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Edited Transcript of NEX.N earnings conference call or presentation 7-Nov-19 1:30pm GMT

Q3 2019 Nextier Oilfield Solutions Inc Earnings Call

HOUSTON Nov 15, 2019 (Thomson StreetEvents) -- Edited Transcript of Nextier Oilfield Solutions Inc earnings conference call or presentation Thursday, November 7, 2019 at 1:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Gregory L. Powell

NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer

* Jan Kees van Gaalen

NexTier Oilfield Solutions Inc. - Executive VP & CFO

* Kevin M. McDonald

NexTier Oilfield Solutions Inc. - Executive VP, Chief Administrative Officer, General Counsel & Secretary

* Robert Wayne Drummond

NexTier Oilfield Solutions Inc. - CEO, President & Director

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Conference Call Participants

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* Chase Mulvehill

BofA Merrill Lynch, Research Division - Research Analyst

* Christopher F. Voie

Wells Fargo Securities, LLC, Research Division - Associate Analyst

* Daniel Jon Boyd

BMO Capital Markets Equity Research - Oilfield Services Analyst

* John Matthew Daniel

Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service

* Marc Gregory Bianchi

Cowen and Company, LLC, Research Division - MD

* Sean Christopher Meakim

JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst

* Stephen David Gengaro

Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

* Vaibhav D. Vaishnav

Scotia Howard Weil, Research Division - Analyst

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Presentation

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Operator [1]

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Good morning, and welcome to the NexTier Oilfield Solution's Third Quarter 2019 Conference Call. As a reminder, today's call is being recorded. (Operator Instructions)

For opening remarks and introductions I'd like to turn the call over to Kevin McDonald, Executive Vice President, Chief Administrative Officer and General Counsel of NexTier. Please go ahead, sir.

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Kevin M. McDonald, NexTier Oilfield Solutions Inc. - Executive VP, Chief Administrative Officer, General Counsel & Secretary [2]

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Thank you, operator. And good morning, everyone. As a reminder, some of our comments today will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995 reflecting NexTier's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements.

The Company's actual results could differ materially due to several important factors, including those risks and uncertainties described in both Keane Group and C&J Energy Services Form 10-K for the year-ended December 31, 2018, recent current reports on Form 8-K and other Securities and Exchange Commission filings. Many of these risks are beyond the Company's control.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Additionally, our comments today include non-GAAP financial measures, including adjusted EBITDA and adjusted gross profit. Please refer to our public filings and disclosures, including our earnings press release, for the definitions of our non-GAAP measures and the reconciliation of these measures to the directly comparable GAAP measures. These are posted on our website under the Investor Relations tab.

With that, I will turn the call over to Robert, President and Chief Executive Officer of NexTier.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [3]

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Thank you, Kevin. And thanks everyone for joining us on the call this morning. Before I begin, and on behalf of the combined team from both Keane and C&J I want to express how incredibly excited I am to be hosting our third quarter earnings call following the closing of our merger with C&NJ Energy Services last week.

Given the timing of our transaction closing, today's discussion will cover Keane's results for the third quarter. We are also excited to formally introduce our new company formed as a result of Keane's merger with C&J, which, as recently announced, we have named NexTier Oilfield Solutions, which now trades under the ticker NEX on the New York Stock Exchange.

I'm pleased to be joined by Greg Powell, Chief Integration Officer of NexTier; and JK van Gaalen, Chief Financial Officer of NexTier.

After a review of third quarter results for Keane, JK, Greg and I will provide an update on NexTier, our strategy and outlook.

With that introduction let's start with Keane's results. For the third quarter Keane achieved another strong performance, delivering on the outlook provided last quarter and extending our track record of meeting our commitments despite a challenging backdrop facing the industry.

I'd like to touch on a few highlights from the quarter. From a top line perspective, total company revenue was $444 million, approaching the high end of our guidance range, reflecting sequential growth of approximately 3% compared to the average third quarter U.S. rate count, which decreased 7% sequentially.

We grew adjusted EBITDA by 8% to $89 million due to proactive cost control and ongoing innovation that drove improved completion efficiencies.

We maintain strong utilization with 22 fully utilized fleet unchanged from the prior quarter, and we continue to benefit from the completion efficiencies enabled by our dedicated model.

We generated $42 million of free cash flow. And on a year-to-date basis Keane has generated nearly $90 million of free cash flow and allowing us to nearly achieve our full year estimate of $100 million or more in the first 9 months alone.

Greg will discuss our third quarter results in greater detail. But first, I'd like to make a few comments related to our recently completed merger.

On October the 22nd we held a successful vote with shareholders of both C&J and Keane voted overwhelmingly in favor of the transaction. About a week later, on October 31, we closed our merger, creating an industry-leading U.S. land services provider. We are extremely excited to complete our transaction as planned and appreciate the hard work from both teams for their contributions in developing a thorough integration plan.

Specifically, I am most excited about the unified approach across our operations teams and the opportunities ahead of us. I would also like to personally thank [Don Gallic] for his partnership and leadership throughout this process.

Additionally, I'd like to extend my appreciation to shareholders for their continued support. Throughout the integration process we have remained focused on delivering for customers and ensuring continued safety and service quality as evidence by our strong third quarter results. Integration planning will now transition to execution. There's work to be done and our entire organization will remain vigilant and seamlessly integrating our 2 companies with a laser focus on maintaining and improving service delivery for our customers.

Due to the importance of this role, Greg Powell has been appointed to lead this critical integration effort, where he is focused on overseeing the integration plans and capturing the cost synergies we originally laid out. And we're off to an excellent start. We have a robust process in place. And we look forward to keeping the investment community updated on our progress all along the way.

Now turning to our latest view on the market. Our business performed well throughout the third quarter. As we progressed into the fourth quarter pockets of softness have begun to emerge, driven primarily by our customers' focus on operating within their cash flow and the associated budget exhaustion. Coupled with normal year-end seasonality and holiday schedules, we believe spending patterns throughout year-end will be a dynamic that the industry is going to continue to face.

Looking ahead, customer budgets for 2020 are being finalized. While it's too early to say with precision, we currently expect that overall 2020 activity will be flat to down slightly versus 2019 with the normal uncertainty associated with commodity prices and some uncertainty around the cadence of spending throughout the year.

With that said, we are seeing increased demand for NexTier services starting in January of 2020 based on recent customer discussions regarding the resetting of capital budgets for the early part of next year.

As far the supply side of available horsepower, we're starting to see a few dynamics play out. First, we are finally seeing attrition of sizable amount of horsepower which in our view represents under-maintained assets that in the current market backdrop don't make economic sense to revive. We believe this attrition reflects the early innings of a much larger cycle.

