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Edited Transcript of FRAC.N earnings conference call or presentation 15-Mar-17 12:30pm GMT

Thomson Reuters StreetEvents

Q4 2016 Keane Group Inc Earnings Call

Mar 15, 2017 (Thomson StreetEvents) -- Edited Transcript of Keane Group Inc earnings conference call or presentation Wednesday, March 15, 2017 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Kevin McDonald

Keane Group, Inc. - EVP, General Counsel & Secretary

* James Stewart

Keane Group, Inc. - Chairman & CEO

* Greg Powell

Keane Group, Inc. - President & CFO

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Conference Call Participants

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* Jud Bailey

Wells Fargo - Analyst

* John Daniel

Simmons & Company - Analyst

* Scott Gruber

Citigroup - Analyst

* Sean Meakim

JPMorgan Chase - Analyst

* Blake Hutchinson

Howard Weil - Analyst

* Jay Pelow

Bank of America Merrill Lynch - Analyst

* Jim Shum

Guggenheim Securities - Analyst

* Rob MacKenzie

IBERIA Capital - Analyst

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Presentation

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Operator [1]

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Good morning and welcome to the Keane Group first-quarter and full-year 2016 conference call. As a reminder, today's call is being recorded. (Operator Instructions). For opening remarks and introductions, I would like to turn the call over to Kevin McDonald, Executive Vice President and General Counsel of Keane Group. Please go ahead.

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Kevin McDonald, Keane Group, Inc. - EVP, General Counsel & Secretary [2]

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Thank you. Good morning, everyone and thank you for joining us. With me today are James Stewart, Chairman and Chief Executive Officer of Keane and Greg Powell, President and Chief Financial Officer.

Before we provide our prepared remarks, I would like to remind all participants that our comments today will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 regarding future expectations about the Company's business, management's plans for future operations or similar matters which are subject to certain risks and uncertainties.

The Company's actual results could differ materially due to several important factors, including those risks and uncertainties described in the Company's S-1 filing with the Securities and Exchange Commission, many of which are beyond the Company's control. Any forward-looking statements we make today are only as of today's date and we undertake no obligation to publicly update or review any forward-looking statements.

Additionally, we may refer to non-GAAP measures, including adjusted EBITDA and adjusted gross profit during the call. Please refer to our public filings and disclosures, including this earnings press release for definitions of our non-GAAP measures and the reconciliation of these measures to the directly comparable GAAP measures. With that, I would now like to turn the call over to James.

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James Stewart, Keane Group, Inc. - Chairman & CEO [3]

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Thank you, Kevin, and thanks, everyone, for joining us on the call this morning. We are extremely excited to be holding our first earnings call as a public company. We priced our successful initial public offering on January 19, and began trading on the New York Stock Exchange on January 20. Achieving this milestone was the result of so many valuable contributions from our employees and business partners. I am extremely thankful to the entire Keane team for the years of hard work that it has taken to get our company to this point.

In addition to our committed employees, our customers, buyers and investors have shown dedication and loyalty for which I'll offer my most sincere appreciation. I have been in this industry for more than 30 years and I can confidently say that I've never been more excited and passionate about the business and the opportunities ahead of us.

From our new public company platform as a pure play completions business, we remain focused on running and growing the Company. While this major achievement affords our Company significant benefits and broader opportunities, it does not change our commitment of providing safe, efficient and high-quality service to our valued customers every day.

For the executive team, our focus is on identifying and capitalizing on opportunities that we believe will increase shareholder value and on fulfilling our customers' high expectations for a world-class service experience.

Greg and I had the opportunity to meet some of you during our roadshow in January, but for those that we haven't yet met, we would like to spend a few minutes telling you about Keane and how we are well-positioned in the current market environment.

Keane has a rich history evolving from a family-run business with just one frac crew working for a single customer and a single basin in the Northeast. In 2011, Greg and I, together with other members of the Keane team, embarked on a strategy to build a platform diversified into key oil and natural gas US land basins along with adjacent completion services.

Over the last six years, we were able to execute and grow to become a market-leading, independent and integrated provider of completion services in the US. We have expanded from a base of 80 employees in 2011 to more than 1700 employees today.

We currently own approximately 950,000 high-quality hydraulic horsepower that is well-maintained making us one of the largest pure play pressure pumpers in the US.

Through our strategic footprint in major US growth basins, including the Permian, Marcellus Utica, SCOOP STACK and the Bakken, we support some of the leading E&Ps in the industry. We have assembled a highly capable management team of seasoned industry veterans who continue to execute on the Company's plans to grow and enhance shareholder value.

