ProPetro Holding Corp. Q3 FY2024 earnings call

• ProPetro delivered strong Q3 results with resilient free cash flow generation despite industry challenges, anchored by next-generation investments and an industrialized operating model.
• Prioritizes cash flow generation, with strong demand for next-generation services. Has 7 Tier IV DGB dual-fuel fleets and is rolling out FORCE electric frac fleets, with 2 committed to ExxonMobil and plans for more deployments.
• Capital allocation strategy includes fleet transition to electrification, value-enhancing M&A, and shareholder returns. Examples of acquisitions like Silvertip, Par Five, and AquaProp are mentioned.
• Faced challenges in wireline and conventional diesel frac markets, but Tier IV Dual Fuel and Electric equipment remained highly utilized. Cementing business captured market share despite rig activity decline.
• Reduced capital expenditures, with year-to-date cash CapEx down 65% vs prior year. Full-year capital expenditure guidance reduced to $150 million to $175 million.
• Confident in future financial results, focusing on controlling costs, maintaining capital discipline, and being positioned as a leader in North American onshore oilfield services with lower costs and enhanced efficiencies for customers.

In the third quarter, revenues increased 1% versus the second quarter to $361 million. Adjusted EBITDA increased 8% sequentially to $71 million. ProPetro has 7 Tier IV DGB dual-fuel fleets. The FORCE electric frac fleets are being rolled out, with the fourth fleet expected to be deployed under contract by year-end and the fifth active in early 2025. The wireline business saw softness, while the cementing business excelled. Approximately 25% of active fleets are Tier II diesel-only, which were impaired with a $189 million non-cash charge, and the company plans to phase them out in favor of more environmentally-friendly technologies. Revenue contribution details weren't explicitly broken down by specific product segments beyond the general categories mentioned.

• Full-year capital expenditure guidance reduced to a range of $150 million to $175 million, down from prior guidance of $175 million to $200 million.
• Expect to run 14 active hydraulic fracturing fleets in the fourth quarter of 2024 and hold fleet count flat.
• Anticipate continued fleet transition to FORCE electric equipment, with potential for additional fleet deployments in 2025 and beyond, aligning with industry trends towards lower emissions solutions.

• Market softness and competition in the conventional diesel-only frac market.
• Weather events impacting results, such as more weather events in July and August than expected.
• Industry macro headwinds affecting the energy services space, including potential challenges in maintaining market share and dealing with changing customer preferences.
• Risks associated with forward-looking statements, where actual results may differ from expectations due to various uncertainties beyond control.

Q: You noted that you expect your active fleets to hold flat at around 14 fleets in the fourth quarter. Could you give us some more color on the utilization of those fleets?

A: As stated, fleet count is expected to be flat. There may be normal holiday seasonality with customers taking off a few days around Thanksgiving and Christmas, but from equipment activity standpoint, not a meaningful decline, and the company is positioned as baseload for many customers.

Q: Just wanted to maybe get some more clarification on the prior question. So some of your peers expect revenues to decline kind of double digits quarter-over-quarter in Q4. Where do you expect -- what do you mean by normal seasonality and there's some weather impacts in Q2, maybe you may not see that in Q4. So where do you expect kind of quarter-over-quarter revenue change?

A: Expecting just into the double-digit range on the low end, mostly driven by normal seasonality, with active fleets operating consistently through the quarter.

Q: In terms of your working capital, we saw some cash outflows and especially we see that your payables sharply declined, days payable came down quite a bit. Where do you -- what was the rationale for that? And how do you see that tracking in Q4 and beyond?

A: Have been working on strategic supply chain initiatives, which have improved the working capital position. Don't see further declines in the AR minus AP spread, and are benefiting from discounts and cost structure improvements in other ways.

Q: Your fourth and fifth fleets and beyond, how do the economics of those compare to the first 3 that you built? And any future construction that happens in, let's say, 2025, do you think that's going to be still in terms of leases or do you expect to buy them outright?

A: Electric fleet pricing has gone up slightly over the last year. Regarding leases vs buys, will take the most favorable option based on capital structure and dynamic capital allocation, ensuring deployment of dollars in the best place to create value.

Q: With your fleet high-grading and ending of investment on the legacy Tier 2 pumps, how should we think about your frac maintenance expense going forward? Kind of what -- where is that trending to on a per fleet basis?

A: Maintenance expense is down significantly, with electric fleets not coming into the shop and most maintenance done in the field, leading to right-sizing of the maintenance organization. Maintenance CapEx expected to show improvements relative to new fleets deployed, with more context to be provided in future calls.

Q: With your revenues to be down sequentially about 10%, what do you think the decremental on that decline in revenue would be from an EBITDA perspective?

A: Decrementals probably in the neighborhood of 26% to 30%, dependent on how it plays out over the quarter, with cost management having provided 100% incrementals this quarter which isn't sustainable.

Q: I just wanted to see if you could give us an update on AquaProp and how the integration efforts are going into your frac fleets.

A: AquaProp has been great, but sand market changes have created noise, taking time for growth, but the company still believes in the wet sand solution and long-term potential to fold it in commercially.

Q: As the world evolves and most of the fleets that are active and marketed are electric or at least high-quality dual fuel assets, how do you maintain differentiation?

A: Differentiation comes down to performance, including guaranteeing operating performance in agreements, exceeding expectations, and having a mindset of competition and performance. An example is an e-fleet pumping continuously for over 11 days straight, and continuing to push the bar higher with customers expecting that.