Second, and similar to 2018, we are seeing a significant reduction in manned fleets which ultimately help balance the effective supply-demand equation. And finally, in the range bound macro environment we have been operating in for the past couple of years, we are seeing clear bifurcation and pressure pumping based on profitability, balance sheet strength and ability to deliver consistent operating performance while continuing to invest in innovation. The new NexTier is even better positioned to compete in these market conditions. More on this later.

These are the realities of the market as it stands today. And I would like to give you an update on what we've been doing in response. In this environment we are focused on controlling what we can control. And this all boils down to efficiency, which to us simply means doing more with the same or doing the same with less.

We identify 4 main areas of opportunity to drive efficiency. First, investing in innovation to deliver further improvements in efficiency and sustainability.

The combination of experience, capabilities and in-flight initiatives from both companies provide NexTier with a tremendous opportunity to lead technology adoption across surface, subsurface and digital.

I'd like to highlight a few of these areas that we are focused on. As far as surface innovation, we are working diligently to simplify the way we work, including well swap systems, quick flash mechanisms and [monoline missiles]. We're also investing in efficiency and sustainability via the newly designed Tier 4 dual fuel engines driving improved emissions and natural gas substitution.

On the subsurface side, we continue to partner with customers to design custom fluid systems to optimize [bright] delivery. We're excited about the combination of Keane's fluid expertise with C&J lateral science expertise. Our digital journey is also progressing nicely. We are transforming the way we look across the business. We are collecting more data from more sources and starting to visualize and act on this data, resulting in significant learnings and opportunities. Key efforts include real-time equipment health monitoring, supply chain control tower and asset lifecycle management.

Second, proactively taking cost-out opportunities across our company. We are working with our operating teams and business partners to identify and execute on opportunities to optimize spend across key areas, including direct materials, maintenance, labor and facilities. For example, given weakness in Northeast U.S. gas basins, we have been proactive in reducing cost associated with our footprint and support structure, including reducing our crew staffing during the third quarter. This is an iterative process that requires constant recalibration to ensure we're most appropriately structured, while maintaining safety and service quality and remaining nimble to be able to respond to market opportunities as they arise.

Third, our merger with C&J encompasses 2 main areas of opportunity. One, we're now starting to capture the high confidence cost synergies that result from our merger. As Greg will discuss later in our call, we've upsized the magnitude of synergies and accelerated the timing to achieve. And two, it allows us to pursue further efficiency by leveraging best practices to improve service delivery and profitability.

And finally, evidencing a commitment from both companies to right sizing the business, our combined workforce is down approximately 20% since just before signing the merger in the second quarter of 2019. And we continue to be proactive and nimble in addressing market conditions.

I'll now pass the call over to Greg to discuss third quarter Keane financials.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [4]

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Thanks, Robert. Revenue during the third quarter totaled $444 million, up from $428 million in the second quarter, and approaching the high end of our guidance range. Within our Completion Services segment revenue totaled $437 million, reflecting a sequential increase of approximately $17 million or 4%, driven by continued execution and efficiency, enabled in part by technology adoption. For the third quarter we operated a total of 23 fleets. And when factoring in white space, we had the equivalent of 22 fully utilized fleets, unchanged as compared to the second quarter.

On a fully utilized per fleet basis, annualized adjusted gross profit was $19.9 million, a 7% improvement compared to $18.6 million in the second quarter, and at the high-end of our guidance of between $18 million and $20 million. We believe this performance continues to position us at the top end of the competitive stack and remains a key differentiator.

Revenues for Other Services segment, which includes their cementing operations, totaled $6.6 million for the third quarter of 2019. Adjusted gross profit improved to $1.2 million compared to $1.1 million last quarter, and representing 18.2% margin. Adjusted gross profit totaled $110.5 million for the third quarter of 2019 compared to $103.2 million in the second quarter. Total company adjusted EBITDA in the third quarter was $88.8 million, in line with our guidance range of between $85 million and $95 million and up approximately 8% compared to $82.4 million in the prior quarter.

Adjusted EBITDA for the third quarter includes management adjustments of approximately $12.2 million, accounted for an SG&A driven by $6.7 million of transaction cost related to our merger with the C&J and $5.5 million in noncash stock compensation expense. Selling general and administrative expenses total $33.2 million for the third quarter compared to $32.6 million in the prior quarter. Excluding the management adjustments, SG&A totaled $21.1 million, unchanged from the second quarter of 2019.

Turning to the balance sheet, we exited the third quarter with cash of $157 million, reflecting growth of $40 million compared to $117 million at the end of the second quarter. We generated approximately $84 million of operating cash flow for the third quarter. Capital expenditures totaled approximately $42 million, driven by maintenance CapEx and investments in technology, resulting in $42 million of free cash flow. Total debt at the end of the third quarter was approximately $338 million net of unamortized deferred charges and excluding finance lease obligations, effectively unchanged versus the second quarter.

Net debt at the end of the third quarter was approximately $181 million, resulting in a leverage ratio 0.6 times on a trailing 12 month basis. We exited the third quarter with total available liquidity of approximately $323 million, which includes cash and availability under Keane's asset-based credit facility.

I'll now hand things back to Robert for a more in-depth discussion of NexTier.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [5]

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Thanks, Greg. Look, we're excited to announce NexTier, our new name, in conjunction with the merger. The name embodies continuous improvement and serves as a steady reminder to our employees and partners that we will always be innovating to move up to the next tier of value creation. For review and then key priorities of NexTier I would like to quickly reiterate the 5 primary benefits of the deal.

First, we're increasing operational and financial scale across services and geographies. NexTier owns a base of 2.2 million high quality well-maintained hydraulic horsepower, will offer customers a more scaled and wider range of completion services including wire line, coiled tubing, cementing and well services. We're well-diversified across geographies with a national reach and local presence, including the Permian, Marcellus Utica, Eagle Ford, Rockies, Bakken and Mid-Continent and California.

Second, we expect our combined platforms to drive significant cost energies. We have a robust plan in place and are shifting to execution mode now that the merger is officially closed. Third, our strong financial platform, which includes a solid balance sheet and liquidity position on a simple pro forma basis, combining C&J's and our balance sheet as of September 30, without further adjustments. NexTier has net debt and a leverage ratio of effectively 0. And total liquidity of $712 million, positioning us to execute in a range of market conditions, while also serving as an enabler to continue to invest in innovation and evaluate alternatives for shareholder return.