Reflecting on what has been achieved over the past six years makes us proud of our accomplishments and optimistic about our ability to create additional value for our shareholders.

Today, we would like to discuss several differentiating attributes that have been critical to Keane's success and in today's environment, a significant component of that is speed to market.

The first piece of speed to market is our equipment. Our high-quality fit-for-purpose and well-maintained equipment enables us to quickly respond to market demand. Given our financial strength and discipline through cycles, we have been able to preserve and maintain our assets enabling timely and low-cost recommissioning.

In addition, we have invested in component inventories and have strategic agreements in place with key component suppliers to ensure that we keep our fleets well-maintained and reliable.

Another key attribute of our speed-to-market advantage comes from our well-managed and reliable supply chain organization. We have scale and flexibility across all critical components, including sand, chemicals, railcars, terminals and last mile logistics. Our wide and diversified network of relationships and sand supply contracts with some of the leading sand providers in the industry is critical to ensuring continuity of supply and the ability to optimize landing costs.

This is especially true in today's environment as effective navigation of the US railway system is more critical than ever, frac jobs are getting more complex and volumes of proppant use and completion designs continue to increase.

Our supply chain includes a logistics network of more than 1200 railcars, access to a broad network of transload terminals, including unit train capability and a fleet of sand-hauling trucks for the last mile. This comprehensive and proactive approach to managing our supply chain allows us to provide our customers with the level of dependability necessary to ensure Keane will complete jobs calmly and efficiently.

The third leg of our speed-to-market stool is our robust balance sheet. As Greg will expand on, we have a strong balance sheet, which provides significant flexibility. Our balance sheet was a key differentiator during the downturn allowing us to maintain investment in our safety and maintenance programs ensuring the integrity of our fleet.

This investment is already paying dividends providing the ability to quickly (inaudible) cost, reactivate fleets in response to the increasing market demand. To date, we have recommissioned seven fleets at an average cost of approximately $1.6 million per fleet.

The second attribute differentiating Keane is our focus on aligning with customers who share our values and commitment to safety and efficiency. We have said that not all horsepower is created equal and our partnership approach of aligning with customers is a key part of our value proposition.

Safety is a critical factor in winning and retaining relationships for the caliber of customers that we partner with. Our focus on safe operations is a cornerstone of Keane's culture and a responsibility we owe to our employees, customers and the communities in which we operate. We are proud, but not complacent, to have an industry-leading safety record with a total reportable incident rate well below the industry average.

We have multi-year relationships with top tier operators who are active across all major basins in the US and have the ability and balance sheet to remain active through cycles. Just as rigs have become more efficient so too has the ability for frac crews to complete more work, greater efficiencies driven by 24-hour operations and zipper fracking.

We partner with customers who focus on high efficiency well completions. That enables us to maximize the operational and financial efficiency of our assets resulting in our ability to achieve attractive gross profit margins while providing our customers with great value.

And then, finally, technology is an attribute that further differentiates Keane in the marketplace. We are a comprehensive provider of completion services, including hydraulic fracturing, wireline plug and perf and engineering solutions.

We offer a suite of engineering solutions and proprietary products each of which supports our customers' objectives for production, optimization and operating efficiency. We have exceptionally talented fluid chemists and engineering specialists who engage directly with customers to develop customized completion solutions.

Our customer-centric products include diverter technology, dust control, produced water, friction reducers and more. These products will continue to be of growing importance to our customers, particularly with the ongoing increase in service intensity.

Before I turn things over to Greg to discuss our recent results, I would like to take this opportunity to give an update on our outlook for the market. We are encouraged by the pace of activity that we saw as we exited 2016 and the ongoing acceleration of momentum thus far in 2017. We continue to receive strong demand signals from our existing customers who are executing on significantly increased 2017 capital programs as compared to 2016.

This increase of activity has begun to meaningfully tighten the supply of job-ready equipment in the field. The market has tightened much faster than anticipated during our IPO roadshow just two months ago leaving us well-positioned.

As part of that, the increase in service intensity that we saw throughout the downturn continues in the current environment. This expansion in intensity places great stress on frac equipment. We believe that only service providers that have well-maintained fleets, strong supply chains and well-trained frac crews are able to consistently deliver on today's completion jobs.

With our modern fleet of quality equipment, robust supply chain and rigorous training program, we are prepared to win alongside our customers in the current environment. Modern frac jobs also can reduce the lifecycle of equipment components, something that we are well-prepared for as we continue to warehouse and inventory of spare components enhancing our ability to maintain our assets quickly and efficiently ultimately leading to better adjusted gross profit per fleet.

