U.S. Well Services, Inc. (USWS) Q3 2019 Earnings Conference Call November 7, 2019 10:00 AM ET

Company Participants

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

Conference Call Participants

John Daniel - Simmons & Company
Daniel Burke - Johnson Rice
Derek Podhaizer - Barclays
Steve Gengaro - Stifel

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 your host, Josh Shapiro, Vice President of Finance for U.S. Well Services. 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 2019 third quarter results. With me today 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 third quarter 2019 earnings. The earnings release can be found on the company's website at www.uswellservices.com. The company also intends to file third quarter 2019 Form 10-Q with the SEC later this week.

Please note that the information reported on this call speaks only as of today, November 7th, 2019 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 yesterday'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. Good morning everyone and thank you for joining us on the call to review U.S. Well Services' third quarter results. USWS navigated challenging market conditions during the quarter and generated solid operational and financial performance.

I will begin this morning by -- this morning's call by reviewing some of the key highlights from Q3. U.S. Well Services had 12 total available fleets for the third quarter. On average 9.3 fleets were active with a utilization rate of 90%, resulting in an 8.4 fully utilized fleets.

Although total revenues declined 14% sequentially to $130.9 million, our revenue per fully utilized fleet increased by 7% quarter-over-quarter to an annualized rate of $62.6 million per fleet.

On a fully utilized basis, USWS generated approximately $16.9 million of annualized adjusted EBITDA per fleet as compared to $16.4 million for the second quarter of 2019 which equates to a 3% increase. After taking into account maintenance CapEx associated with fluid ends, we generated approximately $16.1 million of adjusted EBITDA per fully utilized fleet.

U.S. Well Services continued to demonstrate its operating efficiencies during the quarter growing our average stage count per fully utilized fleet by 6% to 574 stages. We have talked a lot about growing efficiencies over the last several quarters and how we believe U.S. Well Services operate at the efficient frontier.

I would like to provide some additional color on this point. I am proud to say that in July, we set a company record pumping approximately 124 million pounds of sand in a 27-day period with a single fleet. This equates to approximately 4.6 million pounds of sand pumped per day. For this I'd like to congratulate my team on a job well done.

We believe that the efficiency for our frac service provider is best measured based on hours pumped per day. We see one of our competitors noted that they achieved a single day pump time of 21.8 hours versus an industry average of 12 to 15 hours per day.

During the third quarter, our single day maximum pump time was 22.2 hours. Our efficiency and organizational focus on technology and continuous improvement have positioned U.S. Well Services as a value-added partner for our customers. We believe our approach to the business has helped us gain an edge in commercial activity which is critical in a challenging operating environment like the one we face today.

I would also like to mention U.S. Well Services' commitment to environmental stewardship. We believe our Clean Fleet technology is the most environmental-friendly solution for hydraulic fracturing. Through mid-October we have seen our Clean Fleet reduce greenhouse gas emissions by approximately 49 metric tons per hour relative to our conventional fleet, a 87% reduction.

To put this in perspective, the EPA estimates that a typical car emits 4.6 metric tons per year. By replacing a single conventional frac fleet with a Clean Fleet, the equivalent of emissions from 43,400 cars would be eliminated. If the 325 conventional fleets that we estimate to be active today were all replaced with Clean Fleets in U.S. Well services, the emissions reduction would be equivalent to taking 98.5% of private and commercial automobiles in the state of California off the road.

The last thing I would like to touch on is our IP. USWS made significant progress expanding its intellectual property portfolio during the third quarter. We received one new patent and had additional 15 patents go pending, bringing our total portfolio to 23 awarded patents with 97 pending. There is no doubt that the hydraulic fracturing industry remains under pressure and we are not immune to the challenges this market presents.

I mentioned last quarter that we elected to idle one conventional fleet. While we expect this equipment to support our ongoing business, we have no intention of marketing this fleet as a standalone unit going forward. USWS is encouraged by what we are seeing across the industry as service companies are retiring auto horsepower which should improve frac service pricings over time.

Looking forward to the fourth quarter we expect activity levels to remain low across the industry as the E&P sector experiences budget exhaustion issues. With that said, our outlook at U.S. Well Services is optimistic entering into 2020.

USWS has considerable commercial success recently. In our earnings release, we announced that we entered into a new long-term contract to provide electric hydraulic fracking services for our customer in the Northeast.

