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Edited Transcript of QES.N earnings conference call or presentation 7-Nov-19 3:00pm GMT

Q3 2019 Quintana Energy Services Inc Earnings Call

Nov 14, 2019 (Thomson StreetEvents) -- Edited Transcript of Quintana Energy Services Inc earnings conference call or presentation Thursday, November 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Christopher J. Baker

Quintana Energy Services Inc. - CEO, President & Director

* Keefer M. Lehner

Quintana Energy Services Inc. - Executive VP & CFO

* Natalie S. Hairston

Dennard Lascar Associates, LLC - SVP

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Conference Call Participants

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* George Michael O'Leary

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

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Presentation

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Operator [1]

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Greetings, and welcome to the Quintana Energy Services' third quarter earnings conference call. (Operator Instructions)

I would now like to turn the conference over to Natalie Hairston. Please go ahead.

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Natalie S. Hairston, Dennard Lascar Associates, LLC - SVP [2]

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Thank you, operator, and good morning, everyone. We appreciate you joining us for the Quintana Energy Services conference call and webcast to review the third quarter 2019 results. With me today are Chris Baker, Quintana's President and Chief Executive Officer; and Keefer Lehner, Chief Financial Officer and Executive Vice President. Following my remarks, management will provide a high level commentary of the financial details of the quarter and outlook, before opening the call for Q&A. There will be a replay of today's call and it will be available by webcast on the company's website at quintanaenergyservices.com. There will also be a recorded replay available until November 14 2019. More information on how to access the replay feature was included in yesterday's earnings release.

Please note that the information reported on this call speaks only as of today, November 7 2019 and therefore you are advised that time sensitive information may no longer be accurate as of the time of any replay, listening or transcript reading. In addition, management's comments may contain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of Quintana's management, however various uncertainties, and contingencies, could cause actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listener is encouraged to read the annual report on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K to understand certain of those risks, uncertainties, and contingencies. The comments made today may also include certain non-GAAP financial measures. Additional details and reconciliation to the most directly comparable GAAP financial measures are included in the quarterly earnings release, which we can be found on the QES website.

And now I would like to turn the call over to QES' President and CEO, Mr. Chris Baker.

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Christopher J. Baker, Quintana Energy Services Inc. - CEO, President & Director [3]

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Thank you, Natalie, and good morning, everyone. Thank you for joining us today for Quintana Energy Services Third Quarter 2019 Conference Call. Since the last time we spoke in August, we have continued to make positive progress and had a strong third quarter, despite the macroeconomic environment, continuing to deteriorate. With continued constrained customer spending, a surplus of available service equipment and an overall era of uncertainty around underlying market fundamentals. However, despite these difficulties, I'm pleased to say that we have met these challenges head-on and have not only solidified which strengthened our business to operate in what has become a rather unpredictable and volatile marketplace. The corporate restructuring plan affected during the third quarter has gone smoothly. As my prior experience with the Company's corporate team as well as our key operating leadership has enabled me to step in seamlessly.

Ultimately, our team has continued our focus on streamlining our operations, optimizing our asset base and searching for additional cost savings and synergies within the organization. I'm proud of the progress that we have made this quarter and I'm looking forward to other opportunities to improve, execute and expand QES. Although, there are numerous factors driving the market that are outside of our control, such as commodity prices and customer budgets, we have made it a priority to aggressively manage those factors within our control, the best positioned QES for the challenges ahead.

This means a continuation of the rationalization of our cost structure as well balancing this effort with the need to maintain an asset base and geographic presence that will enable us to fully participate in the eventual market upturn. It also means sustaining our momentum and providing superior execution in the field and we do this by supplying highly trained personnel along with well-maintained latest generation equipment and technology that provides our customers the outstanding service quality they have come to expect.

While executing on these initiatives and at the press market can be challenging, we are seeing some encouraging signs that our efforts are paying off. Given the overhanging macro environment of slowing production growth rates in North America onshore, activity declines weight on the third quarter results. We saw a combined horizontal and directional rig count dropped roughly 11% from the end of the second quarter through the end of the third quarter along with further erosion to-date. And while the macro market in the third quarter with very challenged for our industry as a whole, I'm very proud that QES was able to achieve a number of accomplishments.

First, we successfully completed the sale of our Mid-Con conventional pressure pumping locations for $4.4 million. We exited 3 facility as we continued to streamline our operational footprint and our focus. We successfully negotiated a solution to a material supply contract and further, we reduced our corporate G&A beyond the actions previously discussed.