Given the activity levels we saw during the fourth quarter, we converted additional frac fleets from warm to hot status to meet expected demand from existing customers. As a reminder, hot fleets refer to fleets on which we have spent capital and are ready for deployment with trained personnel. Warm fleets refer to idle fleets that we can get to job-ready status. We expect average commissioning costs in the range of $1.7 million and believe it will take us 45 days or less to deploy warm fleets.

Part of the time involved in deploying warm fleets is driven by our unwavering commitment to safety and service quality. Each of our new employees undergo intensive training regardless of the years of experience to ensure every team member upholds and contribute to Keane's industry-leading safety record.

We've spent approximately $2.7 million during the fourth quarter converting three frac fleets from warm to hot. Two were deployed into the build during January and the third in March bringing total deployed fleets from 13 to 16 or 70% utilization of our 23 total fleet.

Given the demand we are seeing from our existing customer base, we expect to continue to accelerate (inaudible) of additional fleets from warm to hot. With the favorable trends that we are seeing on pricing in addition to the significant benefits we accrued from partnering with highly efficient customers, we are prepared to responsibly accelerate the reactivation of our remaining horsepower subject to hiring and proper training of crews.

As market dynamics tighten, we continue to see pricing improve. We have re-openers in our agreements for dedicated capacity providing us the opportunity to recover cost escalations and mark-to-market every three to six months. This means we have the tools necessary to improve our profitability and to efficiently allocate our resources.

Additionally, we expect our supply chain efficiencies to offset margin pressures over the long term. We are in active discussions for additional deployments principally with our existing customers and we will continue to allocate resources with efficient customers that enable us to maximize adjusted gross profit per fleet.

With that, I would like to turn it over to Greg who will provide a review of our fourth-quarter financial performance and some additional color on the first quarter. Greg?

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Greg Powell, Keane Group, Inc. - President & CFO [4]

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Thanks, James. Revenue for the fourth quarter of 2016 totaled $151 million, up nearly 3 times from the $54 million we realized in the fourth quarter of 2015. Adjusted EBITDA for the fourth quarter totaled $6.1 million, a strong increase compared to the approximately $400,000 we reported for the prior year fourth quarter.

During the fourth quarter, we had approximately $6 million of one-time charges, including approximately $2.7 million from the recommissioning of three additional frac fleets, two of which were completed by the end of the fourth quarter and approximately $2.3 million associated with the pre-investment in additional workers to support the increased revenue-generating activity we are experiencing today and expect to realize over the near term.

We had unique opportunities to bring on a large pool of experienced workers and we are proactive in growing our team. Pre-investing in experienced talent enhances our competitive advantage by maximizing our speed to market while also limiting the impacts of potential labor constraints resulting from the market recovery.

Total adjusted gross profit for the fourth quarter of 2016 was $13.2 million compared to $3.9 million during the fourth quarter of 2015. Selling, general and administrative expenses were $7.9 million versus $6.9 million for the fourth quarter of 2015.

In our Completion Services segment, we averaged approximately 12 deployed frac fleets during the fourth quarter and exited the year with 13 deployed fleets, up from an average of approximately five fleets in the fourth quarter of 2015, a 160% increase.

Fourth-quarter revenue totaled $148 million, up from $54 million in the prior-year quarter, a 179% increase. Annualized revenue per deployed fleet was $49.3 million, up from the $43.2 million we realized in the fourth quarter of 2015. We anticipate per deployed fleet revenue to increase as available capacity becomes more scarce.

Adjusted gross profit for Completion Services was $13.3 million, an increase compared to $5.4 million in the fourth quarter of 2015, an increase of approximately 146% driven by higher utilization and improvements in both efficiencies and pricing. Annualized adjusted gross profit per deployed fleet was $4.4 million, up from $4.3 million in the fourth quarter of 2015.

Of our average of 12 deployed frac fleets, 62% were bundled with wireline. Our ongoing emphasis on bundling our Completion Services provides a value-added efficiency tool, creating a win-win for Keane and our customers. By providing this additional component of the well completion process, we provide greater efficiency for both our customers and Keane.

In our Other Services segment, fourth-quarter revenue and adjusted gross profit was approximately $3.1 million and negative $100,000, respectively, compared to zero revenue and gross profit in the fourth quarter of 2015. Fourth-quarter 2015 revenue and gross profit results were zero due to the idling of our drilling business in May of 2015.

Turning to our balance sheet, we exited 2016 with debt of approximately $270 million, cash of $49 million, net debt of approximately $220 million and total liquidity of $89.2 million.