In addition, we successfully extended contracts for four conventional fleets for 2020 and signed new contracts or dedication agreements for three other fleets. Including the new electric fleet, we plan to deploy in early Q1 2020, we expect to begin next year with nine of our 13 fleets contracted or dedicated.

Based on active commercial discussions, we have visibility into work for all of our fleets. I credit our commercial success to U.S. Well Services' partnership with its customers, operational excellence, and tireless efforts from our marketing team.

As market conditions have evolved, USWS has worked with customers to align our incentives so that both parties can operate efficiently and generate attractive rates of return on our assets.

In conclusion, U.S. Well Services had a strong third quarter. We look forward to continuing to deliver for our customers and our shareholders in the fourth quarter and into 2020.

With that, I will turn the call over to Kyle O'Neill, our Chief Financial Officer.

Kyle O'Neill

Thanks, Joel, and good morning, everyone. Revenue in the third quarter declined 14% to $130.9 million when compared to the second quarter. Revenues generated by providing services and equipment declined 11% over the same time period while revenues from consumables which includes sand, chemicals, and transportation were down 22% in the period. These decreases are primarily related to lower fleet -- to lower active fleet count and continued increases in the number of customers self-sourcing consumables.

Although our total revenues declined during the period, our total revenue per fully utilized fleet actually increased 7% over the second quarter and our service and equipment revenue per fully utilized fleet increased 11% over the same time period.

Cost of services in the third quarter decreased by approximately 15% to $90.8 million as compared to the second quarter of 2019. During the period, our cost of labor declined approximately 18%, driven by lower activity levels and cost of consumables decreased by 22% quarter-over-quarter, again, because of an increasing number of customers self-sourcing consumables.

SG&A rose to $8.2 million in the third quarter from $7.6 million in the second quarter. After adjusting for stock-based compensation and onetime fees, SG&A was $6.8 million during the quarter versus $5.9 million in the second quarter.

Adjusted EBITDA decreased 17% during the quarter to $35.3 million. Our annualized EBITDA per fully utilized fleet increased 3% during the period to $16.9 million per fleet versus $16.4 million in the second quarter of 2019.

During the third quarter U.S. Well Services incurred $1.7 million of maintenance CapEx related to fluid ends versus $3.8 million for the second quarter. This equates to $800,000 per fleet in the third quarter versus $1.5 million per fully utilized fleet in the second quarter.

After taking into account this maintenance CapEx on our fluid ends U.S. Well Services generated $16.1 million of adjusted EBITDA per fully utilized fleet versus $14.9 million in the second quarter of 2019.

Turning to our capital expenditures; U.S. Well Services spent approximately $14.5 million on CapEx in the third quarter. Of this $5 million, was related to maintenance CapEx including the $1.7 million for fluid ends noted earlier and $1.4 million was for fleet enhancement and $8.1 million was for growth CapEx related to our newbuild electric fleet. This new fleet will be deployed in Q1 of 2020 for Shell.

Going forward we expect to incur an additional $20 million to $25 million of growth CapEx related to this fleet. As of the end of the third quarter U.S. Well Services had a total cash on hand of $32.8 million, as well as $28.7 million available under our asset-backed revolving credit facility bringing our total liquidity position to $61.5 million.

With that, I'd like to turn it back to Joel for his closing comments.

Joel Broussard

Thanks. Now before we get into Q&A, I want to provide some concluding thoughts on how U.S. Well Services has positioned the company to remain a preferred service provider in a challenging industry environment. Attrition of auto horsepower is inevitable, given the service intensity and demands of our customers.

In response to our customer needs, USWS has focused on developing and implementing technologies and best practices that allow us to operate at maximum efficiency and reduce our operating costs.

Going forward we believe that companies like USWS who continue to deliver innovation and high service quality will be rewarded. We remain dedicated to providing first-class execution and are excited about the future prospects for U.S. Well Services.

I will now turn it over to the operator and open the call up for Q&A. Thank you.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question is from John Daniel with Simmons & Company.

John Daniel

Hey guys, nice quarter. I just got a few. Joel you mentioned a fleet that had 22 hours of pumping time which is off the charts good. Was that an electric or conventional fleet?

Joel Broussard

Conventional.

