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Edited Transcript of FTSI.N earnings conference call or presentation 31-Jul-19 2:00pm GMT

Q2 2019 FTS International Inc Earnings Call

FORT WORTH Aug 11, 2019 (Thomson StreetEvents) -- Edited Transcript of FTS International Inc earnings conference call or presentation Wednesday, July 31, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Lance D. Turner

FTS International, Inc. - CFO & Treasurer

* Michael J. Doss

FTS International, Inc. - CEO & Director

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Conference Call Participants

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* Andrew Ginsburg

R.W. Pressprich & Co. - Associate Director

* John Matthew Daniel

Piper Jaffray Companies, Research Division - Research Analyst

* Konstantin Manoukian

Independent Credit Research LLC - Founder and CEO

* Taylor Zurcher

Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research

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Presentation

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Operator [1]

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Thank you, and good morning, everyone. We appreciate you joining us for the FTS International conference call and webcast to review second quarter 2019 results. As a reminder, this conference is being recorded for replay purposes.

Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, expectations, anticipations or predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those expressed in any forward-looking statement. These risks and uncertainties are discussed in the company's annual report on Form 10-K and in other reports the company files with the SEC. Except as required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statements.

The company's SEC filings may be obtained by contacting the company and are available on the company's website, ftsi.com and on the SEC's website sec.gov. This conference call also includes discussions of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures as well as reconciliations of these non-GAAP measures to their most directly comparable GAAP measure.

I'll now turn the call over to Mike Doss, FTSI’s CEO. Mike?

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Michael J. Doss, FTS International, Inc. - CEO & Director [2]

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Thank you, and good morning, everyone. I'm here with Lance Turner, Company CFO. I'll first go through our financial highlights, and then I'll cover some business and technology updates before going to Q&A. I'm pleased to announce that we had another strong quarter operationally as our crews continued to increase their pumping hours and stages per day. Revenue was $225.8 million in the second quarter, up 1.5% from the first quarter.

Our stage count increased by 7%, but the revenue impact of that was mostly offset by lower sand revenue as more customers sourced their own sand and lower average pricing. We had 21 average active fleets in the second quarter, up from 20 in the first quarter. Today, we have 20 fleets working with 9 in the Delaware Basin, 1 in the Midland Basin, 3 in South Texas, 3 in the Northeast, 3 in Mid-Con, and 1 in East Texas/TMS. Of the 20 fleets, 10 are working for large-cap E&Ps, 3 are working for small and mid-cap E&Ps, and 7 are working for private E&Ps. 3 relocations are single-well ops and the rest are zippers.

Adjusted EBITDA was $41.9 million, up from $39.4 million in the first quarter on higher -- on the higher volume offset by a full quarter impact of pricing concessions that we gave in the first quarter. Excluding a loss from our wireline business, which was idle at the end of June, adjusted EBITDA in the second quarter would have been $43.8 million or $8.3 million per fleet annualized. SG&A was $21.7 million in the second quarter, down from $23.6 million in the first quarter. SG&A for the third quarter is expected to be between $21 million and $22 million.

Net income was $5.9 million or $0.05 per share in the second quarter compared to a net loss of $55 million in the first quarter. The loss in the first quarter was primarily due to $60.8 million of charges related to supply commitments and asset impairments. As for guidance, we expect to average between 19 and 20 average fleets in the third quarter, with adjusted EBITDA per fleet of $7 million to $8 million. The slight guide down on EBITDA per fleet is due to us expecting to lose a few points on pricing. We currently expect to exit the third quarter with 17 or 18 active fleets due to customers dropping fleets. We're going to try to place those fleets, but we won't work for free. Our cutoff is about $5 million adjusted EBITDA per fleet.

CapEx was $14.9 million in the second quarter, up from $11.7 million in the first quarter. We currently expect to spend between $55 million and $60 million for the full year. Our annual maintenance CapEx requirements are between $2.5 million and $2.7 million per active fleet, which is one of the best -- one of the lowest in the industry. That is due to our structural cost advantage in manufacturing and modular pumps, which are perfectly designed to handle today's high-intensity work and increased pumping hours.