Our January IPO raised $254 million of net proceeds, which we used to repay our existing term loan in full and repaid $50 million of our notes. The balance of the net proceeds were added to our balance sheet. As a result, on an as-adjusted basis at year-end, we had debt of $130 million, balance sheet cash of $146 million and total liquidity of $186 million.

In line with our credit strategy, we have successfully entered into a new $150 million asset-based lending facility, which expands borrowing capacity, extends maturity and overall contains more favorable terms.

Additionally, today, we successfully entered into a new 5.5 year $150 million senior secured term loan facility and repaid our 12% secured notes. The facility is backed by Owl Rock Capital, a leading energy lender. The term loan results in meaningfully improved commercial terms, including a significantly lower interest rate on our outstanding debt and contains no financial covenants other than minimum liquidity.

The new facility also provides us with the right to request an increase in the term loan by up to $125 million providing us additional flexibility to act on future growth opportunities, including potential acquisitions.

We continue to believe that further industry consolidation will take place. With our leading industry platform and flexible capital position, we are committed to pursuing potential transactions that fit our model and are accretive all while maintaining our long-standing commitment to financial discipline.

Given the timing of our first post-IPO earnings call, we want to provide a window into what we are seeing for the first quarter. Going forward, we expect to report quarterly earnings earlier in the reporting cycle. The strong momentum that we saw during the fourth quarter of 2016 has continued and accelerated in 2017, driving increased demand for our services.

Job-ready equipment is quickly getting absorbed by the market, which has led to tightened supply for horsepower and improved pricing. The recent increases we are seeing in sand pricing, however, are resulting in a headwind on profitability. Because of the success that we had in proactively and materially driving down price on our purchase sand throughout the downturn, we are now seeing relatively higher inflation rates as our sand prices approach current market averages.

As James noted earlier, our portfolio of pressure pumping agreements allow us to adjust pricing with periodic re-openers every three to six months to reflect these changes in input costs and align contract pricing to market terms for dedicated capacity.

As for our fleet specifically, we currently have 16 fleets deployed resulting in approximately 70% utilization on our 23 fleets. Pricing has continued to improve during the first quarter with leading-edge new dedicated capacity pricing up 25% sequentially as compared to the fourth quarter of 2016. We expect a combination of these factors, together with the activity level we are seeing, to result in first-quarter sequential revenue increases of between 30% and 40%.

Before we open up the lines for Q&A, I would like to hand the call back over to James for some closing remarks.

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James Stewart, Keane Group, Inc. - Chairman & CEO [5]

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Thanks, Greg. I wanted to again thank each and every one of our customers and employees. We are fortunate to have supportive and successful customers, as well as a driven team of experienced and dedicated employees and we look forward to succeeding together.

With that, we thank you again for your time and now we would like to open it up for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions). Jud Bailey, Wells Fargo.

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Jud Bailey, Wells Fargo - Analyst [2]

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Thank you. Good morning. A question -- first of all, appreciate the color on the revenue outlook in the first quarter. I was wondering, given some of the cost inflation you are seeing, Greg, could you maybe give us any color or a way to think about margins for the first quarter in terms of the incremental margins or how to think about gross profit per fleet given some of the headwinds you referenced on sand?

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James Stewart, Keane Group, Inc. - Chairman & CEO [3]

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Yes, thanks, Jud. So the price improvements we have seen were kind of building momentum through the quarter as the supply and demand of frac capacity continued to tighten and the sand inflation really peaked in February and continue to be a headwind through the quarter.

I think on the gross profit per fleet, we will see improvements versus the fourth quarter, but we have got to add up the sand inflation and the pricing of our fleet to see where that shakes out. We will give some more color on that in the first-quarter call.

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Jud Bailey, Wells Fargo - Analyst [4]

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Okay. I guess my follow-up is it sounds like you are seeing a lot of opportunities to deploy additional spreads. James, could you talk about what your thoughts on kind of a line of sight for future deployments? Is it prudent to think about another one to two weeks going after this quarter or second quarter? How should we think about the cadence on potential reactivations going forward?

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James Stewart, Keane Group, Inc. - Chairman & CEO [5]

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Yes, John, I mean that is a good question. I mean we are seeing continued demand beyond the 16 crews that we have working today. A lot of our existing customers are expanding, in the process of expanding their plans. It is kind of hard to say exactly the timing because their budgets are pretty much real-time today. So as oil price goes, or oil and gas prices go up or down, these things can come sooner or later, but we do have line of sight to add additional crews over the rest of the year.