John Daniel

Okay. Got it. And then I don't know if you can comment on this, but I'll try. I think it was several months ago you filed a lawsuit against a competitor on patent infringement. Can you just update us where that stands?

Joel Broussard

We can't comment on ongoing litigation. I'm sorry.

John Daniel

Fair enough. E&P companies increasingly like to talk about their ESG focus, when it comes to their willingness to engage in discussions for electric fleets. Does their lip service to ESG match up yet with their willingness to pay for the ESG benefits associated with your technology? And if so when would you expect to see the next wave of new electric orders?

Joel Broussard

John a select -- a few are and those who have signed contracts for this. And as we mentioned earlier that the impact of going all electric is pretty unbelievable going to take all the cars off and all of them goes off in the streets of California. I will note what's going to drive them to it. Well it's going to be legislative by then doing the right thing.

John Daniel

Okay. We've heard some stuff and read about just there are tenders out there or at least maybe not tenders, but sort of just request for quotes from a few of the large majors for -- whether it be electric or dual fuel. Can you just kind of walk us through that trend what you're seeing? I know you don't want to end customers, but just in terms of what's out there in terms of the real interest?

Kyle O誰eill

Sure Matt. John, this is Kyle. I think we're definitely seeing an increase in inbound calls. We've been on a couple of here industry education program here in terms of really trying to get out there in front of as many customers as possible and educate them exactly how our system works and what the benefits are.

A lot of that work is again continues to pay off with a number of the inbound calls we're now receiving. But -- and I said it's a long sales cycle and we feel very optimistic about this movement gaining real traction and customers have -- really raising the technology going forward.

Joel Broussard

John I see a huge disconnect on the lip service from the executive level to -- from the executive level of our E&Ps from the procurement and operational people when it comes to the admissions.

John Daniel

It would just seem to me -- I mean I'm assuming you might not want to formally announce it but it seems realistic that you'll have another electric fleet built in 2020 above and beyond the shelf fleet I guess is where I'm going?

Joel Broussard

No comment.

John Daniel

Okay. Fair enough. Thank you very much.

Joel Broussard

Yes John.

Operator

Our next question is from Daniel Burke with Johnson Rice.

Daniel Burke

Yes, good morning guys. Maybe wanted to delve a little bit into the commercial outlook, maybe the financial outlook headed into 2020. Good to get the detail on the nine fleets lined up to be working as of now with potential for more in early 2020.

But could you talk at all about what type of expectations you might have in terms of EBITDA per utilized fleet looking out to that period of time? And I guess one thing I'm curious about it seems like you'll have the full quarter's contribution from the electric fleet contract announced today in the Northeast, plus you're picking up Shell. So I would think that will be supportive. On the flip side, I would assume there'll be pressure on the diesel side and pressure on pricing in general. But anything you guys can add would be helpful?

Joel Broussard

To the contrary all of these equipment, we expect to be working first quarter of next year.

Kyle O誰eill

Yes. That's right. And we really -- we're not providing guidance at this time. But we do expect to see some pricing pressure on some of our fleets. But these are the markets where our long-term partnering and contracting strategy really bears fruit.

Daniel Burke

Got it. And then Joel or Kyle last quarter we got maybe this detail. In terms of fleets that are dedicated versus contracted in 2020, you've got the electrics that will be contracted. Do you have any diesels that will remain in the contracted bucket in 2020?

Joel Broussard

Yes. Most definitely will be. Yes we only have two dedications out of those the ones we announced.

Daniel Burke

Okay.

Joel Broussard

And that's through 2020 and beyond. Yes.

Daniel Burke

All right guys. That's helpful. Maybe just a quick one here, Kyle. For clarity I assume this is the case but the $20 million to $25 million of growth CapEx for the Shell fleet that's total remaining CapEx and that would include what's in accrued as well as what has not yet hit the balance sheet?

Kyle O誰eill

No. This is remaining...

Joel Broussard

Remaining to be incurred. Sorry remaining to be incurred.

Kyle O誰eill

And Daniel, we would expect that that gets paid out over the course of 2020. We've been able to work out terms for some critical vendors so that the cash impact doesn't hit all of Q4.

Daniel Burke

Got it. And I guess, I'll try to cram one more in just on the very near term for Q4. The press release suggests you guys dipped to seven fleets at the end of Q3 and bounced back up to nine. It's encouraging to see what looks like sort of a counter-seasonal trend. Anything to point to that's driven that? I guess I'll leave it there. Thanks.