Fourth, our complimentary cultures and operating philosophies. With the combined base of talent, our best athletes are already on the field with a shared goal of delivering leading performance on safety, service quality and efficiency. We remain committed to maintaining and developing partnerships with highly efficient customers under dedicated agreements. And finally, we offer an enhanced platform for continued innovation. Together, we are focused on helping our customers address their challenges by leveraging technology with solutions for now, tomorrow, and the next generation.

I've spoken with many of our customers who share in our excitement of the company we've created and our partnerships going forward. At the time of our merger announcement we emphasizes that we were creating an industry-leading U.S. land completions company. During the integration planning process, our leadership team spent extensive time building our alignment and formulating our priorities, something that I believe is critical to the ensuring of our success.

With the merger completed, it's important to tell our stakeholders exactly how we intend to succeed. NexTier will achieve its goal but executing on all 4 of these points of distinction.

First, NexTier is founded on an unwavering commitment to partnerships, and helping customers win by unlocking affordable, reliable and plentiful sources of energy. This includes partnering on a dedicated basis with high quality customers in all aspects of the relationship through open collaboration. Second, NexTier will be focused every single day on delivering leading safety performance. Safety is the key differentiator that enables our partnership approach, and honors our commitment to the well-being of our employees and partners.

Third, NexTier will strive every day to deliver leading efficiency on behalf of our customers, constantly challenging ourselves to do more. We're relentless in our pursuit of efficiency, which creates value for all of our stakeholders. Fourth, NexTier is committed to leading the charge on innovation. We see every day is a new opportunity for improvement, never settling for status quo. We continue to believe that innovation will drive the next leg of safety, efficiency and sustainability. We're committed to being the clear choice for oil and gas operators seeking a forward thinking partner.

These priorities and the values they represent are not an aspiration, they're an expectation. It's the commitment we've made to our customers, employees and business partners, and how we intend to drive success over the long-term. To learn more, we invite you to explore our newly launched website, which you can visit at www.nextierofs.com.

I'll now pass, thanks, back to Greg for an update on synergies and the asset portfolio.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [6]

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Thanks, Robert. As Robert noted earlier, we initially identified $100 million of annualized cost synergies at the time of our merger announcement. As our integration planning progressed and visibility increased, we found additional opportunities.

We have 2 favorable updates to share with regards to our synergy commitment. First, we're upsizing the magnitude of our expected synergy. We now expect to achieve $125 million of cost synergies, up from our original target of $100 million. And second, we're accelerating our forecasted timing to achieve full run rate synergies, which we now expect by the end of the second quarter compared to our initial estimate of within 1 year of closing. We expect to realize approximately 2/3 of these synergies in fiscal year 2020.

Our confidence has increased. We're keeping our eye on the ball and we'll continue to rely on our strong experience with M&A integration in an effort to build a leading platform and realize the significant base of synergies. We plan to keep the investment community updated on progress and are committed to tracking synergies separate from cost reduction related to activity level.

As part of our integration planning, we performed a diligent study of our joint asset base and have some updates on the go-forward marketing capacity. Within hydraulic fracturing, the process involved 2 main pieces. First, we synced up definitions of horsepower and fleets across their 2 companies. Second, we establish horsepower per fleet requirements based on the increasing service intensity we're facing in the field, plus the need for rotational horsepower to support our rigorous maintenance program. As a result of synchronizing definition, standardizing fleet configurations and taking assets out of service, we effectively reduced our total combined fleet by 10% or 5 fleet, resulting in 45 high quality hydraulic fracturing fleets, and permanently reducing our fracturing fleet by approximately 100,000 horsepower. 100% of our fleets are market-ready without any required CapEx to redeploy.

We are similarly hydrating equipment across wireline, coils, cementing and well services, retiring equipment that we believe cannot generate attractive returns. The summary of our actions includes the following. Within wireline, our combined asset base included 161 units. Of this amount we've retired 43, resulting in 118 marketed assets.

For coiled tubing, our asset base included 30 total units. Of this amount, we've retired 5, resulting in 25 marketing units, approximately 60% of which are large diameter. On the cementing side, our combined asset base included 140 units. Of this amount, we retired 39, resulting in 101 marketed units. Our well service segment is primarily comprised of our rig services business. Of our 364 total workover rigs, we retired 88, resulting in 276 marketed rigs.

We are proud to be playing our part in reducing capacity, permanently removing a sizable base of equipment, a portion of which is operated in the last year. With these efforts completed, our marketed equipment based is even stronger, higher quality and capable of efficiently servicing our customers' needs today and into the future.

I'll now turn the call over to JK for some comments on our outlook.

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Jan Kees van Gaalen, NexTier Oilfield Solutions Inc. - Executive VP & CFO [7]

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Thanks, Greg. Before I start, I would like to comment that the company plans to file an 8-K that will include C&Js historical financials, including year-to-date results through to September 30.

Taking a look at NexTier's consolidated pro forma balance sheet. We had a cash balance of approximately $335 million as of September 30. Total debt at the end of the third quarter was $338 million, which was comprised of Keane's legacy term loan facility and excludes finance lease obligations. This results in net debt at the end of the quarter of approximately $3 million, which will reflect a total leverage ratio of essentially 0 on a pro forma trailing basis.

We quickly executed on further improvement in our financial position with the successful expansion of our asset-based revolving credit facility from $300 million to $450 million effective at close. With this expansion, total pro forma liquidity is $712 million, which includes $335 million in cash and $377 million of availability under our asset-based credit facility.

The upsized facility with our expanded banking group was a favorable outcome. And it demonstrates our lenders' recognition of both a financial and operational strength for NexTier. We extend a thank you to our expanded banking group for their support. And we look forward to working with them over the coming years.

Now turning to our outlook for the fourth quarter. Giving the timing considerations of our recent close, we are providing our outlook broken down between legacy Keane and C&J. For revenue, Keane is expected to total between $310 million and $340 million and C&J is expected to range between $290 million and $310 million, resulting in total NexTier revenue of between $600 million and $650 million.

At the adjusted EBITDA level, Keane is expected to total between $50 million and $60 million, and C&J is expected to range between $10 million and $15 million, resulting in total NexTier adjusted EBITDA of between $60 million and $75 million. The reduction relative to the third quarter of 2019 is primarily driven by lower utilization, mainly due to customer budget exhaustion and seasonality as well as continued competitive pricing.

