US Well Services, Inc. (USWS) Q2 2020 Earnings Conference Call August 6, 2020 11:00 AM ET

Company Participants

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

Conference Call Participants

Daniel Burke - Johnson Rice & Company

Josh Shapiro

Thank you, operator, and good afternoon, everyone. We appreciate you joining us for the U.S. Well Services Conference Call and Webcast to review Second 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 opened for Q&A.

Yesterday evening, U.S. Well Services released its second 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 second quarter 2020 Form 10-Q with the SEC this afternoon.

Please note that the information reported on this call, speaks only as of today August 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.

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. Second quarter of 2020 presented the most severe challenges ever faced by the modern oil and gas industry. As economies across the globe shut down in an effort to slowdown the spread of COVID-19, demand and pricing for crude oil collapsed. U.S. oil and gas producers aggressively reduced drilling and completions operations beginning in mid-March and have only very recently begun to increase activity.

Our strategy at U.S. Well Services has always been to position the company to perform through down cycles. We value long-term partnerships with our customers that have historically provided us with better utilization and pricing stability across our fleets during challenging market environments. While our business was certainly not immune to the turmoil, I am proud of how the business performed through such a difficult market.

We saw our active fleet count drop from 10.7 in the first quarter to 4.3 in the second quarter. Throughout the quarter, three of our four new-generation electric fleets were working along with one of our conventional fleets. Currently we are operating five active frac fleets. We recently deployed our fourth new-generation electric fleet to work for a previous customer in the Permian Basin.

With the addition of this fleet we now have two electric fleets working in the Permian, two electric fleets in the Northeast, and one conventional fleet in the Eagle Ford. Our inactive equipment is well-maintained and ready for work when demand picks back up. We continue to evaluate opportunities to redeploy these fleets, but we'll only do so if the pricing and duration of work justify the staffing, training and capital needs required to fulfill the job.

Based on some estimates of the number of working frac fleets through the quarter, our fleets may have accounted for nearly 10% of the total market. While this isn't the way we want to grow market share, we are pleased with the strength of our partnerships with our customers that helped us maintain utilization. We are delivering true value to our customers in the form of fuel, cost savings, operating efficiency and a reduced carbon footprint, which is why we believe demand remains strong for electric frac fleets even in today's challenged environment.

U.S. Well Services posted positive adjusted EBITDA for the second quarter thanks to both our customer contracts and our team's ability to rapidly cut costs as the market deteriorated. On an annualized basis, we generated approximately $10 million of adjusted EBITDA per fully utilized fleet, which demonstrates the earnings power and steady utilization of our electric frac fleet.

As challenging as this downturn has been, we still believe the opportunity for U.S. Well Services is great. Competitors and equipment are exiting the market at accelerating rate, helping to bring the market closer to balance. More importantly we have seen a growing awareness from E&P companies that they must evolve the way they operate in order to meet goals of lowering well costs and minimizing the environmental impact of their completions program.

We offer the market a proprietary proven suite of technology that allows them to achieve these goals, as well as best-in-class service. As such, this company is well positioned to lead the industry in this evolving market.

With that, I will turn the call over to Kyle O'Neill to discuss our financial results.

Kyle O'Neill

Thanks, Joel and good morning everyone. Revenue decreased 64% sequentially to $40 million, driven by a sharp reduction in our active fleet count. Service and equipment revenue decreased 59% compared to the first quarter. And consumables sales including sand, chemical and trucking services decreased by 90% as customers continued to move to self-sourcing materials in order to cut well costs.

Our cost of sales decreased to $29 million, a 66% decline relative to Q1, resulting in our gross profit margin increasing to 27% versus 24% in Q1 of 2020. These improvements were largely driven by the quick implementation of our cost-cutting initiatives.

SG&A totaled $5.2 million for the second quarter or $4.1 million after excluding stock-based compensation and onetime transaction costs. This compares to $8.4 million in the first quarter of 2020. The reduction in SG&A was largely attributable to our cost-cutting initiatives and a reduction in professional fees.

U.S. Well Services reported adjusted EBITDA of $8.5 million for the second quarter of 2020, down 34% sequentially from $12.7 million. Adjusted EBITDA per fully utilized fleet was approximately $10 million for the second quarter, as compared to $4.3 million in the first quarter.

