U.S. Well Services, Inc. (USWS) Q1 2021 Earnings Conference Call May 17, 2021 11:00 AM ET

Company Participants

Josh Shapiro - VP, Finance and IR
Joel Broussard - CEO
Kyle O'Neill - CFO

Conference Call Participants

Ian MacPherson - Simmons
Stephen Gengaro - Stifel
John Daniel - Daniel Energy Partners
Daniel Burke - Johnson Rice & Company

Operator

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

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

Josh Shapiro

Thank you, operator, and good morning, everyone. We appreciate you joining U.S. for the U.S. Well Services conference call and webcast to review the first quarter 2021 results. Joining U.S. 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 opened up for Q&A.

Earlier this morning, U.S. Well Services released its first 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-K with the SEC this afternoon.

Please note that the information reported on this call speaks only as of today, May 17, 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 would like to turn the call over to U.S. Well Services' CEO, Mr. Joel Broussard.

Joel Broussard

Thanks, Josh and good morning, everyone. The U.S. Well Services' team delivered another strong quarter with significant growth in both revenue and adjusted EBITDA. During the quarter, our operations were impacted by the freeze in Texas resulting in a loss week of 70% of our active fleet. Despite the windstorm and other challenges we faced redeploying fleets, the USWS team did an incredible job. I'm proud of the way this team continues to execute for our customers. Kyle will dive into the specifics of our first quarter financial results. But before he does, I would like to offer a bit of perspective on the current pressure pumping market dynamic.

At this time last year, the outlook for the oil and gas industry was bleak. Demand for crude was oil devastated as the Global Economy shutdown and response to COVID-19, which took WTI prices below zero before selling in the high twenties and low thirties prevailed. There appear to be limited prospects for improvement in commodity prices. And the number of active U.S. frac fleets dropped below 50.

The market backdrop for the upstream oil and gas sector has improved a great deal since that time. WTI crude oil prices have stabilized above $60 per barrel, thanks to a combination of demand growth and a restrained response from global oil producers. First quarter results posted by the U S shale producers demonstrated that the industry is able to earn returns and generate free cash-flow at these commodity prices. While hydraulic fracking activity in the number of active fleets across the industry has rebounded with commodity prices frac service pricing has yet to recover. Today we estimate that there are around 200 active fleets working in the U.S. Many of which are working at prices that we believe are unsustainable. Because the market for conventional diesel powered frac services continues to be oversupplied, service pricing has been unable to rise off trough level set during the depth of the pandemic. At the same time, EMP operators are demanding next generation fracturing technologies that minimize the cost and greenhouse gas emissions associated with well completions.

U S. Well Services' has a solution. Our proprietary clean fleet technology, offers best-in-class fuel cost reductions and offers industry leading greenhouse gas emissions performance. Consider this, at today's delivered diesel prices, a typical Tier-4 diesel frac fleet operating at 9,000 PSI and a 100 miles per minute would consume between $1.5 million and $1.8 million worth of diesel per month. If performed by a clean fleet, the same job would consume between $150,000 to $200,000 of fuel gas resulting in substantial cost savings and significant reduction in the greenhouse gas and small producing emissions.

The fuel cost savings from using a clean fleet could be as high as 3,500 per pump hour, that is to say the ENP customer would pay 3,500 per hour over prevailing market rates for diesel equipment without impacting its costs while hedging its service costs. Meanwhile, the service company can make money at these levels and reinvest in its equipment and people.

We firmly believe that Clean Fleet Technology represents the future of the hydraulic fracturing industry. Moving forward U.S. Well services will continue to do focus on innovating and offering best-in-class electric fracking services and solutions. In the near-term, our team is working with customers to raise service pricing on our conventional diesel powered equipment and is confident, safe pricing increases will be implemented throughout the remainder of the year. However, we continue to monitor pricing across our portfolio and react swiftly if market pricing remains depressed.

With that, I will turn the call over to Kyle.