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Jud Bailey, Wells Fargo - Analyst [6]

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Okay. And just one last one from me. Greg, I don't if you have a number in mind for the first quarter, but I assume you will have some reactivation costs for 1Q. I assume it is going to be lower than it was in the fourth quarter. Do you have a sense of how big that could be?

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Greg Powell, Keane Group, Inc. - President & CFO [7]

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Yes, it will be lower. It just depends on the number of fleets. We will be close to the same number of fleets. Because of the demand we are seeing, we are pushing very hard to move fleets from warm to hot and we are probably going to get at least another three fleets from warm to hot given the three deployments in the first quarter, but they will be in the range of closer to 1.8 per fleet.

In the fourth quarter, you will notice we had an anomaly of a large pre-investment in headcount because of a unique opportunity we had in the market that won't recur in the first quarter, so it will be lower.

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Jud Bailey, Wells Fargo - Analyst [8]

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Okay, great. I will turn it back. Thank you.

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Operator [9]

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John Daniel, Simmons & Company.

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John Daniel, Simmons & Company - Analyst [10]

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Greg, just on that last question, I think you mentioned three fleets going from warm to hot. Does that mean we are going from 16 working fleets to 19 or is that three included from the 13 to 16?

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Greg Powell, Keane Group, Inc. - President & CFO [11]

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No, in the first quarter, in March here, we have got 16 working and then we are getting three from warm to hot ready to go to work and then we will look at customer opportunities and economics before we kind of go from hot to active.

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John Daniel, Simmons & Company - Analyst [12]

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Okay. Just as we think about, coming back to margins here, the adjusted gross profit per fleet was $4.4 million, assuming I heard that correctly and recognizing the tailwind of higher pricing being offset by the headwind of rising costs, do you see that number being higher in Q1?

And then again kind of looking out to Q2, once you get all these fleets out there and it is a lag affect, if you will, from when you can recoup pricing, what is the trajectory on margins in Q2 versus Q1?

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Greg Powell, Keane Group, Inc. - President & CFO [13]

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Yes, in the first quarter, we will see net pricing lift versus the fourth quarter so that number will be higher and then we have got a portfolio of dedicated agreements and some of them can price, or traditional MSAs can price, reprice faster, so we are actively working on those and then we will have a portion that are three months and those will reprice in the second quarter and then a portion that are six months and they will reprice in the third quarter. So there should be a steady trajectory of margin improvement as long as the backdrop holds up.

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John Daniel, Simmons & Company - Analyst [14]

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Okay, thank you. And then last one from me. James, you mentioned the willingness to pursue acquisitions. Aside from targeting accretive deals, can you speak to specific productlines that you are targeting and just the likelihood of deals potentially being consummated this year?

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James Stewart, Keane Group, Inc. - Chairman & CEO [15]

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Yes, John. Thank you. A good question. I think we are going to stick to the same playbook that we have had. May focus on our Completion Services line. That is going to be pressure pumping equipment, potentially more wireline plug and perf coil tubing, those kind of things.

We do believe at the moment causes cyclicality and the volatility. We are a big believer in a consolidator versus adding equipment to the market at the moment. So we are looking and we do have a pipeline of M&A opportunities that we are looking at and if they are accretive to the value, then we might be able to do some of those.

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John Daniel, Simmons & Company - Analyst [16]

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Okay. And the probability of doing something?

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James Stewart, Keane Group, Inc. - Chairman & CEO [17]

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That is hard to say.

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John Daniel, Simmons & Company - Analyst [18]

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Fair enough. I hope you guys get some spring break time. Thank you.

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Operator [19]

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Scott Gruber, Citigroup.

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Scott Gruber, Citigroup - Analyst [20]

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Good morning. You guys highlighted the pressure you are starting to see from sand, which is fairly well-known in the market. You guys also appear ahead of the curve in terms of hiring incremental crews. Overall, what level of cost inflation are you seeing on the labor side?

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James Stewart, Keane Group, Inc. - Chairman & CEO [21]

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So yes, I mean the sand is much more material in our income statement as far as cost of goods sold. On the labor, we are probably seeing around 10%, but it is on a much lower base though. So materiality, it is lower, but the sand has been (technical difficulty).

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Scott Gruber, Citigroup - Analyst [22]

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Got it. Are you seeing much on the equipment refurb costs? I know it's smaller as well, but just curious.

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James Stewart, Keane Group, Inc. - Chairman & CEO [23]

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We have not seen much on inflation. There has been a little bit on [foraging], which drives the input costs to kind of [fluid ends] and [power ends] a small amount, but we've not seen either a tightening in the supply chain or much price pressure on [consolidated] debt.