Joel Broussard

Well, we had some of our older contracts roll off and we had to reposition the fleets in different customers, but two of those fleets went with existing customers that had existing fleets.

Kyle O誰eill

Yes. And the exit rate that was just -- that was the active we count on a day at a point in time. I think a better metric to always look at is kind of the average active fleets or average fully utilized fleets for the quarter.

Daniel Burke

Got it. All right, guys. Look I'll leave it there. Again, nice quarter in Q3.

Joel Broussard

Thank you.

Kyle O'Neill

Thanks.

Operator

Our next question is from Derek Podhaizer with Barclays.

Derek Podhaizer

Hey, good morning, guys.

Joel Broussard

Hey, good morning.

Kyle O'Neill

Good morning.

Derek Podhaizer

Just wanted to break apart some of the profitability gains that you saw. Maybe you can help kind of bucket it between what you're able to capture via the efficiency step-up and then also letting that one fleet go and idle that. How much of a drag was that on profit? Just if you can help kind of expand on the reason for the pick-up in profitability per fleet?

Joel Broussard

That one fleet that we idled was our first fleet we built and it wrote off of a legacy contract. So the uptick was due to two of our fleets rolling off of long-term contracts.

Derek Podhaizer

Got it. And then just your thought...

Joel Broussard

That was found in the downturn in 2016.

Derek Podhaizer

Got it. That's helpful. I know you mentioned that you're not marketing that -- that idled fleet is not going to be marketed as a stand-alone fleet. I mean when you look across the rest of your conventional and maybe even your older Clean Fleet. I mean how are you thinking about it? Are there any other future sort of retirements or anything you can rightsize or maybe pull some pumps off to increase the capacity on your other fleets? Just thinking about all the attrition and recalibration we've seen so far across the press room as to help with the oversupply. Just kind of thinking about where -- what else could you do besides taking that one fleet out?

Joel Broussard

Not until 2021. 2020 we think all our diesel fleets have spoken for and will be working.

Kyle O'Neill

But we constantly evaluate that. If we need to spend maintenance CapEx on anything we look at where that's going to work what the pricing is what the length of duration to ensure that we're going to hit our target rate of return on any CapEx dollars we spend.

Joel Broussard

And we've always said from the beginning that we're going to replace our diesel fleet to electric and this was the first case.

Derek Podhaizer

Got it. That's helpful. Just last one for me. Just thinking about the 2020 CapEx I know you've mentioned that the $20 million to $25 million some of that will bleed into 2020. Anything besides the maintenance CapEx, which you've given out we can bifurcate that between the diesel and the clean. I mean anything else that we should expect via fleet enhancements to come into 2020 for the total budget?

Joel Broussard

No.

Kyle O'Neill

Yes. I think we're always evaluating new technologies and new innovations. I mean that's a real cornerstone of U.S. Well Services' strategy. So I wouldn't say -- there is no number that we guide to or commit to spending on fleet enhancement, but not to say, it's not possible.

Derek Podhaizer

Got it. That's it for me. Thanks guys.

Kyle O'Neill

Thanks, Derek.

Operator

Our next question is from Steve Gengaro with Stifel.

Steve Gengaro

Good morning gentlemen. Just a quick question as you think about -- obviously the fourth quarter looks soft across the industry. But when you look at your pricing discussions and conversation with customers around the e-fleet versus the conventional fleet. I mean 4Q may be a tough time comparison based on your contracts. But what are you seeing now versus maybe what you saw six to nine months ago as far as the stickiness and willingness of customers to pay maybe a different price for the e-fleets versus conventionals?

Joel Broussard

I think it's reflective in our numbers. When you look at our EBITDA per fleet, our electric fleets are definitely in the top tier of our total EBITDA per fleet which drags up our diesel fleets.

Kyle O'Neill

You're right.

Joel Broussard

Annualized EBITDA.

Steve Gengaro

Is there a way to think about that going forward as we look out and try to think about the...

Joel Broussard

Yes. We were starting to realize some of the fuel savings. At the beginning when we started this and the diesel market was high, we would give the clients all the diesel savings. Now it's pretty much split. So we're making more money on our electric fleets than diesel fleets in the current market.