With that, I would like to pass it back to Robert for a discussion of our future outlook.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [8]

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Thanks, JK. And while the fourth quarter in our industry has become more volatile and it's still too early to assess NexTier with the too much precision we want to frame how we're thinking about the earnings power for NexTier. The framework we're about to provide is based on a couple of key tenants. First, the environment we're now in feels a lot like last year. We're facing very similar dynamics, including range-bound macro conditions, over capacity, contract renewals and the need to drive efficiencies. In addition, we have high confidence in our ability and track record to execute on the things that we can't control. Which include right-sizing the cost structure of our business, executing on synergies and driving the next leg of efficiencies.

So now let's look at some of the possible scenarios for the earnings power of NexTier. First, as an anchor point, assume that the market recovers from the abnormally low activity expected in the fourth quarter, with increased activity driven by E&P budget resets, offset by reduced pricing. In this scenario our business could perform at levels similar to what we expected in the fourth quarter or approximately $270 million of adjusted EBITDA at the mid-point on an annualized basis. Layering in pro forma $125 million in synergies results in approximately $400 million of adjusted EBITDA. While we believe this case to be overly pessimistic, it does help frame a conservative case of potential performance.

Second, as an alternative scenario, we experienced a market that is very similar to this year. In this case we start with a full year 2019 adjusted EBITDA estimate of approximately $450 million, plus the $125 million of pro forma synergies, resulting in $575 million of adjusted EBITDA. If you assume continued year-over-year pressure, driven primarily by additional price concessions to support our customers, this would drive adjusted EBITDA degradation of approximately $150 million, resulting in adjusted EBITDA of $425 million.

Applying a more favorable outlook where price and utilization stabilized due to a reduction in effective capacity, we exceed our synergy target and capture a higher base of efficiency. This could result in recovering at minimum half of the EBITDA degradation resulting in adjusted EBITDA in excess of $500 million.

In all of these scenarios we generate significant free cash flow. Our annual capital investments will include maintenance and strategic investments and innovation. Assuming a CapEx range of $165 million to $225 million driven by our ability to flex CapEx with activity and using the adjusted EBITDA bookings of $400 million to $500 million. We generate free cash flow of between $ 235 million and $275 million, reflecting a free cash flow yield well in excess of 20%.

While simplistic, our intent is to provide a framework of how to think about the earrings power of NexTier. On this base of free cash flow generation and with the formation of a new Board we will develop NexTier's approach to capital returns. Overall, we believe we are in a differentiated position across our peer set. And I'm excited to forge ahead as we focus on delivering leading efficiencies for customers, returns for investors and a rewarding work environment for our people.

With that we'd now like to open up the lines for Q&A. Operator?

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Tommy Moll with Stephens Inc.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [2]

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So you all have only been operating as a pro forma for a week now post close. But there was obviously a lot of cooperation in advance of close. Robert, I wondered if you could comment on some of the additional things you learned as you approach closing and have since then in terms of the challenges -- both the challenges and the opportunities. And specifically on the synergies, if you could give us context on what gave you optimism to upsize the number and then pull the forward on that?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [3]

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That's a good question, Tommy. And it has been a very, very fun process, I have to admit. Thanks to the cooperation that we had between the 2 companies, particularly the leadership area but also the cultures of the 2 companies are very, very similar, particularly in the field where the revenue is being generated. And what we've learned a lot is that we both have best practices that we can learn from each other, that's going to make a difference on our bottom line. And that's not necessary even in the synergy assessment. So that's one thing that made me very comfortable with the situation because where the rubber meets the road it's working better than you could -- that I would have even expected.

Second thing I'd say is the customer feedback has been extremely positive. I would have expected maybe a little bit of concern. But they mainly were concerned about us being able to continue to deliver excellent service. And in Q3 we had both kind of did that.

On the Synergy side, I would say that it was grassroots process that both teams working together in conjunction with some outside consulting helped us make sure we had a good cost baseline for the first half of 2019 the benchmark off of. And that as we went through the process that without a lot of coaxing to try to get the number up from me, I've been very impressed with the fact that they have been able to find additional synergies giving us the confidence to commit to $125 million.

So, so far so good, you're right. We're only a week into it, we got more to learn. But so far I'm extremely happy and Greg is running an excellent process so far.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [4]

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And then shifting gears to capital returns, which is something that you alluded to in your earlier remarks. Certainly it kind of takes some time with the combined company to figure out the go-forward plan in terms of a buyback, which is something that Keane had been pretty aggressive with prior to signing of the merger agreement. So I know you can't give us the final answer now, but to the extent you can give us any indication on where you and potentially the Board are leaning there, your stock is certainly very attractive at these levels. You have a lot of dry powder that you could deploy. So any thoughts there? And then also specifics on timing of when we might hear from you again with a more final decision on that point.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [5]

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Hey, it's a good question, Tommy. Look, I would say we had our first Board meeting this week to get the 2 boards together. And the nice thing is that we do have a nice war chest there to have this opportunity. Not only the balance sheet but the projected free cash flow generation is going to support whatever decision we make there as far as capital returns go. I would say the Board's challenged us straight away to come back with full projection, what we want to do about that going forward. Keeping in mind that the market is got some uncertainties in it and the go-forward look there's going to be a balance between stock buyback, potential dividend and strategic investments that we might need to make into the future to establish further differentiation.

So time line, I would say relatively soon. But at this point it's just a little bit too early for us to be able to come out with a clear guidance on that.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [6]

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Fair enough. And just a quick follow up to make sure I heard you correctly, Robert. You mentioned the 3 buckets. It's fair to assume those were not mutually exclusive. So whatever plan you might recommend to the Board could include sum of all 3?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [7]

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That's correct.

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Operator [8]

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Our next question comes from the line of Sean Meakim with JPMorgan.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [9]

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So there's a pretty significant contrast in profitability between Keane and C&J. But this is known when you agreed to the merger. So could you maybe just talk about your expectations for convergence between those 2 levels of profitability? On the one hand what's your ability to pull up CJ's margins over time? And what are kind of the specific strategies there? And on the other, as you're going to what could be a more difficult year 2020, confidence in being able to sustain Keane's margin (inaudible). So we're not thinking [convergence] coming from that direction.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [10]

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Good question. Look, I would say this, is that as we come together it’s still early days of course. And as I mentioned a bit earlier, best practices of managing the frac side of the, there's been some real nuggets on both sides that we both probably wish we would have thought of earlier before we got together. So these things are going to who help us.

The opportunity to leverage the support structure on the larger scale is not a minor point to give us the ability to squeak out better profitability. But I would also point out that in the Synergy numbers that we have projected, closing the gap on profitability per fleet is not part of that. And I'd also add that the guide that we provided on C&J for Q4 is not really indicative of the performance in general because it was more related in Q4, the Q4 guide to client mix.