Importantly, our adjusted EBITDA margins improved to 21% in the second quarter versus 11% in Q1. Cash from operations was approximately $33 million, as compared to an $11 million use of cash for the first quarter. The sequential increase is attributable to improved margins, reduced interest expense and increased collections. Capital expenditures for the quarter totaled $4 million, of which $3.5 million was directed towards maintenance CapEx and the balance was for growth CapEx that was a carryover from Q1.

As of June 30, the company had total liquidity of $13.4 million. Since the onset of COVID-19 pandemic, our top priorities have been the safety and well-being of our employee's, customers and vendors. To this end, we have and we will continue to exhaust all options to bolster our liquidity to allow us to manage through this historic downturn. Examples of these include, the previously announced cost reduction initiatives, which resulted in higher margins and increased fleet profitability during the quarter; amending our credit facilities to among other things provide for interest and amortization relief for 24 months; and exploring the various coronavirus relief programs such as deferral of employer social security taxes, the carryback of net operating losses and the Paycheck Protection Program, which we applied for and received in late July.

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

Joel Broussard

Thanks, Kyle. Although we believe the worst is behind us, there is no doubt that the challenges remain. The market continues to be oversupplied with horsepower and demand for frac services will only begin to fully recover once economic conditions normalize.

At U.S. Well Services, our continued dedication to improving our service quality, customer relationships and technological differentiation are relentless and we think this will position us to deliver long-term value to our investors. I want to thank everyone on the U.S. Well Services team for their tireless work and dedication to ensuring the safety and efficiency of our operations in such a difficult time.

Now, I'll turn it over to operator for questions.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] We have a question from Daniel Burke of Johnson Rice & Company.

Daniel Burke

Hey, guys. Good morning.

Joel Broussard

Hey, good morning, Daniel.

Kyle O'Neill

Good morning, Daniel.

Daniel Burke

Hey, I was just curious on the – good news on the deployment of the remaining new-gen electric fleet. Can you maybe give us some color on the duration of the work program that you've secured for the fleet?

Joel Broussard

Yes. We feel that it will work about 90% of the rest of the year – 80% to 90% the rest of the year and full time next year.

Daniel Burke

Okay. And that's with the same client bridging into next year?

Joel Broussard

No we think it will go to another client that has a – one of our other fleets already for contract.

Daniel Burke

Okay. That helps. And can we assume that the economics you'll achieve on that fleet here in the second half of the year are similar to sort of the – I think the hurdles you tossed out for sort of your electric fleets Joel on the last earnings call?

Joel Broussard

It should be in line with our fleets are earning today correct, on this quarter.

Daniel Burke

Okay. That's good to hear. That's great. And then the only other one really I had was maybe on just the financial side. Given the net working capital position, I'd assume the working capital release that you all experienced in Q2, won't continue in the second half of the year. But just to be clear there Kyle, will working capital be a source of funds in Q3? Or is it more likely to be neutral through the remainder of the year?

Kyle O'Neill

I think it's more likely to be neutral. Obviously, that depends on kind of activity levels. But I think we've kind of come down that working capital slope and have stabilized so expect it to be neutral.

Daniel Burke

Understood. And then I guess maybe just the last one just a little bit more open-ended then. Joel, your comments on making sure that fleet deployments will meet your economic hurdles I think is sensible. But can you just talk about what you see in terms of the landscape on the diesel side? What is that like? What level of discussions are you having with clients? And what's maybe the probability of finding an opportunity before year-end for an incremental diesel fleet?

Joel Broussard

I mean that all depends on what the price of oil does of course. And we're not going to work on diesel fleets and have negative EBITDA or negative cash flow. Even if it's slightly positive EBITDA, if it's negative cash flow, when you consider maintenance CapEx, we're not going to do it.

As you can see we think a lot of equipment is coming out of the market. A lot of companies are going away that have done this. They've even – were doing it back in mid last year bidding at negative cash flow. And you see what's happened to some of these companies either they're getting out or having financial issues.

So we as – I guess to sum it up is that we're not going to work for negative cash flow and we're seeing a lot of bids on diesel fleets at negative cash flow. To sum it up, we bid a job with a client and we were the highest out of 20 bids.

Daniel Burke

I think that sums it up well. I mean – and again, compliments on the capital discipline. And guys that’s it for me. I’ll leave it there.

Joel Broussard

Thank you, Daniel. Appreciate it.

Operator

I have no further questions at this time. I would like to hand it back to Josh for closing remarks.

Josh Shapiro

Thanks, everybody.

Joel Broussard

Thank you, everybody. Have a good day. Appreciate it. Bye.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may now disconnect your lines.