Kyle O'Neill

Yes. We've had greater success in maintaining or sustaining our pricing on the electric fleets than conventional. And so we kind of move it back into premium pricing on our electric fleets. Because from the E&Ps perspective, they look at what we charge, which we call service and equipment plus the diesel fuel they've got to buy. And then they compare that to the equipment and service and equipment rental price that we charge on the electric. And they are better off with the electric, but we are starting to share those fuel savings.

Steve Gengaro

Great. Thank you.

Kyle O'Neill

Yeah.

Operator

Our next question is from Sal Cohen [ph] with Cowen & Company.

Unidentified Analyst

Hi, good morning. Congratulations on the quarter. Just wanted to get some more color on the debt profile right now. I know you'd mentioned a strong liquidity position. How do you envision that evolving over time? And do you have any deleveraging targets in mind at this point?

Kyle O'Neill

I think as -- once we get our last electric fleet online you're going to see our CapEx spend drop off pretty significantly in 2020 as well as adding that EBITDA contribution. So we expect to see strong free cash flow delivered in 2020 will allow us to pay down debt.

Unidentified Analyst

Got it. And just as a quick follow-up. Do you have any color going into year-end what depreciation for 2019 is going to look like?

Kyle O'Neill

I don't have that off the top of my head, but I can -- we can come back to you with an estimate.

Unidentified Analyst

Okay. Thanks very much.

Kyle O'Neill

Thank you. Sal.

Operator

Our next question is a follow-up from John Daniel with Simmons & Company.

John Daniel

Okay. I've got a dumb question for you. You got the 13 -- the 13 fleets are all spoken for it sounds like for 2020, but nine of which are dedicated. Is that right?

Kyle O'Neill

No.

Joel Broussard

No. Well, it's almost spoken for. Nine are contracted.

John Daniel

So contracted or dedicated?

Joel Broussard

Dedicated and two are -- only two are dedicated. So seven are contracted, two are dedicated. And the other ones we've been awarded the work but the paper haven't been done yet.

John Daniel

Okay. So here's -- that was dumb question number one. Dumb question two is, when you look at these contracted and dedicated fleets, because they're contracted and dedicated should we assume that they are always fully utilized right as you go about how you. Yes?

Joel Broussard

No. I think -- John I think you'll still see some gaps in utilization from time to time. I think if you looked at what we've been doing through the first nine months of the year the utilization is roughly around 90% between probably 85% at the low point to mid-90s. And so I think that's probably a good way to think about the business. Because customers are always going to have some breaks in there. There's going to be things that come up. Short though they might be they will impact utilization.

John Daniel

Got it. And then you mentioned in the release you've got -- the release you said, you had seven active fleets, two Appalachia, two Eagle Ford, three Permian. What do you expect that geographic breakdown to be in early 2020?

Kyle O'Neill

Yes, about the same. I think we'll be handing two more in the Permian, right?

Joel Broussard

Correct. Yes.

John Daniel

So the Permian grows the other -- the Eagle Ford and Appalachia are basically flat?

Joel Broussard

Actually three more in the Permian with the new shale fleet.

John Daniel

Okay. Got it. And Joel hypothetically you were to order a new electric fleet hypothetically, what would the -- are you seeing any reasons that the CapEx per fleet comes -- is coming down just as you guys get better at building these things? And what would that number roughly be?

Joel Broussard

Our next fleet we feel we can go up to $30 million because we already have the generator. It's a.

John Daniel

Impressive. And then the last one sorry to ramble here. But I know electric is sort of -- is your forte. Would you entertain buying Tier 4 DGB engines for your conventional fleet?

Joel Broussard

No, John. I mean, we've had some Tier 4 engines. Actually, we've had four of them fail with less than 2,600 hours. We feel that -- I feel personally the useful life of these things are going to be 60% of a Tier 2 and it's not the answer. The answer is 12 to 18 hours a day is electric motor for the future.

John Daniel

Okay. Thank you for letting me come back for questions.

Joel Broussard

Of course. Thank you, John. Appreciate it.

Operator

There are no further questions at this time. I'd like to turn the floor back to management for closing remarks.

Joel Broussard

Thank you all for joining the call. Good day.

Operator

Thank you. This concludes today's conference. You may disconnect your lines at this time and have a wonderful day.