So if you think about looking at C&J's history from Q3 to Q4, Q4 to Q1, 2018 to 2019 was a very similar start. So to benchmark Q4 is the gap, I wouldn't do it. To put -- to give you time and about how we converge, it's a little bit early for us to be able to do that. But I hope all those factors that I outlayed there is, as you can see, that there's a number of moving parts.

The second point I'd make though is that when you look at the well construction and intervention business and the well servicing business inside C&J, the momentum, the profitability momentum there is already improving and I'm impressed and happy about it.

They've been rationalizing their underperforming regions inside well servicing. And the support cost has come down dramatically. And the divestiture of the fluids business inside well servicing has promoted improved profitability. So all of those things give us a lot of momentum as we roll into latter part Q4 and into next year. But we'll get more visibility on the profitability (inaudible) going forward down the road a little away.

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Sean Christopher Meakim, JP Morgan Chase & Co, Research Division - Senior Equity Research Analyst [11]

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Understood, that's fair. So that - could you maybe also talk a little bit about the contribution to those EBITDA projections for NexTier in terms of how much is coming from the nonfrac businesses, the wireline, coiled tubing, cementing, well services? To what extent are they contributing in those numbers? When you think about the flex and the downside to the upside case, how much flex does it -- comes from those nonfrac product lines?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [12]

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Yes. Hey, good morning, Sean, it's Greg. So if you -- in the Barclays deck we put out the second quarter contribution from those businesses is about $33 million. Those are relatively -- that's a good run rate to use. It's obviously dipped in the fourth quarter with activity. But the improvements Robert mentioned on the cost side will give those some uplift.

So I think $35 million to $40 million is a good range of EBITDA for those businesses in a more steady state volume environment. And there's not as much flex in those as there obviously is in the frac business with utilization and pricing.

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Operator [13]

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Our next question comes from the line of Marc Bianchi with Cowen.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [14]

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Robert, I wanted to go into C&J, and I guess legacy Keane a little bit in the fourth quarter. I know maybe they're not representative of where you kind of see the businesses over time. But just to help us understand what the underlying assumptions are maybe on a profit per fleet and number of fleets. If you could help us out a little bit.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [15]

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Yes, hey Marc, it's Greg. So in the fourth quarter we have the fleet count as 17 for Keane and 8 for C&J, so a total of 25 fleets. And then on EBITDA per fleet, Keane is at about $13 million and C&J about $6.5 million for combined weighted average of $11 million. Kind of the underpinning of the guidance, midpoint of the guidance.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [16]

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Okay, that's really helpful. And, I mean I guess as you alluded, there's maybe some unusual customer mix for C&J in the fourth quarter. Can you help quantify that, what -- where would that run rate be or what kind of profitability will we be looking at for the C&J side of the business if you didn't have this sort of unusual event?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [17]

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Well, look, I would just say that the Q4 change from Q3 is driven a lot more by the schedule than it is anything. And a lot of the customers are becoming more clear about what the holiday plans are. And the lack of a full schedule for these fleet as we get into the latter part of November, around Thanksgiving through the end of the year, it's what's driving a large part of that.

But I'd also want to point out that the guide so far has been that we got a lot of robust demand in Q1 for these fleets to come back online. And I think you'll see that EBITDA per fleet move back towards the kind of the Q3 combined number as opposed to staying in that Q4 area.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [18]

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Okay. So Marc, historical, I think the questions we got earlier on the disparity of profit per fleet when we signed the deal and the 2Q numbers which were public, Keane is in the neighborhood of $14 million to $15 million of EBITDA per fleet for second and third quarter and C&J was in the $10 million $11 million neighborhood. So that was kind of the disparity under more normal market conditions.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [19]

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Yes, okay. And then just in terms of the in the sort of $400 million scenario that you laid out. I think you said it, it assumes some little bit activity recovery offset by some reduced pricing. How much pricing decline are you kind of expecting there? And what have you seen so far? Do you have a good handle on kind of what that downside could look like? And is that something you've already sort of talked through with customers at this point?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [20]

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So if you remember from Keane perspective, when we went into 2019, we took a proactive position in the latter part of '18 to go to our customers proactively, to trade early price correction for sustainable pricing through 2019. And during the year we were able to claw back some of that cost, take some costs out of the system, claw back some of that profitability.

We're trying to do the same thing a bit this year. And that process is still going on. And I would say that there's a little bit already in the Q4 numbers in there, be a little bit more in Q1. But, again, largely, the impact on the number so far, if we look at Q4 and our current views in the Q1 is it's mostly activity driven in Q4 which we see the bounce back.

So that scenario that you refer to is essentially just trying to point out even in abnormally low Q4 activity run rate, you project that through 2020, and that's not what we're saying to do; but if you did, even in that case we're still generating free cash flow north of 20%. That was the point we were trying to make there.

As far as guiding on price beyond that, I think it's a little bit too early for NexTier. And the spot market pricing has pretty well been discussed in previous calls and so forth. We don't repeat that too much. It's just that we're not participating hugely in that part of the market.

When we do, we're typically trying to go in with customers who are efficiency minded long-term because efficiency and price are so much hand-in-hand, when we can get a commitment for a certain volume the price can be much more flexible than it is like in the spot market.

So we sometimes dive into the spot market to get a foot -- a toehold to demonstrate the efficiency and then establish pricing going forward that's providing a lot of value for the customer and a fair deal for us. That's kind of our overall kind of overriding pricing aim for right now.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [21]

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Okay. That's clear, all right. If I could just, one more on the -- just on the net debt position. The $3 million, that -- just to confirm, that does not include the payment of the dividend?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [22]

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Correct.

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Jan Kees van Gaalen, NexTier Oilfield Solutions Inc. - Executive VP & CFO [23]

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That's correct. That's September.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [24]

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Yes, it's a September number. I mean, we…

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [25]

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Yes, after the dividend.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [26]

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That's before the dividend.

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Marc Gregory Bianchi, Cowen and Company, LLC, Research Division - MD [27]

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That's before. So after the dividend net at September would be what?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [28]

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So it'd be $335 million of cash minus $65 million compared to $338 million of debt.

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Operator [29]

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Our next question comes from the line of Dan Boyd with BMO.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [30]

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One question. I think Greg might be uniquely positioned to answer this one. But there's just a lot of investor concern out there that Keane's legacy profitability or the GAAP relative to peers isn't sustainable, and that all pressure pumping results are sort of going to revert to the mean -- revert to the mean, primarily just due to pricing pressure.