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Scott Gruber, Citigroup - Analyst [24]

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Got it. You mentioned a little bit of a cost creep here on restarting. As you look further into the restart effort, are you confident you could still keep the restart costs below that $2 million mark?

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James Stewart, Keane Group, Inc. - Chairman & CEO [25]

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Yes. I mean we feel pretty good about that. The cost creep we have seen hasn't been due to any change in the state of the equipment. It has been, because we are growing faster, we are leveraging some third-party services to help us commission. So there has been a little bit of inflation on that. But we feel pretty good about the average number. When we get to the back of the fence, we will see a little bit higher end on the average, but we will still be in that same -- we updated the number to 1.8 and we feel confident with that.

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Scott Gruber, Citigroup - Analyst [26]

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But nothing stretching into the 5 or 6 range as you get towards the back of the fence?

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James Stewart, Keane Group, Inc. - Chairman & CEO [27]

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Absolutely not.

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Scott Gruber, Citigroup - Analyst [28]

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Got it. I will turn it back. Thanks.

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Operator [29]

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Sean Meakim, JPMorgan.

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Sean Meakim, JPMorgan Chase - Analyst [30]

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Good morning. So on pricing, is the uplift that you see would you say has been better than you have expected? As I think about the variation by basin, we have heard about more competition in the Permian. I wonder if that is having an impact on pricing. Just curious if there is some difference in what you see in the Permian versus in terms of your competitor?

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James Stewart, Keane Group, Inc. - Chairman & CEO [31]

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Yes, Sean, this is James. Yes, I mean we are seeing the pricing -- the pricing is moving faster than we had expected due to the acceleration of the demand. A lot of that is driven by the increase in demand in the Permian, but we are seeing incremental demand pretty much across our footprint. So it is not just isolated to the Permian. I mean things have tightened considerably in all of the basins that we work in.

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Sean Meakim, JPMorgan Chase - Analyst [32]

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Okay. So you wouldn't say significant deviation from the Permian versus some of the others?

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James Stewart, Keane Group, Inc. - Chairman & CEO [33]

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No, no.

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Sean Meakim, JPMorgan Chase - Analyst [34]

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Okay. Okay, got it. And then just in terms of the expanded capacity from your peers, have you been surprised at the rate of reactivation from some of your competition and just thinking about how that could have an influence on your actions with respect to reactivating or eventually thinking about newbuild capacity.

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James Stewart, Keane Group, Inc. - Chairman & CEO [35]

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Yes, Sean, on the current supply and demand, it feels like it is incredibly tight right now, which has given us the pricing power. So the reactivations I don't think have been surprising or burdensome to this point.

As far as new orders, from our perspective, the economics at this point don't justify building capacity. So our belief is a lot of this capacity that is being ordered is either replacement or to supplement fleets that are kind of going from vertical frac crews to horizontal.

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Sean Meakim, JPMorgan Chase - Analyst [36]

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Got it. Okay, great. Thanks, guys.

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Operator [37]

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Blake Hutchinson, Howard Weil.

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Blake Hutchinson, Howard Weil - Analyst [38]

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Good morning, guys. I was hoping you could maybe just give us a little color on how things have maybe changed or evolved here with regard to kind of your effective utilization and the pace at which your customers have been proceeding I guess on average or however you want to couch it. Is there still room to capture more on the efficiency curve on average for what we see posted as kind of your utilized fleet?

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James Stewart, Keane Group, Inc. - Chairman & CEO [39]

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Yes, I mean the customers today, the market has gone into a little different mode than it has been before as all of our customers are more focused on cash flow and having their projects self-funding much faster than before because they have raised a lot of public equity versus debt.

So depending on the customer and when we try to continue to focus and upgrade to the highest efficiency customer that can deliver the volume of well, have a backlog of wells and deliver all of the necessary infrastructure so you can be most efficient. We are continually working with our customer to be more and more efficient. I mean that shows up in our results. We will have more about that when we talk about Q1 later.

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Blake Hutchinson, Howard Weil - Analyst [40]

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Okay. Thank you for that. And then, Greg, just to be perfectly clear with regard to how leading-edge pricing commentary filters through the income statement, I think you did lay it out in buckets, but just so we all come across with the same understanding. The 25% leading-edge commentary, you would expect to be fully effective (inaudible), some time perhaps 3Q?

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Greg Powell, Keane Group, Inc. - President & CFO [41]

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Yes, that is correct, Blake. That's correct.

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Blake Hutchinson, Howard Weil - Analyst [42]

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Okay. Just wanted to make sure that is understood. Thanks. I will turn it back.