Our cash flow in the second quarter was impacted by a $15.9 million payment related to previously accrued supply commitment charges. Additional amounts were paid as partial year reservation fees included in prepaid assets. That's it for this year. Next year, the settlement payment will be $11 million and occur in the first quarter along with reservation fees for the full year. All 5 remaining annual settlement payments are fully accrued for. We ended the second quarter with $162.1 million in cash and net debt of $313.8 million.

In the third quarter, we expect to close on the sale of our 45% interest in SinoFTS, our joint venture in China to Sinopec, for total proceeds of $33 million. As mentioned in our release, we are on track to generate approximately $100 million of cash flow in 2019. It could be slightly higher than that including asset sale proceeds. As for share repurchases, we bought back approximately 761,000 shares for $4.6 million in the second quarter. We plan to continue to purchase small amounts opportunistically.

Shifting gears, as I mentioned at the outset, we had a good quarter operationally. We completed 344 stages per fleet, our second-highest quarter ever, which is especially remarkable considering that average stage times have increased by 16% since the second quarter of 2017 when we achieved a record 356 stages per fleet.

Note that stages per fleet are not necessarily comparable between companies, there are differences depending on geographic footprint, stage times, treating pressure and the amount of zipper versus single-well ops. Despite this strong operational performance, the environment is challenging commercially given the oversupply. Contributing to that, our E&Ps, especially publicly traded E&Ps reducing fleets due to pressure to live within cash flow and to not exceed previously announced CapEx budgets. Higher completion efficiencies industry-wide are also a factor. For fleets that are released, opportunities in the spot market are few and far between and competitively bid. We recently lost bids to competitors at prices 10% to 15% below us, and I believe we already offer an attractive value proposition to customers.

Next, I'd like to highlight a few of our technology projects. As a manufacturer, we believe our platform allows us to implement improvements much faster than if we relied on third parties. That said, we do closely follow new technologies available on the market. One focus area remains our fluid ends. About 25% of our R&M expense relates to the fluid ends, and fluid end failures are a common cause of NPT.

Over the past few years, we have made a number of changes to our fluid ends from changing the geometry to allow for more efficient flow, to improve metallurgy. We've also employed the use of sleeve technology. These improvements and others have reduced our fluid end expense per pumping hour by 25% over the last 2 years while our average treating pressure has increased by about 15% over the same period.

We have another project underway to improve the durability of our blenders. Most blenders were not built for today's intense jobs along with operating for significantly more hours per day, per month and year.

We are deconstructing our blenders to pinpoint and fortify weak points with the goal of reducing the frequency of blender-related NPT events. Upgraded missiles, which we designed and built are reducing the risks of cavitation in our pumps, which has improved useful life. This is another example of how we've used the vibration sensor data to redesign equipment, to reduce damage accumulation.

We continue to make strides towards automation. We are now at the point where our software notifies the operator of equipment at risk of failure along with recommended actions. By the end of the year, on at least one fleet, the software will automatically take action unless the operator declines, which is expected to both reduce NPT and improve the quality of stages completed. We have a project engineering team as part of our National Operations Center in Aledo that is involved in all of these projects and many other ancillary projects such as the use of the diverter skids and restring a real-time fluid control system.

Lastly, let me share our thoughts on electric fleets. At a cost of $50 million to $60 million, the economics simply don't work in this environment. We also think that we are in the early innings, and the best design has not yet been discovered; however, we are watching developments closely. For the customer, the benefits are twofold, fuel savings and lower emissions. All of our customers would like to save money on fuel costs, which runs about $1 million per month per fleet on diesel.

On alternative to electric fleets are dual-fuel fleets, which also provide the flexibility to continue to operate if natural gas becomes unavailable. We can retrofit one of our Tier 2 fleets at a cost of about $2 million to burn gas with about a 50% diesel displacement rate on average.

