U.S. Well Services, Inc. (USWS) Q3 2020 Earnings Conference Call November 6, 2020 11:00 AM ET

Company Participants

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

Conference Call Participants

Ian MacPherson - Simmons
Daniel Burke - Johnson Rice & Company

Operator

Greetings, and welcome to the U.S. Well Services Third Quarter 2020 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the former presentation. [Operator Instructions] As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Mr. Josh Shapiro, Vice President, Finance and Investor Relations. Thank you, sir. 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 Review Third Quarter 2020 Results. Joining us on the call this afternoon 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 evening, U.S. Well Services released its third quarter 2020 earnings. The earnings release can be found on the company's website at www.uswellservices.com. The company also intends to file its third quarter 2020 Form 10-Q with the SEC this afternoon.

Please note that the information reported on this call speaks only as of today, November 6, 2020, 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. During the third quarter of 2020, concerns about COVID-19 pandemic began to subside. An increasing global economic activity helped to stabilize commodity prices. Even though hydraulic fracturing activity has picked up, the market remains oversupplied and faces significant pressure on service pricing. These persistent market headwinds have caused a number of our competitors to file for bankruptcy and has led others to merge businesses with the goal of increasing scale and service offerings.

U.S. Well Services' strategy has remained consistent through the market turmoil, and our results in the third quarter further validates our approach to operating in such a cyclical industry. Kyle will give you more detail on our financial performance this quarter, but I would like to highlight a few of the key data points. We averaged 5 active frac fleets versus 4.3 fleets in the second quarter, and on a fully utilized basis, our average fleet count was 4.2 versus 3.4 fleets last quarter.

On an annualized basis, we generated approximately $42 million of revenue and $7.5 million of adjusted EBITDA per fully utilized fleet. Unlike many of our competitors, we were able to generate positive adjusted EBITDA through this downturn as a result of our reduced operating costs and the higher utilization of electric fleets. At U.S. Well Services, we believe that being a great frac company takes more than just high-quality service in the field. It requires an ability to anticipate our customers' greatest needs and find innovative solutions for them. On this front, our focus has never wavered. We deployed the industry's first all-electric frac fleet in 2014 and began developing our data analytics platform shortly thereafter.

In helping our customers reduce capital costs, enhance completion efficiency and harness big data to improve decision making, U.S. Well Services has established itself as a critical partner that is uniquely positioned to help them address the challenges they face in today's market. Increasingly, our customers are experiencing mounting pressure to improve their return on capital, while also making significant reductions to the environmental impact of their operations.

In order to satisfy these objectives, E&P companies are leaning heavily on their vendors to deliver high-quality service at low cost with a smaller greenhouse gas emissions footprint. U.S. Well Services offers a full set of solutions to help our customers meet their goals. Our Clean Fleet technology delivers substantial fuel cost savings. Some of our customers have reported savings of as much as $250,000 per well, which results in meaningful improvements to returns.

In addition to capital cost reductions, we helped reduce our customers' completion costs by continuously improving our operating efficiency. U.S. Well Services' equipment and personnel are constantly capturing data and sending it to the cloud where our systems and team of data scientists and engineers generate analysis and insights.

We can then use these insights to monitor equipment, health, planned preventive maintenance procedures and build our machine learning capabilities. All of these things result in greater uptime and lower costs for our customers.

Electric fracturing technology like our Clean Fleet is currently the most effective commercially available solution for lowering greenhouse gas emissions. In recent months, many industry participants have commented on the emissions performance of different frac equipment. We also performed a detailed study on the matter. Unlike our peers, we actually run both diesel and electric frac fleets, which allows us to take real measurements and get real results.

We found that our electric frac fleets reduced CO2 equivalent emissions by more than 40% compared to Tier 4 diesel fleets. We also ran simulations using OEM specifications and found that a Tier 4 dual fuel fleet generates over 10% more CO2 equivalent emissions than our electric fleets, even if it is assumed to be operating near its peak diesel substitution rate throughout the entire duty cycle.

I am proud of what our team has accomplished through this challenging time in our industry, and I remain incredibly excited about our future, U.S. Well Services' technology, the team, the passion to succeed in any market and to deliver value for our shareholders. I will now turn the call over to Kyle to discuss our financial results. Kyle?

Kyle O'Neill

Thanks, Joel. And good morning, everyone. Revenue increased 11% sequentially to $44 million, driven by higher active fleet count. Service and equipment revenue increased 13% compared to the second quarter and consumable sales, including sand, chemicals and trucking, decreased 36%.