But I think having now seen the operations of both companies, where Keane's profitability has clearly been quartile, C&J's was not. That's clearly in the 4Q numbers. So I was wondering, how much of that higher profitability would you attribute to higher pricing versus operational efficiency? And then when you think about the value being delivered to the customer in terms of stages or pumping hours per day, however you want to define it, how does the 2 fronts compare?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [31]

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Look, one thing I would say is that when you look at the profitability aspect of the completion crews, frac being part of that, and wireline being another part. The fact that we have integrated operations at the well site is a factor in the differentiated profitability because it delivers differentiated pumping efficiency. So that's a big factor I think that sometimes not fully appreciated in the market, but 80%, 85% of our fleet pumping have our wireline with it, giving us the ability to crew that and put supervision across the entire completion spread is a way to lever the cost a bit, that's one thing.

And I don't think you can talk about price being that big of a factor without talking about efficiently because we're in the same market as everyone else when it comes to pricing. It's just that when you put efficiency and pricing together and then focus a lot on taking nonproductive time out of the business, you can -- you can continuously differentiate, I think.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [32]

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Yes. So Dan, the only thing I'd add to that is, look, frac equipment is frac equipment, and there's innovation going on in this space, which is exciting. At the end of the day it's the management system and the customer underwriting and customer selection that makes these things more profitable. And if you think back from a Keane history perspective, when we the IPOed about 3 years ago we had just completed the Trican asset acquisition and tripled our asset base. And there was -- when we were on the road to the IPO show, there was a lot of trepidation about how we're going to take these assets which were deemed to be suboptimal assets and put them into Keane's model. And then Keane generated $400 million EBITDA last year and on track for $300 million this year and significant cash flow.

So I'd just say in C&J this merger is much better-positioned because, as Robert mentioned, there's a lot of best practices between the 2 companies we'll leverage. So you're getting a running start versus in '17 was more just getting assets off the fence. So I'm very confident I think we've demonstrated a track record in the management system for customer selection, execution on the well site, the dedicated model to take assets and drive profitability. And I think that's what's driving the bifurcation in this space.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [33]

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Okay. That's helpful. And just to summarize that, again, correct me if I'm wrong, but what you're saying is there's actually not much of a pricing difference. It primarily comes down to operational efficiency. And there's a little bit of not completely apples-to-apples because of the wireline being included. Is that a fair summary?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [34]

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I think that that's a fair summary. So maybe for the last part I'm not sure exactly what you mean there other than say that I think the wireline leveraging frac efficiency because of the combined team aspect of it, if that's what you mean, yes.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [35]

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Okay. It's material.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [36]

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Yes.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [37]

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Okay. And then just on that forward guidance or the forward expectation for the first quarter potentially having profitability for crew back to the third quarter level. Given that there is some pricing pressure in the system, are you saying that the synergies will offset the pricing pressure to get that fleet profitability back up there? Or is there something else that you see offsetting some of that pricing pressure?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [38]

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Look, I would point out that again Q4 is largely an activity issue where that efficiency component won't be as good because of the white spaces in the schedule. So recovering that will be a large part of it.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [39]

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Yes. So Dan I wouldn't characterize this as bulls on the price environment. I think the scenario as we laid out, the first one is assuming that you get a volume recovery. And then that gets offset by price. And we said if the fourth quarter profitability was to track, overlaying the synergies, you still generate over $200 million in cash.

The second scenario was if the pricing environment stabilizes a little bit based on supply and demand, balancing out on effectively main crews, which we saw happen last year. Then that pricing pressure might dissipate. And like Robert said, we're in the middle of that -- we're in the middle of that, the evolution of getting things setup for next year. So I think those are the scenarios we're trying to lay out for the earnings power of the platform with where we are today.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [40]

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And just a comment, one more time on pricing, I would just point out that we're able to go to our customers pretty much year-in and year-out and deliver deflationary costs and claw it back taking out operating costs or improving efficiency in the operation. And that's the same thing we're telling them again as we go into 2020.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [41]

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Okay. And then last one for me is when you look at the pro form fleet and everything that you're going to have sort of available, has all of that worked at some point in the past 3 years? And if not, what percentage of that fleet maybe hasn't worked in the past 3 years?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [42]

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Yes, I'd say for the assets we're retiring is probably about half of them have worked sometime in the last year and a half have not. I mean, it's different by product line. The well service you probably see more stacked equipment given the overcapacity in that space. And then wireline and frac you see stuff that worked more recently.

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Daniel Jon Boyd, BMO Capital Markets Equity Research - Oilfield Services Analyst [43]

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And lot of the stuff that's being retained, has any of that not worked?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [44]

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No, the stuff that's been retained has all worked within a year and is in very good shape. And we mentioned in the prepared remarks that there's 0 CapEx required for any of that equipment to go to work.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [45]

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Which goes back to Keane's philosophy over time to have kept the equipment fresh, do the investing fully on the required maintenance CapEx. But I came out clear in the prepared remarks is that I thought the asset rationalization and some of the early morning reports I thought was taken a little lightly, but if you look at wireline, we took 25% of the fleet out; and cementing 25% of the fleet out; well servicing rigs, 25% of the fleet out; coil, 15%; and as Greg pointed out 10% in frac. So I mean we took a big bite at it during this process.

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Operator [46]

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Our next question comes from the line of Stephen Gengaro of Stifel.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [47]

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Two things. One is that -- I just wanted to confirm something, but your maintenance CapEx expectation is about $4 million a fleet. I think that's what you had in the Barclays presentation. Is that accurate?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [48]

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Correct. That's correct.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [49]

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Okay. And so when we think about your, sort of the parameters around the CapEx you guys gave, how should we think about fleet coming back into the market and what are sort of the -- what would be your key sort of financial decisions or parameters on when you bring fleets back? And obviously the fourth quarter is light, right. But when you look beyond that are there levels of EBITDA per fleet that you sort of will require to reactivate fleets that are ready to come back?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [50]

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Good question. So look, when we are going through that process, thinking about how to redeploy the dry powder that we have. We have the customer base that we already have that some of these have plans in the future to increase the number of fleets they have deployed, that's one avenue. But one avenue that I'm extremely excited about, I failed to mention earlier was that buying company's sales and marketing organization is much enhanced to what we had individually.

And I mean -- I don't say that lightly because it would give us a better ability to sift through the customer opportunities out there to find like-minded partners that are focused on efficiency. So the reason I say it that way is simply to say that how we might deploy a new fleet into the market would have a strategic aspect to it. We might enter the market in the spot market of perhaps to try to convert one of these clients to the efficiency model, that were -- efficiency-dedicated models that we're used to being able to use a lot. So there is aspects of that. But certainly we would kind of redrawing the line at it not being in any case cash flow negative. And that maybe distinguishes us somewhat from some parts of the market.