These actions in addition to our relentless focus on our cost structure, yielded the impressive results that were reported yesterday. For the third quarter QES reported consolidated revenue and adjusted EBITDA of 121.1 million and 8.7 million respectively. Compared to 125.6 million and 5.9 million in 2Q of 2019. We posted the highest quarterly adjusted EBITDA for the year, driven by improved profitability from our Directional Drilling, pressure control and pressure pumping segment.

This performance was driven by our cost cuts in corporate restructuring initiatives, which began in the second quarter and continued throughout the third quarter as well as improved utilization of our remaining active cruise. Taking a closer look at our segment performance, in Directional Drilling our utilization remained steady and we were able to successfully drive some sequential market share gains.

You may also recall that during the previous quarter, we experienced some transitory issues in the form of increased standby and rig moves, which negatively impacted our 2Q margins. With those issues now behind us, along with continued holding of our cost structure, we saw a sizable improvement in our profitability.

For the third quarter of 2019, rig days were relatively flat both sequentially and year-over-year, coming in at 4,863 days. Our monthly average rental revenue was 67 of which 59 were follow-me rigs. Our customer base in DD is extremely Blue Chip focus, as we generated revenue working for 7 of the top 10 operators in the US so far in 2019, and we have outsized market share among the top 20 operators, compared to the broader retail.

We are very proud of this statistic and believe it is implemented of our dedication to providing the highest level of performance and service to our customers in the field and a cost competitive price. Adjusted EBITDA margins for our directional business expanded by more than 500 basis points sequentially, as the cost cuts initiated in Q2, fully took effect during the third quarter, and a more favorable job mix drove an improvement in our blended day rate.

Now turning to our completions related segments. Within our 3 completions related segments, budget exhaustion and constrained customer cash flows have driven widespread reductions in completion activity, leading to more white space on the calendar and oversupply conditions for our equipment, which further adds to the pricing pressure.

From where we stand now, we've seen these conditions deteriorate from the end of the third quarter into fourth quarter. Although this elevated pressure has made conditions more difficult. We have to refine our cost structure and work to maintain acceptable utilization levels up for our crude units in order to stabilize margins. Based on our strategy, our growth spending continues to come down. We are highly focused on both enhancing returns and optimizing our asset base to suit market conditions.

Looking at our Pressure Pumping segment. The Pressure Pumping segment showed sequential improvement in both revenue and adjusted EBITDA. Our 2 active frac spreads experienced higher utilization, although this was partially offset by lower pricing and slowed activity in the last month of the quarter.

We were also able to sequentially improve margins as a result of our cost cutting program. You may recall from our last earnings call that our pressure pumping strategy shifted thoughtfully and deliberately in order to improve utilization at lower cost. We announced the pursuit of opportunities in adjacent geographic markets and the consolidation of our Mid-Con pressure pumping operations into our centralized Union City facility.

The expansion to adjacent markets enabled us to attain a higher utilization level that carried into the third quarter and the centralization of our Mid-Con operations is effectively reduced our cost base and paired our presence to more appropriate levels. In the third quarter, we actually begin to see the benefits of these actions flow through to our Q3 profit and margins.

Moving to Pressure Control. Our Pressure Control segment saw a moderate sequential drop in revenues, but the segment's adjusted EBITDA more than doubled over the same time period. With approximately 70% of segment revenues driven by coil tubing continued soft pricing in the coil tubing market weighed on the segment's top-line.

However, this was partially offset by an increase in activity and utilization as well as a material improvement in our snubbing margin which was also driven by improved crew utilization. These factors coupled with our cost cutting efforts yielded strong sequential improvements in adjusted EBITDA despite the revenue drop.

In fact the segment's third quarter adjusted EBITDA was the highest it has been in 2019. Lastly, turning to our wireline segment. As I mentioned earlier, fundamentals in the wireline business continue to be the most challenged of our 3 completions oriented businesses with results contracting in this activity ground to a halt at the end of the third quarter.

Wireline for the -- revenue for the third quarter it was down 50% sequentially and down 48% year-over-year. Although lower overall activity was the primary driver for the decline. We also idled one additional location, which contributed to the lower revenue as we retrenched to 2 core geographic regions in our unconventional pump down business. There also remains an overall lack of pricing discipline in the market due to the fragmented the wireline service market and the more limited pump down opportunities available in the back half of 2019.