We currently have 3 such fleets. Cat's new Tier 4 final DGB, or Dynamic Gas Blending Engines, are specifically designed to operate as dual-fuel and are advertised as having a higher diesel displacement rate of about 75% on average, making them particularly appealing. We are currently evaluating whether upgrading one or more of our existing fleets with these new engines makes sense commercially and economically.

Before we go to Q&A, I'd like to recognize the contributions of our hardworking employees. We have some of the best people in the industry. And they have shown true dedication to service quality and incredible perseverance in dealing with the cyclicality of our business. To those listening, thank you for a job well done.

I'll now turn it over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question comes from the line of John Daniel with Simmons Energy.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [2]

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Quick question for you. On the -- and I apologize for background noise, I'm at an airport. When you guys talk about the fleet count dropping to maybe 17, 18 fleets at the end of Q3, are you -- and I know it's early, but I mean at this point, are -- first, are those fleets being -- are you losing them because someone under bid you? Or that's just the customer who is shutting down work? And then if you could look at your crystal ball, just kind of give us your thoughts as to what that might happen -- what might happen to -- as you're going through Q4 and then the holiday season? Are you -- and I know it's early...

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Michael J. Doss, FTS International, Inc. - CEO & Director [3]

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Sure. Well there is a lot of uncertainty, the further out you go, but as far as the third quarter, the fleets being dropped are due to customers just cutting back on activity. We did lose 1 fleet in a bit of a price war with a competitor. And as far as the fourth quarter, we think we're going to see some budget exhaustion, which we typically see in November, December. And no reason to think that we won't to see that this year, but we don't really have a good estimate.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [4]

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Okay. And when you look at the stage count, which is really impressive. I mean it's a -- the customers are dropping fleet, not because of performance I would suspect, but just because of budgetary reasons. So assuming that's right, are they also telling you, hey, Mike, Lance, we're going to be coming back the first quarter, like is there an expectation like last year that some of the fleets will be returning as budget dollars are refreshed or is it too early?

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Michael J. Doss, FTS International, Inc. - CEO & Director [5]

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Yes. No, absolutely. And so a lot of it is just -- companies are being very strict about capital discipline and staying within budgets. And so to the extent that they're ahead of plan, which many customers are, that's going to lead to some softness in the fourth quarter and then everything gets reset January 1. And as far as your comment earlier on releasing the fleets, it's due to budget constraints, almost entirely.

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John Matthew Daniel, Piper Jaffray Companies, Research Division - Research Analyst [6]

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Okay. I guess the final one for me, and I don't know how specific you can get on this, but like we all know that more and more consolidation is needed in your sector. Can you just give us your latest thoughts on where you see that? And how you might play in that?

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Michael J. Doss, FTS International, Inc. - CEO & Director [7]

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Sure. Yes, absolutely. We've -- I think we've commented on this before, position hasn't changed. We think consolidation makes a lot of sense in this industry, provides a larger platform across which to allocate your costs. And so there's some clear benefits associated with that. Also if you get the right combination, you can get some diversification in terms of customer base, which could be another additive benefit, but we expect to see more of it. And we are interested, we're not under pressure to do any deals, but I think we're open-minded, and we'll consider the right opportunities for sure.

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Operator [8]

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Our next question comes from the line of Taylor Zurcher with Tudor, Pickering, Holt.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [9]

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Wanted to start by just asking on the 2 to 3 fleets that are coming down or likely to come down here in Q3. What basins and plays are those 2 or 3 fleets in specifically? And then I think on the last call, you called out a handful of fleets that were underperforming the average annualized EBITDA per fleet, I think somewhere around $5 million. Would those 3 fleets fall into that bucket?