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Stephen David Gengaro, Stifel, Nicolaus & Company, Incorporated, Research Division - MD & Senior Analyst [51]

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Okay. Now that's helpful color. And then just finally, so you're -- when you look at the overall CapEx for the year next year, the range you gave, is that beyond those maintenance levels for the frac fleet? Is that maintenance on the rest of the assets? Or is there some incremental CapEx in those numbers based on activity?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [52]

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Yes, it's a combination of 2 things, Stephen. It's the maintenance CapEx and then it's the CapEx for the nonfrac product lines which runs about $40 million a year depending on activity. And then the last piece is strategic, which is to continue to invest in innovation.

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Operator [53]

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Our next question comes from the line of Chase Mulvehill with Bank of America.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [54]

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I guess I want to come back to C&J a little bit and just trying to connect the dots with the pro forma. It looks like C&J had some really strong cash flow in the third quarter. So I don't know if you can maybe provide some color around what actually free cash flow was in the quarter for C&J and really kind of what drove that?

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Jan Kees van Gaalen, NexTier Oilfield Solutions Inc. - Executive VP & CFO [55]

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Yes. Hi, Chase, good morning. This is Jan Kees. Look, we -- I can't really talk about the numbers. The numbers will be coming out in about 2 weeks. But the organization as a whole, C&J performed relatively well on the free cash flow.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [56]

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Okay. There was no one-offs or anything that kind of drove that cash flow number, correct?

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Jan Kees van Gaalen, NexTier Oilfield Solutions Inc. - Executive VP & CFO [57]

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Not that I'm aware of.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [58]

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Okay. And then just sticking with cash. The cash -- how should we think about cash integration, Greg, as we go forward, just trying to layer in some cash costs into the cash flow statement?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [59]

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Yes. So look, there's kind of 3 pieces to the equation. There's the -- the dividend was paid at $66 million. On the deal cost side for the transaction, I think we'll have about $50 million, $20 million of that was [sunk] in the second and third quarter. And probably another $30 million in the fourth quarter for pure transaction cost. And then the third bucket is cost to achieve synergies which we estimated about $50 million, $50 million to $60 million. 50% of that will be in the fourth quarter of '19. And the other 50% will be in the first half of '20.

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Chase Mulvehill, BofA Merrill Lynch, Research Division - Research Analyst [60]

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Okay. All right. That's helpful. Appreciate it. And while I have you, Greg, synergies in the fourth quarter, how much are included in the guidance?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [61]

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Look, synergies in the fourth quarter are nominal, probably a couple of million dollars. And the reason for that is the way you ramp up to our $125 million by the end of the second quarter, means you got to get to a run rate of about $10.5 million per month. So when you annualize that you get to the $125 million. So what we're saying is we'll get that $10.5 million per month synergy run rate by end of June. So the second 6 months you'll get a full $10.5 million per month. That gives you kind of half of the $125 million. And then between close and June we'll be ramping that run rate up. So this is kind of the math with very small amount in the fourth quarter.

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Operator [62]

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Our next question comes from the line of Chris Voie with Wells Fargo.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [63]

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Just curious about the guidance you gave for 4Q, 17 fleets for Keane and 8 for C&J. Is that on a fully utilized basis? Or is that active fleets? Because that kind of could help inform any kind of rebound in 1Q 2020 if you expect that to fill out from additional activity per fleet or if you expect to reactivate any fleets in that scenario?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [64]

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Yes, the fleet numbers I gave earlier, the 17 and the 8 for 25 fleets is on a fully utilized basis.

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Christopher F. Voie, Wells Fargo Securities, LLC, Research Division - Associate Analyst [65]

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Okay. And can you give the active fleet number that you had in 3Q for each company?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [66]

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22 for Keane and 11 for C&J. So 33 fully utilized.

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Operator [67]

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Our next question comes from the line of John Daniel with Simmons & Company.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [68]

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Greg, you touched on innovation. Can you say if you guys plan on introducing an electric option in 2020 or your willingness to purchase new pump designs…

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [69]

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Yes, so on the next-gen equipment, I mean, we worked very closely with our customers, John. I'm trying to go at a pace that makes sense for what the requirements are and also make sure we have a return profile. And that's kind of consistent with what we've been saying. We don't think the electric math works right now. If there's a circumstance where the customer wants to go in that direction and we're their partner, we'll certainly evaluate options if there's a mutual return.

We are finding dual fuel, as we talked about before, to be a really nice bridge option to get the arbitrage on the fuel. We've got a nice portfolio of tier 2. We were one of their early testers of the few prototype units of the tier 4 DGB. We've since made some investment decisions in the tier 4 DGB. I think we're one of the tri-pioneers on putting that into production. And it's all driven by customer demand. So when the demand profile is there we'll continue to expand. But the dual fuel looks like a nice bridge technology as the electric solutions mature and hopefully the cost comes down.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [70]

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Okay. Can you say how many fleets you’ll retrofit with tier 4 DGB?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [71]

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We're not putting out a number. I'd say we're dipping our toe from a fleet perspective and then any subsequent builds will be demand-driven.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [72]

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Okay. On the retired assets ex frac, are you actually scrapping that? Are you going to sell any of those little assets?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [73]

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They're going to be scrapped, cut up.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [74]

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Okay. Good. All right. And then would you be -- as you find the opportunities to reactivate fleets in Q1, the same sort of disparity in the EBITDA per fleets. Is there -- what -- is the threshold meeting the Keane Group EBITDA per fleet or would you reactivate at the C&J level? Walk us through what's that number that would entice you to bring a fleet back.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [75]

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Look, what Robert said is the cash flow number. So it's not -- it just is -- it's consistent upon our new cost structure. So the 2 things we look at, we take GP per fleet minus EBITDA per fleet, minus CapEx per fleet. So if we're $4 million CapEx and then let's say G&A sitting at $4 million to $5 million till we got the synergies value looking at $9 million. If you go below that, you're pumping dollar bills down the well bore and we have no interest in doing that. So I'd say that's a cash threshold for gross profit per fleet that'd be required to see us even consider activation.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [76]

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And then just 2 quick ones here. I know you said they were market-ready, the 45 fleets. But again, you'll probably have some opportunities to deploy stuff I would think. Are we going to see fleet reactivation costs flow through or no?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [77]

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Zero. The only activation cost we'll have is ramping up the employees 30 days and we have to get them trained up. And there's a good market of employees out there today. So I would expect 0 activation cost.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [78]

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So I mean by keeping the fleet warm, fresh.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [79]

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Fair enough. And the last one is just some simple housekeeping. Would you be willing to sort of offer a view on depreciation G&A for 2020? And just where is the share count?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [80]

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The share count is being finalized by the accounts, but as of 11/5 it was around 210 million.