We are continuing our efforts to rightsize the wireline segment and to focus on the most efficient operators working in our core geographic markets, given the systemic challenges within wirelines market, we believe further reducing our footprint, right-sizing our cost, focusing operations of high efficiency pumped out and giving district managers great accountability are their appropriate steps to manage through these challenges.

With that, I will now turn the call over to Keefer, who will review our financial results in greater detail. Keefer?

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Keefer M. Lehner, Quintana Energy Services Inc. - Executive VP & CFO [4]

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Thanks, Chris. Before I dive in the segment detail, I'd just like to point out that this was a busy quarter for QES, but the team did a fantastic job in a tough market and it shows in our results. The benefit of our Q2 cost cutting initiatives began to be reflected in our Q3 results and Q3 was our best quarter of the year from an adjusted EBITDA perspective.

Let me begin with an overview of our business segment financial performance, starting things off with Directional Drilling. For the third quarter of 2019, Directional Drilling revenues of $57.1 million increased 5% sequentially and were up 12% from the third quarter of 2018.

Compared to Q2 of 2019, day rate was the primary factor that accounted for the directional drilling revenue increase, driven by job mix, geographic mix and demand for premium tool services.

As Chris mentioned in his remarks, rig days were flat both sequentially and compared to the same period in 2018. For the third quarter of 2019, we had a total of 4,863 rig days and a monthly average of 67 rigs on revenue, of which 59 were fall new rigs.

During the third quarter, we successfully drilled 364 wells for 39 customers on 83 discrete rigs across 33 different target formations. Third quarter adjusted EBITDA for the directional Drilling segment was $9.1 million, which was up 56% from the second quarter of 2019. Adjusted EBITDA margins for our Directional business increased by more than 500 bps sequentially to 16%.

Now on to Pressure Control. Our Pressure Control segment generated total revenues of $26.8 million for the third quarter of 2019, which was down 3% sequentially and down 14% year-over-year. Pressure control adjusted EBITDA in Q3 was $3.7 million, which more than doubled the $1.6 million earned in Q2. The segment's adjusted EBITDA margin, also more than doubled, rising from 5.7% in Q2 to 13.7% in Q3 of 2019. The margin increase was driven by the combination of both improved activity as well as the impact of our ongoing cost reduction initiatives.

Moving on to Pressure Pumping, the Pressure Pumping segment generated total revenues for the quarter of $27.3 million, reflecting a 14% sequential gain and a 45% decline from last year's third quarter, we saw our average revenue per stage increased 28% sequentially driven by a shift in job mix, offset by a corresponding 13.6% decrease in stages completed during the quarter.

For the third quarter of 2019 Pressure Pumping frac to total of 700 stages, compared to 810 stages in Q2 of 2019 and 908 stages in Q3 of 2018. The decrease in stages compared to Q2 was driven primarily by white space on the calendar and schedule challenges during the third quarter pressure pumping adjusted EBITDA for the third quarter was $1.2 million compared with $762,000 in Q2 of $5.8 million in Q3 of 2018.

Lastly, we'll close out the segment discussion with Wireline services. Wireline revenue for the third quarter was $9.9 million, which was down 50% sequentially and down 48% from the third quarter of 2018. From Q2 of 2019 to Q3 of 2019. We experienced a 14% decrease in revenue days and a 24% decrease in day rate. Wireline adjusted EBITDA for the third quarter of 2019 was a loss of $2.8 million, which was down from a profit of $384,000 in Q2 of 2019 and down from a loss of $738,000 in Q3 of 2018.

Now I will turn to our consolidated results. For the third quarter of 2019 revenues were $121.1 million representing a 4% sequential decline and down 20% from last year's third quarter. Our consolidated adjusted EBITDA was $8.7 million in the third quarter of 2019. This was up from $5.9 million in Q2 of 2019 and down 33% from Q3 of 2018.

The sequential increase in EBITDA was largely driven by the flow through of the Q2 cost cutting initiatives and our ongoing corporate restructuring program. During Q3, the company implemented a corporate restructuring program to align its cost structure with the current and anticipated market conditions for US onshore oilfield service providers in connection with this plan QES recorded $5.3 million in restructuring charges during the quarter.

Additionally, due to deteriorating condition in the North America completions market and cash flow losses in our wireline in Pressure Pumping segments during the third quarter of 2019 we tested the carrying value of certain of QES's long live tangible and intangible assets for impairment. Based on the results of our recoverability testing our Pressure Pumping segment recorded an impairment expense of $34.2 million and our wireline segment recorded an impairment expense of $2 million for a total impairment expense of $36.2 million during the third quarter.