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Michael J. Doss, FTS International, Inc. - CEO & Director [10]

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No, not necessarily. They're really not related. I'd say the fleets being dropped, a couple of them in the Northeast. That's probably our weakest area at the moment. And then 1 or 2 in West Texas, but we're finding replacement work for some of those. So mostly in the Northeast, for 2 of them and then the others, which will be offset by some wins would be activity in West Texas. And what was the other question you had about the $5 million?

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [11]

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I was just asking last quarter you basically called out 2 to 3 fleets that were right around -- priced right around $5 million of annualized EBITDA per fleet. And I was curious if those 3 fleets fell into that bucket?

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Michael J. Doss, FTS International, Inc. - CEO & Director [12]

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No, they didn't. And it's -- of those fleets that I had mentioned on the last call, we were able to remediate a couple of them just through hydrating or contract renegotiations. And so we had some success with that. But like I say the overall market still remains pretty weak.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [13]

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Okay, understood. And then when you talk about $100 million of cash flow for 2019, could you just refresh for us what definition you're using there? And then does that include the proceeds from the JV sale, the minority interest in your JV that are coming in Q3?

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Michael J. Doss, FTS International, Inc. - CEO & Director [14]

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Sure. Yes, our free cash flow definition is basically cash flow from operating activities minus capital expenditures. And I think the asset sale proceeds, which will be larger this year because of the joint venture disposition, are going to add to it. So we could be a bit over $100 million on our scenarios including asset sale proceeds.

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Operator [15]

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(Operator Instructions) Our next question comes from the line of [Harry Collins] with Bank of America Merrill Lynch.

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Unidentified Analyst, [16]

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For the pricing commentary regarding the $7 million to $8 million in EBITDA per fleet next quarter, what's kind of driving that pricing down? And do you think 3Q will be the bottom for pricing? Or do you think, they're like down in 4Q?

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Michael J. Doss, FTS International, Inc. - CEO & Director [17]

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It's a little uncertain at this point. I'd say we're not at a price-war territory yet as an industry, but I think just given the expectations of a softer second half, there have been some concessions that have been given. Hard to say if it's the bottom, I don't think the price decreases will be material on average and nothing like what we saw in the first quarter with our customer base.

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Unidentified Analyst, [18]

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Okay. And so does this imply that the 2 to 3 fleet, your fleets drop and then stacking in 3Q are priced higher than rest of the fleets?

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [19]

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No, not necessarily. When I go through the 3 fleets, I think you've got a broad mix, you've got some that were on the lower end of the spectrum. And I think you even got one that was kind of in the middle -- upper middle packs, so I'd say they're probably average.

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Unidentified Analyst, [20]

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Got it. And then a couple of competitors have talked about the zipper fracs mix shifting to more single-well pads in the back half and that impacting efficiencies. Are you guys seeing this? You mentioned towards the beginning of the call the mix, but do you guys see a shift and the back half is kind of going to slow down?

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Michael J. Doss, FTS International, Inc. - CEO & Director [21]

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No, nothing seasonally that's anything noteworthy. Customers, they kind of vary at any point in time. We can have more or less zipper operations. Of course, we prefer zipper operations. It does tend to be done at bit of a lower price, other things being equal. We're not really seeing a shift from what we're seeing.

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Unidentified Analyst, [22]

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Okay. And then did you guys give a -- the per-frac mix at the beginning of the call in 2Q of what your kind of percentage was?

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [23]

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We did not, but it's about 70% this quarter. And so that's up from last year.

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Operator [24]

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Our next question comes from the line of Andrew Ginsburg with R.W. Pressprich.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [25]

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I just wanted to follow-up on the $100 million cash flow comment. So it looks like if we basically annualize first half, it will get us to about $50 million free cash flow. And since we're seeing the Sinopec divestiture, is it included in that $100 million cash flow guidance? Just trying to reconcile the disconnect from a softer second half but on an annualized basis of the first half, cupping at $50 million. Can you provide some commentary around that?