Kyle O'Neill

Thanks, Joel and good morning everyone. Before I dive into the first quarter financial results, like to comment on the recent SEC statement regarding the accounting and reporting for SPAC related warrants. In mid-April, the SEC released a statement informing companies with warrants issued by SPACs, may require to be reclassified as liabilities measured at fair value at the end of each reporting period. The statement has changed the industry accepted practice of accounting for warrants’ equity. As a result, we and many other companies formed through business combinations with SPACs, have restated our financial statements to correct the classification of warrants as a liability.

The restatement has no impact on our operations, revenue, operating income or other key non-GAAP financial metrics such as adjusted EBITDA. With that. I'll now turn to the review of our first quarter.

U.S. Well Services averaged 10 active fleets during the quarter with a utilization rate of 88% resulting in 8.8 fully utilized fleets. As Joel noted the winter storm in February caused a work shutdown for seven of our fleets for an average of seven days.

If not for this work stoppage, we would have averaged 9.3 fully utilized fleets for the quarter. We generated $76 million of revenue for the first quarter of 2021 up 59% from $48 million in the fourth quarter of 2020. The sequential increase in revenue was driven by the uptick in our active fleet count and was offset by an estimated $5 million to $5.50 million of revenue lost due to the work shutdown during the winter storm.

While servicing equipment revenue was up 54% sequentially pricing on a per pump hour basis declined 5% sequentially due to the redeployment of conventional fleets at market pricing. As Joel mentioned earlier, we have initiated discussions with our customers regarding price increases and will continue to evaluate the economics of each fleet in our portfolio to ensure that we're maximizing value for our shareholders.

Our cost of sales for the quarter was up, was $63 million, up 48% quarter-over-quarter from $43 million in the fourth quarter of 2020. While most of the sequential increase in our cost of sales is attributed to higher labor, repair and maintenance and costs associated with higher active fleet count, U.S. Well Services began to see signs of inflation during the quarter. Most notably we have seen costs for chemicals, accommodations and trucking rise significantly since the beginning of the year and are continuing to work to mitigate the impact of these inflationary pressures on our financial results.

SG&A was $7.4 million in the first quarter of 2021. Net of stock-based compensation and other non-cash charges, SG&A was $5.9 million, which compares to $5.6 million for the fourth quarter of 2020. The sequential increase in SG&A was primarily related to personnel costs and professional fees. Adjusted EBITDA for the first quarter was $11.5 million, up from $1.8 million in the fourth quarter of 2020. Annualized adjusted EBITDA for fully utilized fleet was $5.2 million up from $1.4 million in the prior quarter.

On an accrual basis, U.S. Well Services spent approximately $9.6 million of maintenance capital expenditures during the first quarter of 2021. Turning to our balance sheet, the company ended the first quarter of 2021 with over $32 million of liquidity consisting of $18 million of cash on hand and $14 million of availability under our ABL facility.

With that, I'd like to turn the call back to Joel for some final remarks.

Joel Broussard

Thanks Kyle. Although this market environment remains challenging U.S. Well services is excited for what lies ahead. We believe we possess the technology, team and track record to deliver for our shareholders and customers as the market for frack services continues to evolve. Operator, please open the call up for Q&A

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from the line of Ian MacPherson from Simmons. You may proceed with your question.

Ian MacPherson

Thanks. Good morning, Joel. Kyle, how are you?

Joel Broussard

Great. How are you?

Ian MacPherson

Good thanks. So, I wanted to get your view on how margins should improve coming out. You had the Q1 weather impacts and you've scaled up to basically doubling your footprint from where you were a year ago ahead of the full benefit, or really much benefit at all with pricing, which is now coming to you over the course of this year progressively. So when you think about those tailwinds how much EBITDA leverage do you have on a per fleet basis going from now until the end of the year, do you think? And you, you can airbrush that answer as much as you care to, but I'd like to get a sense for you know, how we begin to harvest EBITDA and cash flow from the footprint that you've recovered now?