Consolidated G&A expenses were $12.1 million, which was down 13% from the second quarter of 2019. This decrease was a result of lower stock-based compensation expense. I'd also note that our corporate expenses have come down significantly over recent quarters as part of our larger cost rationalization efforts, falling from $3.6 million in Q1 of 2019, to $2.6 million in the third quarter of 2019.

Going forward, we expect our corporate expenses to approximate roughly $2.3 million to $2.8 million per quarter. Third quarter, interest expense was $898,000, which was largely flat with the second quarter's interest expense and up from $574,000 in the same period of 2018. Going forward, we would expect interest cost to come down as we unwind working capital and pay down debt.

The provision for income taxes in the third quarter of 2019 with a negligible amount and related primarily to state margin taxes. Now I'd like to briefly discuss our cash flow statement, balance sheet and liquidity position.

During the third quarter operating activities provided cash of $3 million, our net working capital for the quarter was $48.6 million and this was down from $50.9 million in Q2 of 2019. As activity has slowed and revenues have decreased we have worked to shore up our working capital by focusing on converting receivables to cash and buy more effectively managing our vendor relationships to match cash disbursement timing with receipts from our customers.

We will continue to proactively manage our working capital to achieve greater cash flow efficiency going forward. Gross CapEx totaled $7.6 million during the third quarter of 2019, compared to $8.9 million in the second quarter of $2019 and $11.9 million in the third quarter of 2018. During the third quarter capital spending was driven primarily by maintenance capital spending. On a net CapEx basis to $7.6 million of gross CapEx was largely offset by asset sales of $6.7 million yield and net CapEx of only $920,000. The asset sale proceeds were largely driven by the previously announced sale of our conventional Mid-Con pressure pumping locations and the monetization of other obviously assets.

For 2019, we continue to forecast $32 to $35 million of gross capital spending for the full year. And as always, we plan to remain highly disciplined in evaluating our capital spending and is highly volatile macro backdrop. Other cash flow items of note in the third quarter include the repayment of $2 million of our revolving credit facility as well as $570,000 in share repurchases, totaling 305,000 shares, bringing our total year-to-date share repurchases to 573,000 shares.

We continue to have a strong balance sheet and ended in the third quarter with a total debt balance of only $33 million and $14.9 million of cash on hand, yielding a net debt balance of $18.1 million. We continue to have one of the strongest balance sheets in the sector. We ended the quarter with $39.1 million of net availability under our revolving credit facility and total liquidity of $54 million.

With that, I'll turn the call back over to Chris.

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Christopher J. Baker, Quintana Energy Services Inc. - CEO, President & Director [5]

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Thanks, Keefer. With rig count still trending down and completions activity plate budget exhaustion and excess capacity, we have been heavily focused on maximizing the company's flexibility, rebalancing our footprint within select geographic markets and improving our ability to weather uncertainty in the market landscape.

We saw Q3 adjusted EBITDA expand meaningfully despite a reduced revenue base. So it's clear, we're making positive strides towards that goal. Despite these encouraging results, there remains more work to be done. With that in mind, we will continue to aggressively address our cost structure and focus on streamlining and better integrating support functions, including HR payroll and accounting within our completions oriented businesses and QES more broadly going forward.

We will continue to focus on driving asset and crew utilization while managing our asset base for the long term. At the end of the day, we are in the service industry so we focus day in, day out on providing the safest highest level of service possible to our customers and we will put our crews up against anyone in the industry.

Looking towards the fourth quarter from a consolidated perspective, we do not expect any meaningful improvement, a customer activity for Q4. On the drilling side, we expect activity to hold and are optimistic that customers may begin to pick up rig late in Q4. But on the completion side, we will continue to fight through further deterioration in pricing and utilization with that said, our ongoing asset optimization and cost structure refinement coupled with our strong balance sheet and considerable liquidity provides us with an industry-leading credit profile and significant operating leverage, putting in us in an enviable position compared to industry peers.

As we look to 2020, we are working through our budgeting process now as our, all of our customers. We're not expecting meaningful activity improvement over 2019 levels, however, we also do not believe the third or fourth quarters of 2019 are necessarily representative of the new status call. We remain optimistic about our prospects for 2020. I believe our 3Q results illustrate the significant intrinsic operating leverage embedded in QAF, as we have worked to optimize our cost structure and streamline the organization. Finally, I would like to thank all of our co-workers across Quintana for their continued efforts and personal commitment to safety, integrity and customer service.