Our cost of sales increased 7% to $31 million, resulting in our gross profit margin increasing to 29% versus 27% in Q2. These improvements were driven primarily by the reduction in field level overhead and repair and maintenance costs.

Recently, we detailed analysis of our fully loaded maintenance costs, which include both our repair and maintenance expense as well as our maintenance capital expenditures for all of our fleets.

Over the last 12 months, we found that our maintenance costs for our electric fleets was approximately 35% lower than our conventional diesel equipment. This translates into approximately $4 million to $6 million of annualized savings per fleet versus a diesel fleet. This is incredibly important and often overlooked by market observers that typically only consider the revenue-generating potential of an electric fleet as an advantage over conventional equipment.

Moving on. SG&A totaled $6.1 million for the third quarter or $5 million after excluding stock-based compensation. This compares to $4.1 million in the second quarter of 2020. The increase in SG&A was largely driven by an increase in professional fees. U.S. Well has reported adjusted EBITDA of $7.9 million for the third quarter of 2020, down 7% sequentially from $8.5 million. Adjusted EBITDA per fully utilized fleet was approximately $7.5 million for the third quarter as compared to $10 million in the second quarter.

Our adjusted EBITDA margins were 18% for the third quarter, down slightly from 21% in the second quarter. Capital expenditures for the quarter totaled $3.8 million. As of September 30, the company had $11.8 million of total liquidity. While we believe our cost-cutting initiatives undertaken since the onset of COVID-19 have been highly successful, our team is continuing to evaluate ways to reduce costs and enhance our ability to generate returns in the current market environment.

And with that, I'll turn the call back over to Joel for some closing remarks.

Joel Broussard

Thanks, Kyle. I just want to thank the U.S. Well Services team for their continued hard work in such a difficult market. I'm always impressed by my team's work ethic and dedication to execution on behalf of our customers.

Operator, you can now 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 with Simmons. You may proceed with your question.

Ian MacPherson

Thanks. Good morning everyone. I wanted to just bounce off of you the pretty consistent consensus of the other completion services companies this quarter, which has been an outlook for continued positive momentum in total frac activity through the peak of this quarter, notwithstanding some holiday vulnerability later in the quarter. And then generally, an expectation that barring a pretty significant relapse with commodity prices that next year would average higher activity than where we are even in Q4, some have said a range of 150 to 165 fleets, maybe next year. Who knows? But I wanted to get your perspective on that and also how you see your ability to redeploy fleets and either hold your current activity level or continue to grow it based on the opportunity bucket in front of you today.

Joel Broussard

Yeah, Ian, thank you. We're seeing a little pickup in the bid activity, a couple of awards. So we're thinking activity is going to increase in the fourth quarter and going into the first quarter of next year.

Ian MacPherson

last longer on the e-fleets?

Kyle O'Neill

No.

Joel Broussard

But we don't have all changes. We don't have similar kits and et cetera, engine rebuilds, transmissions, that's where the cost savings are.

Operator

Our next question comes from the line of Daniel Burke with Johnson Rice & Company.

Daniel Burke

Let's see. First, appreciate the detail on the presentation this morning. That's appreciated. Question. In terms of the customer interest in ESG and, of course, cost savings increasing, is that sufficient to stimulate any interest in the legacy electric fleet?

Joel Broussard

Yes. Yes, so I was on mute, sorry. Yes. We are bidding stuff in that fleet at lower rates and lower pressures. We're currently bidding now. And I guess the answer to your question will be yes, it is. And also noise, also noise.

Daniel Burke

Okay. That's helpful. And then maybe the only other one I wanted to ask you all about, I assume the sixth fleet referred to in the fourth quarter would be redeployment of the fourth new gen electric. I assume that's the case. And can you talk about the visibility on that fleet into next year?

Joel Broussard

Yes. That fleet is actually working today. They went back to work. And it will be working through the first half of the year for sure on a contracted basis.

Daniel Burke

Okay. And just to be clear then, so as of today, you've got 6 deployed fleets?

Kyle O'Neill

That's correct.

Operator

Thank you for joining us today. This concludes today's question-and-answer session. Mr. Joel Broussard, I'll turn it back over to you for closing remarks.

Joel Broussard

Thank you for joining us today. Have a nice weekend. Thank you all for joining. Bye.

Operator

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Have a great rest of your weekend.