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Operator [43]

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(Operator Instructions). [Jay Pelow], Bank of America Merrill Lynch.

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Jay Pelow, Bank of America Merrill Lynch - Analyst [44]

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Good morning, guys. Kind of a similar question to Sean's. Just given the line of sight that the industry has on capacity reactivations and in conjunction with the recent pullback we have seen in oil prices, have conversations with customers over the past couple weeks gotten any more difficult on the pricing side in terms of pushing pricing beyond just the 25% that you have seen since Jan. 1?

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Greg Powell, Keane Group, Inc. - President & CFO [45]

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Yes, that is a good question. I mean the answer to that question is no. I mean we have -- and I mean we're a week (inaudible) into a cycle and I think everybody expects there to be cycles in the market. But, as of today, we haven't had any pushback from any customers on cutting their budgets or changing any plans and we still have the same opportunities in the hopper that we had two weeks ago.

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Jay Pelow, Bank of America Merrill Lynch - Analyst [46]

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Okay, fair enough. And then my other question was just how many of your fleets that are currently active right now are still on that pre-Jan. 1 pricing and kind of an idea of how that is going to roll over over the next couple of quarters.

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James Stewart, Keane Group, Inc. - Chairman & CEO [47]

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Yes, I mean the bulk of the fleet is kind of on fourth-quarter pricing. I mean we have quarterly and then we have six-month kind of reopeners and then there is a handful that are on traditional MSAs that we can reopen. I mean as you can appreciate, it is a little commercially-sensitive to talk about when all of our contracts reopen, but we do have a portfolio of contracts, some are traditional MSAs all the way to a three-year commitment take or pay. As soon as we can reopen those contracts, we are actively working to do so.

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Jay Pelow, Bank of America Merrill Lynch - Analyst [48]

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All right, great. Last one from me, just any line of sight on reactivating or putting to work any of your cementing or coil tubing assets? I know it is small, but --.

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James Stewart, Keane Group, Inc. - Chairman & CEO [49]

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The cementing, no. On the coil tubing assets, like we've mentioned before, we continue to evaluate strategic alternatives either for organic investment, adding some of the bigger units or through M&A. So coil potentially; cement, no.

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Jay Pelow, Bank of America Merrill Lynch - Analyst [50]

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Okay. Thanks.

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Operator [51]

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Michael LaMotte, Guggenheim.

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Jim Shum, Guggenheim Securities - Analyst [52]

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Good morning. This is [Jim Shum] for Michael. Given the tightness in finer mesh frac sand grades, I was wondering if you are seeing any shift in completion techniques, perhaps more gel and away from water fracs?

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James Stewart, Keane Group, Inc. - Chairman & CEO [53]

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Yes, that is a good question. I mean the fine meshes are under pressure and they are seeing inflation and continuity of supply issues. I don't know that we have seen shifts to gel. I think the next step is to maybe look at a 30/50 or the next course grade and continue to do it with the slickwater, but we are having active discussions with our customers and I think the industry is as a whole about having kind of a plan B and plan C design should some of these meshes continue to be tight in supply or the inflation gets to a point where you are better off moving to an alternative grade.

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Jim Shum, Guggenheim Securities - Analyst [54]

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Okay, so you are seeing some slickwater fracs with 30/50 sand?

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James Stewart, Keane Group, Inc. - Chairman & CEO [55]

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Correct.

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Jim Shum, Guggenheim Securities - Analyst [56]

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Okay. And then have you seen any potential constraints to the business as activity and efficiencies ramp up? So like specifically are you seeing any bottlenecks to last mile trucking or access to water or is it too early to talk about that?

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Greg Powell, Keane Group, Inc. - President & CFO [57]

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The trucking so far has held up. I mean it is starting to see some inflation. We have a fleet of our own trucks that we use to supplement the third parties and as you know, there is a whole suite of new last mile solutions that are out there. We are evaluating those and the more of those that get adopted, it takes some pressure off the pneumatics. So we are going to continue to evaluate the solutions that are out there and in the meantime, we are using our pneumatic fleet as an insurance policy to help us ensure continuity of supply and also optimize the cost.

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Jim Shum, Guggenheim Securities - Analyst [58]

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Okay, great. And any issues on the water front?

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Greg Powell, Keane Group, Inc. - President & CFO [59]

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The water is taken care of by our customers. It is something we focus on when we kind of select the customers that we are working with to make sure, like James said, they can meet their requirements on their efficiency side of the ledger. So it is something that we pay attention to, but the customers we work for have ready access to water.

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Operator [60]

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(Operator Instructions). Rob MacKenzie, IBERIA Capital.