With that, we will now take your questions. 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 George O'Leary with Tudor, Pickering.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [2]

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Morning Chris, morning Keefer. My first question, yes, it was actually just kind of popped up as you're ramping up your concluding statements, Chris, on the drilling side, and correct me if am wrong. But I think I heard you say you thought activity there might be flattish, there is clearly some share capture in the third quarter, is that playing a role in eligibility to keep your directional drilling business kind of flattish with the third quarter is a job mix again kind of helping there, the revenue there and then the potential for customers to pick up activity late in the quarter, I thought, was interesting, I guess, what kind of drove that comment, that discussion of the customers or something else?

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Christopher J. Baker, Quintana Energy Services Inc. - CEO, President & Director [3]

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So I guess a couple of facets to that. We've clearly seen rig count continue to roll going into October and so that's going to drive some decline in overall job days. But as we look out towards December and kind of the exit rate, what I would say from where we sit today, we're forecasting a Q4 exit rate as far as job days to be greater than where we sit today and so, I think ultimately job fall slightly from Q3, but I think we're going to exit the quarter and enter 2020 on a better footprint we sit here today. Ultimately, at the end of the day, I just reiterate something that I said earlier, I mean we've got a very, very blue chip customer base, our performance in the field in our shop and Willis, and the performance we deliver continues to drive outsized market share and so when you look at the rollover in rig count I would argue, yes, we have gained share and we continue to expect to do so as rig count kind of climbs back going into Q1.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [4]

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Alright, that's super helpful color and answered all those questions as well. The next question I had, clearly the cost cuts are really impressive and you're kind of getting that your efforts from earlier in the year are bearing some fruit. I wonder if you could walk us through kind of which cost bucket those cuts. So far, which drove the lion's share of those, if you think about it from a people perspective leases in real estate, supply chain, the asset sales, I know there were some facilities there. Which were the primary bucket those costs came from and then looking forward as you further look to rationalize the footprint, etcetera, where is your focus?

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Christopher J. Baker, Quintana Energy Services Inc. - CEO, President & Director [5]

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Yes, sure. So I mean look, that's a pretty broad question at the end of the day, I would say a couple of things. First, at this point we're mostly fine-tuning. I would think we're 90% of the way there. We have in October reduced one additional pressure pumping crew. But otherwise pretty much all of the incremental reductions are going to be from synergies within corporate and other kind of back-office functions. Keefer, you want to jump in is going to talk about the buckets.

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Keefer M. Lehner, Quintana Energy Services Inc. - Executive VP & CFO [6]

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Yes, George, I mean you hit kind of all the bucket nail on the head personnel was certainly kind of the largest grouping. But you're right on, in that we also clearly executed on the asset sales, we've attacked the supply chain, we've internalized portions of our cost structure where possible and we're going to continue to chip away at those items through the end of the year assuming the market remains status quo. The market changes obviously, we'll continue to reassess and attack the cost structure is necessary.

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George Michael O'Leary, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - MD of Oil Service Research [7]

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Great. I'll sneak one more in, if I could. Just given all the changes that you just kind of a numerator that we talked to you a little bit from our repair and maintenance CapEx perspective where would you say that sits today, given the current asset base.

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Keefer M. Lehner, Quintana Energy Services Inc. - Executive VP & CFO [8]

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Sure. So I think maintenance CapEx for us is and others is clearly a function of utilization levels which obviously today are relatively depressed. So from a modeling perspective, I think, how you all to think about it is probably maintenance CapEx as a percentage of revenue. I'd say we're not planning to certainly cannibalize any of our equipment base or to forego any necessary spending, but capital spending will be down on an absolute basis just due to lower activity levels. So for us on a year-to-date basis, maintenance CapEx has been running a little north of 5% of revenue going forward. I'd expect kind of 5% to 6% of revenue to be a decent range provided though that any changes in revenue are more of a function of utilization rather than price.

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Operator [9]

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I would like to turn the floor over to Mr. Baker for closing comments.

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Christopher J. Baker, Quintana Energy Services Inc. - CEO, President & Director [10]

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Thank you once again for joining us on the call today and your interest in Quintana Energy Services, and we look forward to talking to you again next quarter.

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Operator [11]

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Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines at this time and have a wonderful day.