxide emissions. They were really designed to reduce NOx particulate matter nonmethane hydrocarbon type emissions. And so the performance of a Tier IV engine versus Tier II engine on CO2 emission is pretty similar.

And so while the Tier IV DGB engine will provide some benefit here, it does suffer from things like methane slip from incomplete combustion of the natural gas. And so the emissions might be better than a Tier IV diesel, but not nearly to the same degree as our electric fleets. However, I think where customers prefer the DGB is they’re more readily available.

Today, electric fleets, we estimate that they’re less than 10% of the active fleet. And so being able to access some portion of these benefits will drive them towards a DGB over electric. But I think the preference for electric is stronger given the more complete benefit package.

John Daniel

And that’s -- I’m just what curious more about is like when you talked about customers on another route, if it’s because maybe you guys are looking for multiyear sort of backing for your project, whereas the other solutions might be less expensive. So there’s less of a commitment. I don’t know if you’ve seen any color like that, that’s all.

Joel Broussard

We’re actually looking for a 12-month commitment now, John. So -- and also, we operate Tier IV engines. I know how much those costs on a CapEx basis to operate and electric is just so much cheaper.

John Daniel

And just the next question I want to dig into because you referenced the lower maintenance cost this quarter, given sort of the transition away from conventional. Can you guys elaborate a little bit more on sort of like-for-like the maintenance cost per fleet between the 2 now that you’re -- just anything there would be helpful.

Joel Broussard

Josh?

Josh Shapiro

Yes, sure. I mean historically, we’ve seen 35% to 40% all-in cost advantage for the electric versus the diesel. And I think you’ll start to see more of that play out in numbers as we’re able to eliminate diesel operations from our financial results we report.

John Daniel

Fair enough. And then the final one...

Joel Broussard

John, that really showed up in this quarter earnings when you look at our EBITDA versus maintenance CapEx. And we still have a few diesel fleets working, but if -- that is nearly approved.

John Daniel

I just remember from years ago in New Republic, that was something you guys talked about, it was hard to see, and now it feels like we’re able to see it, so...

Joel Broussard

We’ll really get to see in the last -- from September, October, November, we have no diesel cut in the working.

John Daniel

Okay. And then the last one, guys, hopefully, you can answer, but we know that some of the equipment went to Alamo because that went out via 8-K. I’m not sure if you can name the buyers of what’s been sold subsequent or what’s on the docket. But can you describe for us the type of buyer, whether it’s existing player, a new player? Or just any color along those lines would be helpful.

Joel Broussard

Josh, do you want to take that one? You’ve be handling most of the asset sales.

Josh Shapiro

Yes, sure. So it’s -- the interest has been kind of across the board. There have been service companies interested in buying some of the equipment, some resellers, some refurb shops. So I’d say the interest has been pretty wide. The bulk of what we sold to date in the third quarter was to Alamo in the transaction that we kind of publicly disclosed as well as a buyer, nonservice company.

Operator

The next question is coming from Stephen Gengaro from Stifel.

Stephen Gengaro

Two things, if you don’t mind. The first is you referenced the profitability in the quarter and not having a lot of diesel contribution in the EBITDA line. So just kind of back of the envelope, I mean, when we sort of do the math on how many Clean Fleets are out there in your current fleet, it looks like EBITDA per fleet is running like around $9 million in the quarter for the electric assets. Is that a ballpark reasonable number?

Joel Broussard

Kyle, do you want to take that one?

Kyle O’Neill

Yes. I mean, I think that’s -- we don’t report the electric versus the diesel, but the electric equipment is definitely at a substantial premium. So that’s within the realm of kind of a reasonable range.

Stephen Gengaro

Okay. You’re going to have to report just electric soon, Kyle. But that kind of step-up is not a ridiculous thought process as you go into the next quarter given the amount of fleet you plan to have work and seem to be all electric.

Kyle O’Neill

Yes. I mean I’ll caution you that as we drop from -- I think we had almost 8 fleets running in Q2 down to -- we’ll be around 5, you’re going to have the overhead really bite into that. So I think that 9 -- $9-plus million of EBITDA per fleet is kind of field level results and then you’re going to -- that come down with the absorption of overhead.