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [26]

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Yes. So the first half, the $50 million you mentioned, I would expect in this -- excluding the China JV proceeds, the second half would be a little softer just because, if you think about the cash conversion in the first half, it included Q4 of last year. And our EBITDA numbers have stabilized but have come down a little bit since Q1. And then you add on the China JV, it should be well -- it should be over -- well over $100 million. And so that's kind of how I think about the cash flow. Obviously, there is a lot of variables there on fleets and working capital that we try to model out, but that's in general, the way it's going to happen. And then the other thing on the annualizing is the Covia payment. Obviously, the timing of that is impactful from a cash flow perspective if you're including working capital.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [27]

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And that was the $15 million or so that you mentioned earlier on the Covia payment?

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [28]

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Correct.

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Andrew Ginsburg, R.W. Pressprich & Co. - Associate Director [29]

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Okay. And then just to follow -- ask one more question. Do you think -- how are you guys looking at the equity buyback? So we have utilization dropping more and more because things are getting pretty competitive. So in terms of the equity buybacks, are we really looking to drive forward with that? Or depending on utilization and cash flow metrics for the year, maybe pull back on that, if you could just provide some commentary around that as well?

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [30]

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Yes. So -- we executed a pretty small amount in Q2. And I don't expect to ramp that up significantly. The way we look at it is we're going to be looking at the outlook. We're going to be balancing our liquidity. The equity buyback is one avenue. We've also got the term loan, which we've brought down significantly and we'll continue to consider that. And then, in the past, we've also kind of utilized notes, repurchasing notes in the open market. So we'll look at all the options, balance our liquidity, bump that up against outlook and ultimately, we're focused on returns and cash generation. And then, we'll kind of choose the best allocation for that.

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Operator [31]

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(Operator Instructions) And our next question comes from the line of Stan Manoukian with Independent Credit Research.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [32]

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In regard to the capital allocation that you just mentioned, the capital allocation which is amongst the best return you get on capital between buying back these -- the bonds or paying off the term loan or buying the stock. I was wondering how does this decision relate to the utilization of your fleet. Is it sort of related to the -- your future outlook on what's going on in the market? Or you have different variables to sort of make up your mind on how to allocate your capital?

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Michael J. Doss, FTS International, Inc. - CEO & Director [33]

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Yes. So I'll -- Stan, I'll try to answer that question. So in terms of capital allocation, I mean, I think we're pretty flexible in how we do that. So it does definitely take into account some of our views on the business outlook. Despite all the uncertainties, we have an outlook that we execute against. And so I think that we're going to be prudent with the softer market that we're in. I think as Lance mentioned that we're going to basically continue to just nibble at the share repurchases, that's not going to be a large share, at least at this point. And as far as the other capital allocation decisions on debt repayment versus liquidity levels, we just continually assess that. And we want to make sure that we have sufficient liquidity to handle all scenarios.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [34]

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And to follow on this, if I may, what sort of fuels your confidence that this slowdown is just a cyclical sort of downturn versus sort of permanent trend? Because there is a lot of noise in the market that fracking industry's in trouble. And there's going to be more sort of allocation of capital by drilling companies by your customers towards offshore or some other sources of oil drilling and -- but you are still confident and you have the highest percentage of allocation in the spot market. So the question is number one about your -- fuels of your confidence? And second, where do you see more softness in the spot market or in the market with large oil companies?

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Michael J. Doss, FTS International, Inc. - CEO & Director [35]

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Yes. I'll try to answer some of that and if I leave out a piece, just let me know. But as far as what's the weakest segment of the market, I mean, for sure the spot market is the weakest, and that's always an indicator of the overall strength of the market. If the spot market is above-average pricing, it's a strong market. If it's below, it's weak. And so we're definitely in that position at this point. Dedicated pricing, definitely tends to converge to spot. But I think it -- there is a time element there and also, customer base can have an impact on that as well. And so that's a sense of the market. And as I think ahead, I don't think the shale industry is condemned by any means, I think it's been incredibly productive for the economy.