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Rob MacKenzie, IBERIA Capital - Analyst [61]

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Thank you. Good morning, guys. I guess my question is on the opportunity you mentioned with regard to picking up a big chunk of workers in the frac business. I presume that is from company W and if so, it would seem like you could already have more than enough crews to not just crew up 19 fleets, but perhaps more. Is that accurate and how many fleets would you say you have the ability to crew up today if you wanted to?

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James Stewart, Keane Group, Inc. - Chairman & CEO [62]

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Yes, we picked up the bulk of the employees in the fourth quarter and we have since deployed three fleets. So a lot of that population has been consumed. We do keep a bench of employees and try to proactively hire for the next fleet, so we probably have one extra fleet of people in the system as we sit here today, but most of the fourth-quarter hires have been consumed in our increase in utilization in the first quarter.

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Rob MacKenzie, IBERIA Capital - Analyst [63]

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So that one extra fleet, that would mean 20, correct? That includes the three hot-stacked fleets plus one more?

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Greg Powell, Keane Group, Inc. - President & CFO [64]

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No, it would just mean -- one 24-hour crew for us is around 60 people. So we have an extra 60 people in the system.

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Rob MacKenzie, IBERIA Capital - Analyst [65]

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Okay. But my question then was are the hot-stacked fleets, the hot fleets all crewed or not?

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Greg Powell, Keane Group, Inc. - President & CFO [66]

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They are not all crewed, they are just ready to go from an equipment perspective.

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Rob MacKenzie, IBERIA Capital - Analyst [67]

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Got it. Thank you. And then how much do you think, and I know it's hard to separate, but how much do you think the removal of call it that 0.5 million horsepower from the market affected the pace at which this market tightened?

And then kind of building on an earlier question, how do you gauge the risk that incremental capacity adds and/or reactivations help loosen that up here, particularly in the context of weakening oil prices?

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James Stewart, Keane Group, Inc. - Chairman & CEO [68]

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Well, I mean our opinion is that whatever that number is that is dispatchable horsepower and there is a lot of different thoughts on that, but let's just say it is plus or minus 10 million horsepower, we believe that horsepower has been dispatched and then there is probably -- I think we got up to about 17 million or so in the peak in 2014 and we believe maybe half of that can come back at some cost once the margins continue to improve. I think we will see some of that come back as margins improve. Margins are not at and the demand is not adding incremental horsepower yet.

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Rob MacKenzie, IBERIA Capital - Analyst [69]

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Okay. Thank you for your time.

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Operator [70]

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John Daniel, Simmons & Company.

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John Daniel, Simmons & Company - Analyst [71]

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Thanks for putting me back in. Greg, just given the debt refinancings and the new term loan, can you tell us where cash is post all of this, as well as what the outstanding debt balance is as of today? I'm trying to get that right.

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Greg Powell, Keane Group, Inc. - President & CFO [72]

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Yes, so the debt balance as of today, thanks for bringing that up. We are excited; we just signed a new term loan today. It extended the maturity out 5.5 years. It is $150 million to replace our legacy note, which was 12% interest. The new one is L725, very covenant light, just a $35 million minimum liquidity and one feature we are excited about is the ability to upsize $125 million, which gives us good stretch for growth.

So the debt today is sitting at $150 million as adjusted for the IPO. We had cash at year-end at $146 million, so we will roll that through the first quarter and we got CapEx and the working capital growth and then we will kind of update on the cash numbers, John, here when we get first quarter out.

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John Daniel, Simmons & Company - Analyst [73]

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Fair enough. And then just one last one from me, just kind of looking ahead to Q2. Given that the bulk of your fleets are still on Q4 pricing, some of which will be repricing in the coming months, as well as the fact that you'll have the full quarter benefit in Q2 of the three reactivated fleets and potential additional fleets, is it reasonable to assume that Q2 revenue could be up at a similar clip as the Q1 improvement?

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Greg Powell, Keane Group, Inc. - President & CFO [74]

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I think based on the carryover you described, yes. As far as incremental fleet to this point, it is too early to tell. We will kind of continue to monitor the market to move another fleet from active, but just as far as rolling forward, what you mentioned, that is a fair assumption.

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John Daniel, Simmons & Company - Analyst [75]

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Okay. Thanks, guys.

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Operator [76]

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Thank you. At this time, I will turn the floor back to Mr. James Stewart for closing remarks.

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James Stewart, Keane Group, Inc. - Chairman & CEO [77]

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Thank you, everyone, for joining our Q1 quarterly call.

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Operator [78]

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Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you, everyone, for your participation.