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Jan Kees van Gaalen, NexTier Oilfield Solutions Inc. - Executive VP & CFO [81]

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210 million.

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [82]

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Around 210 million, which is double the Keane. On SG&A, at a simple pre-synergy run rate of $65 million per quarter. And then G&A is hard to give because we're going through purchase accounting which will reset the G&A. So soon as we have good numbers on that, we'll share it with the investment team.

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Operator [83]

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Our final question comes from the line of Vebs Vaishnav with Howard Weil.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [84]

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Couple of things struck me in the initial comments when Robert was talking. You talked about manned fleet has balance supply and demand. Could you please expand on that, by what you mean by that?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [85]

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Yes. Great question, Vebs. And I think it's sometimes underestimated, is that once a service company takes the capacity out of the market, we are taking the people off of the market, out of the market via layoffs or furloughs. It's much more of a different decision to reactivate because you don't want to be jerking people around back and forth. And the cost associated with restaffing a crew is not insignificant. So there's a little bit of a balance in the market. We take is that how many of our idle fleets do we keep hot and ready, meaning the difference between hot and warm being that a hot fleet has got ready equipment and ready people and a warm fleet has ready equipment with no people. And I think a lot of people are taking action right now to reduce the number of crewed fleets out there.

So the reason for even pointing that out is it there's a pricing point associated with that. People are not going to redeploy people into a market. As Greg points out, just pumping dollar bills down to well bore. So that's the reason for pointing it out. And that's the difference.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [86]

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Okay. So I guess like the other way of thinking is when you guys talk about 17 fleets for legacy Keane, what you're saying is 17 would be equivalent, but there'll be like 23 hot stock fleet. Is that the way to think about it?

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [87]

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No. I would just say that 17 is fully-loaded. It may be 18 or 19 that are in the field making jobs to make it -- the math work on 17 fully-loaded. And besides that, we might have another 1 or 2, hot and ready to take advantage of our pipeline of sales opportunities that we will risk a handicap accordingly. So how you balance that flex capacity has a lot to do with profitability. If you carry too much cost, your profitably is going to be down. But you have opportunity to catch upside. So that -- we try to be smart about that. And every day we get -- try to get a little bit more information about what our pipeline looks like for new jobs and handicap it accordingly.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [88]

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The second thing you mentioned was we are in the very early cycle on attrition. And you also -- I guess if you can talk on that. And also some thought process of why retiring only 100,000 horsepower?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [89]

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Yes, so a couple of points. The reason we said we think we're early in an attrition cycle is because I think the horsepower that's being served up for retirement has essentially been dead horsepower on the fence that now it's (inaudible) to retire. So we're seeing that. And the one thing I will point out is both companies are relatively -- have relatively mature fleets that we've done a very good job of maintaining maintenance CapEx. And in the Keane side we've been in 4, 4.5 for 3 years now. And we keep the fleets fresh. And I think there's other CapEx numbers out there in the market that are significantly lower. But I would argue the full fleet is not being maintained, right. So there's some leakage in that number versus an actual because your fleet is deteriorating.

As it relates to the horsepower, I can kind of unpack that a little bit. So on the frac fleets we went from 2.3 to 2.2. And then we went from 50 to 45 fleets of marketed capacity. There's a few moving parts in there. The first thing we had to do was standardize the definitions of horsepower. C&J had a definition of horsepower that was about 2,000 per pump, whereas Keane used, I think, what was the more common industry standard of nameplate engine capacity, which is 2250 or 2,500, depending on the engine model. So the first thing we did was adjust that, which actually took C&J's horsepower up 130,000 by our definition. The next thing we did was increase the horsepower per fleet to deal with both the increasing service intensity as well as the need for rotational horsepower because the pumps are working so much at these efficiency levels. So that added a certain amount of horsepower per fleet where we're now running collectively at 49,000 horsepower per fleet in that math. And then 100,000 horsepower effectively 2 horizontal fleets was permanently retired.

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Vaibhav D. Vaishnav, Scotia Howard Weil, Research Division - Analyst [90]

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Got it. Okay. And one last question, if I may squeeze in. When you talk about the $10 million threshold level to restart a fleet, when you talk about including in that like $4 million of CapEx, is that just a maintenance CapEx around fluid end? Or are you talking like, well, every 3 years you may have to replace engines and transmissions, and that's included in that number?

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Gregory L. Powell, NexTier Oilfield Solutions Inc. - Executive VP & Chief Integration Officer [91]

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Fluid ends all go through the income statement. So that's not included in CapEx for Keane. What's included in that Maintenance CapEx number is -- or C&J. What's included in the maintenance CapEx is the rotational refurb of key components, including engine, transmission and power end. And when you keep up with those and replace them, that's the $4 million we've been spending to keep the fleets fresh over the years. So that's a recurring number. It goes through the CapEx to keep the fleets fresh. You take that plus G&A and that gets you to the threshold for gross profit.

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Operator [92]

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Thank you. Ladies and gentlemen, we have reached the end of our question-and-answer session. I'd like to turn the call back over to Mr. Robert Drummond for closing remarks.

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Robert Wayne Drummond, NexTier Oilfield Solutions Inc. - CEO, President & Director [93]

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Thank you very much. Look, in closing I want to highlight a few key points. First, we're very pleased to have closed our merger as planned. I appreciate the hard work and support provided by so many. Our combination has created an industry leading U.S. land service provider, committed to delivering leading performance for customers and returns for investors.

Now second, we've identified more opportunities for cost savings. And we're increasing the magnitude of expected synergies and has accelerated the pace of achievement. And third, we're being responsible from an asset portfolio perspective, rationalizing a sizable portion of our combined asset base, resulting in an even stronger base of equipment on which to execute our strategy and deliver for our customers.

And forth, we remain focused on driving efficiency and safety through continued investment in innovation. Our leading balance sheet position comprised of essentially 0 net debt and more than $700 million of total liquidity, positions us to maximize the impact of our robust innovation capabilities. We look forward to updating you on our progress and performance on our first quarter call early next year.

And I also want to publicly thank all of our employees from both legacy companies for your extra effort and contributions that provided the foundations for NexTier. Many have been managing extra-long hours to help us get to this point. Thank you very much. And thanks to everyone on this call for your interest in NexTier. Have a great day.