And I think we've just sort of been victims of our own success to some extent. I mean, we continue to get more and more efficient, beginning more wells, more lateral feet with drilling rigs, completion crews are doing their work more efficiently than they ever have and so, you just need less equipment to maintain a certain level of production. So I think that we're going through a transitional period where -- maybe the industry was built for 2,000 rigs, but 900 is really all it takes. And so don't see a lot of material downside risk to the rig count. I mean, it could slide a bit lower, as efficiency and capital discipline are definitely topics of the day. But I don't see a scenario like 2016 where just the bottom drop out and commodity prices was really the main driver back then.

Today, it's much more of the capital discipline theme and efficiencies. And those are just kind of my quick thoughts on it. I think another thing that could lead to improvements in the supply and demand of frac horsepower, is just the rate of attrition. So as activity has come down, fleets have been dropped. They're kept warm for a certain amount of time but eventually they kind of drop out of the marketed bucket. And so when we see variations in activity like the increase that we currently expect to see in the first quarter resumption of spending. The market will tighten up and will it tighten up enough that we have pricing power, it's too early to say. But at some point, we expect that, that will happen, just kind of given the natural attrition cycle and what happens in response to weaker periods like the one we're going through now.

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Konstantin Manoukian, Independent Credit Research LLC - Founder and CEO [36]

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Just one quick comment if I may, it is no secret as far as I know that the main part of the competition price -- pricing war is related to the integrated oil companies that have sort of pricing power to get revenues from other sources. And the question is, do you expect the attrition to derive from them or from sort of -- from independent frackers?

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Michael J. Doss, FTS International, Inc. - CEO & Director [37]

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It's hard to know. I mean, the majors, the integrated oils have come back on shore, the last couple of years. I think that, they're going to face the same economics as the independents, the same pressures to generate returns and cash flow on their investments. I don't think the wells that the majors are drilling are magical in any way. And so I think they're going to experience some of the same impacts that the independents are facing. But yes, there is no doubt this year that the majors are up pretty significantly in their spending onshore whereas independents tend to be down by single digits, 10% maybe and so you're seeing that shift. But I don't think that, that will continue, those kind of growth rates are going to continue for the integrated, that's just my expectation.

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Operator [38]

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Our next question is a follow-up question from the line of [Harry Collins] with Bank of America Merrill Lynch.

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Unidentified Analyst, [39]

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For the 2 to 3 fleets dropped in 3Q, are those spot or dedicated fleets? And are they -- what kind of customer are they as far as like mid-cap large-cap major?

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Michael J. Doss, FTS International, Inc. - CEO & Director [40]

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Let me think for a minute. 2 of them are privates, 1 is independent. And I think we may lose 1 or 2 others and then gain 2 or 3 others. That's where the uncertainty comes in, in terms of the exact count. But I think that activity turnover is just in the public E&Ps. And I mentioned the 2 that are dropping off, that are privates -- yes. Go ahead, Lance.

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [41]

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I think 1 would have been dedicated.

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Michael J. Doss, FTS International, Inc. - CEO & Director [42]

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Oh, right. One was dedicated and the others were operating on a spot basis, more or less.

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Unidentified Analyst, [43]

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Then where will that land you guys kind of on a spot to dedicated mix, pro forma, I guess?

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Lance D. Turner, FTS International, Inc. - CFO & Treasurer [44]

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Probably around the 60% mark.

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Michael J. Doss, FTS International, Inc. - CEO & Director [45]

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60 dedicated.

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Operator [46]

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And we are showing no further questions at this time. I'll turn the conference back over to you.

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Michael J. Doss, FTS International, Inc. - CEO & Director [47]

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All right. Well, thanks again, everyone for joining us today. And we look forward to updating you next quarter.

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Operator [48]

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Ladies and gentlemen, this does conclude today's conference call. We thank you for your participation, and ask that you kindly disconnect your lines.