Kyle O’Neill

Ian as we all know, we're looking at our peers and others that as to CapEx everybody's still negative. So pricing does have to come up on the electric - on the diesel fleets, however, on our electric fleets we're satisfied with the margins and they're dragging our diesel fleets up, simply because of the cost savings to the client. We're seeing a little softening in the market and we feel that there's around 200 fleets working, not 220 and some of these fleets are going to the spot market, but we're, we're either going to we're having difficult conversations with our clients now on the diesel equipment and we have of course we have lesser than they have with some of our peers, but the conversations are happening and margins have to come up on our diesel equipment or we won't work them.

Ian MacPherson

Got it. And then Kyle, do you have any perspective on how free cash flow could unfold over the balance of the year? I know you had some working capital going against you in the first quarter. I'm interested in that particular component as well as just the total picture for cash generation and liquidity balances towards the end of the year. Yeah,

Kyle O’Neill

That's it that's exactly right. We did have kind of a working capital build in Q1 as we redeployed some of those fleets. So you know, kind of in a normalized operating environment we would expect to see that cash flow profile and continue to improve throughout the year.

Operator

Our next question comes from the line of Stephen Gengaro from Stifel. You may proceed with your question.

Stephen Gengaro

Thanks. Good morning, gentlemen. A couple things. So one is on the conventional side, I think your maintenance CapEx for fleet is like $5.50 million-ish per, per year. A, is that right? And B, does that suggest you won't deploy fleets on the conventional front unless they are generating some number higher than that?

Joel Broussard

Correct. Yeah, that's about right. That's, you're exactly right. We won't deploy unless we can, more than cover our maintenance CapEx. It's got to be cash flow accretive.

Stephen Gengaro

Okay. And on the, on the e-fleet side, can you just remind us sort of the where you stand from a contractual perspective? Just so I have the sort of most updated data.

Joel Broussard

Currently we have 5 electric fleets working. We expect all of those to work through the end of the year, except maybe our original one which we built in 2014. It has worked as of now through October.

Stephen Gengaro

Okay. And two other quick ones. One is you mentioned, I think on the last call for about $50 million in CapEx, you could, deploy 2 incremental e-fleets based on equipment you have in the yards, et cetera. Is that A, is that still about the right number or, B, where do you stand on that thought process?

Joel Broussard

Actually, that number is as coming down. We think that we could upgrade the two original fleets we built with just [pumps] (ph) for around $30 million. 30 to 35.

Stephen Gengaro

Okay. Great. And then just as a final one, and this follows up on Ian's question you're in the quarter, you mentioned $5 to $5.50 million of revenue impact. Your adjusted EBITDA was about $11.50. Can you give us a sense for what the EBITDA impact or even the per fleet EBITDA impact was? And then additionally is where's the moment - like I'm going to, I guess what I'm thinking about is can EBITDA per fleet get to double digits this year or no because of the dilutive effect of conventional assets?

Joel Broussard

Kyle can you take that one?

Kyle O’Neill

Sure. Yeah, I think getting to double digits across the entire fleet this year will be challenging largely because of the current market for diesel equipment.

Stephen Gengaro

And an EBITDA impact from the quarter, do you have any sense for what it was on that? Is it just sort of in the 2 to 3 million range or is it...?

Kyle O’Neill

I think it's, I mean I think it's probably closer to $1 million to $1.5 million EBITDA impact.

Operator

Next question comes from the line of John Daniel with Daniel Energy Partners. You may proceed with your question.

John Daniel

Hey guys. Joel, thank you for the color. I just want to follow up a little bit on your comment about activity and just what I'm going to refer to as a smidgening of softening. Do you think that's a reflection of front end loaded customer budgets to faster reactivations amongst your frac [brethren] (ph)? Just a little bit more color would be helpful.

Joel Broussard

I think it's both of what you are speaking of, where, when I say slightly softening, we're just seeing some of the people that came out of the gate, wanting more spot fleets than, Hey, we'll take it from the rest of the year. That's what we're seeing. And we’re still seeing pricing in the 6,000 and below pump range, which we all know is a negative cash flow. Once you have a -once you add CapEx in there.

John Daniel

Okay and then the last one from me, just with the cleaner emission fleets, with the rise in diesel prices, how would you characterize inquiries and interest on the part of customers today versus three to four months ago on this technology?