Stephen Gengaro

Understand that. That’s fair. The other one is -- I’m just trying to think how to ask the question, but when I look at your financial position, right, you’ve obviously -- you’re working to repair the balance sheet, but you’ve also committed to a lot of CapEx.

And it feels aggressive like from our perspective, but I was curious if you could walk us through your expectations for where the balance sheet is now, what the CapEx looks like in ‘20, the back half of this year, 2022, and how you see the balance sheet evolving, can you keep yourself in a reasonably safe position but still fund the growth that you have laid out for us?

Joel Broussard

Kyle?

Kyle O’Neill

Sure. Right. So in the June transaction, we raised from June and then the early part of July, we’ve raised approximately $97.5 million of cash proceeds. That’s resulted in about $50 million after the Smart Sand settlement fees and expenses and some required debt pay downs. So with our new funding -- the cash requirements for these new building fleets will be around $100 million to $115 million. Most of that will be due when the fleets are delivered in early to mid part of 2022.

We’re currently selling assets to reduce the term loan balance. We’re targeting to get that below $110 million from a little over $230 million at the end of the quarter. So we’re looking at about $120 million of debt paydown. And then $50 million to $60 million of additional funding is going to be needed to build on all 4 fleets, which we think we’ll be able to source through.

We’re looking at several different options, including equity equipment financing, et cetera. So we think it’s a very achievable plan, and I think we really need to get to that -- get back to 9 or 10 active fleets to have the critical mass to really start to see the true economic benefits of our Clean Fleets.

Joel Broussard

Yes, I’d like to add one thing to that. We’re going to do it between equity, debt and also additional license sales.

Kyle O’Neill

And just as you think about what we’re building this for -- what we’re building these fleets for and what the economics are, I mean this should be -- the new fleets, combined with the debt pay down should be highly accretive for our shares.

Stephen Gengaro

Okay. Okay. And then the $120 million of incremental debt paydown that you envisioned comes from what?

Kyle O’Neill

Primarily, assets.

Stephen Gengaro

Excuse me?

Kyle O’Neill

From assets.

Joel Broussard

Sorry, Kyle.

Stephen Gengaro

Yes. So those are asset sales in addition to the ones -- the ones that you have already announced so far, right?

Joel Broussard

Correct.

Kyle O’Neill

Well, let me -- we’ve announced about $20 million of asset sales. There would be an incremental $100 million will be through asset sales or scheduled amortization.

Operator

Your next question is coming from Daniel Burke from Johnson Rice & Company.

Daniel Burke

Joel, when you mentioned additional license sales, do you mean to the party that already has the options to, I guess, acquire additional licenses? Or would it be a second or multiple other parties than ProFrac?

Joel Broussard

We feel ProFrac and potentially others at this point.

Daniel Burke

Okay. All right. Fair enough. And then -- maybe just since we’ve talked a little bit about the asset sale plans, they seem pretty key to getting that debt level down by the end of this year. So asset sales have to proceed at a pretty good pace. I think you guys have put out a target of about $130 million in total asset sale proceeds, not to say that would all be completed by the end of this calendar year. But is that still a viable target?

Kyle O’Neill

Yes, that’s still in the range of what we’re targeting.

Daniel Burke

Okay. All right, guys. And then maybe just one other one. When we think about the new fleets coming in on the electric side, can you talk a little bit about the power gen strategy you’ve got in mind for the fleets?

Joel Broussard

Yes. We’re going to leave it up to the client on what they want, whether -- whichever power generation asset they choose. We feel the turbines are the best now and the most environmental friendly. So we’re -- whatever they recommend, whether it’s grid power, whether it’s reciprocating engine, whether it’s turbine, we’ll leave it up to the client.

Daniel Burke

Okay. And Joel, I think the plan would be not to put those on the balance sheet, though, is that fair?

Joel Broussard

Absolutely.

Operator

We reached the end of our question-and-answer session. I’d like to turn the floor back over to management for any further or closing comments.

Joel Broussard

Thank you for your participation in the call. Have a great day.

Operator

Thank you. That does conclude today’s teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.