Joel Broussard

It's been drastic, we've done several test pads with our original fleet. We built [14] (ph) for customers. We made an announcement on one of them, which was [Cowen] (ph), right? There's probably five others that were going to be doing test pads for this year. RFPs are coming out with strictly electric when in the past we saw diesel and electric.

So we're excited; I don't think this - I hope diesel prices isn’t going down and the higher diesel prices go up, the more savings on the, we have one customer that we've been working with since 17, I mean, 18, sorry, they're spending $2.4 million a month in diesel. And it's real. And now, as you've seen, we've renewed contracts with EQT and Range, in the past and Shell we've extended contracts, all three of those. So they're seeing the efficiencies, they're seeing the fuel savings and they're seeing the emissions reduction.

Joel Broussard

Okay. Got it. And I guess the last one for me, Joel, would be if someone came either tomorrow with a contract in hand, that which was accommodating to you, how quickly could you get the next electric fleet deployed?

Joel Broussard

January one.

Joel Broussard

Okay. Thank you very much.

Operator

Our next question comes from the line of Daniel Burke - Johnson Rice & Company. You may proceed with your question.

Daniel Burke

Yeah. Good morning guys.

Joel Broussard

Good morning. What's happening?

Daniel Burke

Not much, I think I've really got one left, but really and it's on the topic we've danced upon in Q&A but in terms of adding incremental Clean Fleets, I just wanted to better understand it; look like you guys, raised a bit of incremental debt and equity in the first quarter. So what, what do you need, are you willing to make those investments to bring an extra fleet or two to market without that customer commitment or are you already making that investment now in anticipation of that customer demand being there? I'm just not clear on that.

Joel Broussard

We haven't ordered any fleets yet but and we're negotiating this with different clients for contracts as we speak. Nothing has been solidified.

Daniel Burke

Okay. All right. Really guys, that's all I was looking for was that piece of clarity, I'll leave with that.

Joel Broussard

Again.in it, it’s one thing I'll add is that, we've always said for the last several years, since we've been well two years, that we were going to eventually transition from to an all electric company and that still is our goal.

Daniel Burke

That's good to hear again, guys, you thank you for squeezing me in.

Operator

Our next question comes from Stephen Gengaro with Stifel. You may proceed with your question.

Stephen Gengaro

Thanks. Kyle, I wanted to follow up on two things. One was, can you give us a range of the difference in EBITDA per fleet, in your -- for your E-fleets versus your conventional fleets currently?

Joel Broussard

Kyle, you want to take that one?

Kyle O’Neill

Yeah, Historically we haven't broken out that the difference approximately twenty years between two fleets. So I think it's something where we look at our whole portfolio but we have put on there that are operating costs and operating and maintenance costs are 40 to 45%, less than a traditional piece of fleet.

Stephen Gengaro

okay, thanks Kyle, what I was…

Joel Broussard

and also CapEx is drastically less than a conventional fleet, maintenance CapEx.

Kyle O’Neill

Exactly. I was just going to say it's about the same magnitude.

Stephen Gengaro

Okay. Cause what I was getting – what I was trying to get to is when we think about, the 20, 21 and maybe, hopefully 2022 is a different year. Right. But when you have, when you look at, whatever the EBITDA expectations might be for the Company as I, so I would look out the 2021 and 2022, I was just actually just sort of looking at the consensus numbers right now, which am I asking you to blast but let's say the consensus numbers are 50 and 90 in EBITDA in 2021 and 2022,; what does that mean for free cash? Is there a way to think about that?

Kyle O’Neill

Yeah. I mean, I think that the guidance we've given before is 5 to $5 million bucks of EBITDA for diesel equipment and $2 million to $3 million for the electric equipment. So you can kind of back and do a maintenance CapEx number and take that out of your EBITDA to get to your free cash flow capacity.

Stephen Gengaro

Okay. All right. Thank you guys. Helpful.

Operator

Ladies and gentlemen, we have reached the end of today's question and answer session. Thank you for your participation. This concludes today's teleconference You may disconnect your lines at this time and have a wonderful rest of your day.s