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

Q4 2018 Quintana Energy Services Inc Earnings Call

Mar 12, 2019 (Thomson StreetEvents) -- Edited Transcript of Quintana Energy Services Inc earnings conference call or presentation Thursday, March 7, 2019 at 3:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Keefer M. Lehner

Quintana Energy Services Inc. - Executive VP & CFO

* Rogers Daniel Herndon

Quintana Energy Services Inc. - CEO, President & Director

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Conference Call Participants

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* Harris Newell Pollans

BofA Merrill Lynch, Research Division - Research Associate

* Taylor Zurcher

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

* Ken Dennard

Dennard Lascar Associates, LLC - Co-Founder, CEO and Managing Partner

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Presentation

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Operator [1]

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Greetings, and welcome to the Quintana Energy Services Fourth Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ken Dennard, with Dennard Lascar Investor Relations. Thank you, Mr. Dennard, you may begin.

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Ken Dennard, Dennard Lascar Associates, LLC - Co-Founder, CEO and Managing Partner [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 fourth quarter 2018 results.

With me today are Rogers Herndon, QES' President and CEO; and Keefer Lehner, the CFO and Executive Vice President.

Following my remarks, management will provide a high-level commentary on the financial details of the fourth quarter and outlook before opening the call for Q&A.

Before I turn the call over to management, I have a few housekeeping details to run through. There'll be a replay of today's call and it will be available via webcast on the company's website at quintanaenergyservices.com. There's also a recorded replay available until March 14, 2019, and more information on how to access the replay feature was included in yesterday's earnings release.

Please note that information reported on this call speaks only as of today, March 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, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States Federal Securities Laws. These forward-looking statements reflect the current views of QES' management. However, various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in 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 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 press release, which can be found on the QES website.

And now with that behind me, I'd like to turn the call over to QES' President and CEO, Mr. Rogers Herndon. Rogers?

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [3]

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Thank you, Ken, and good morning, everyone. Before I discuss the specifics of the fourth quarter, I'd like to mark our first anniversary as a public company by highlighting the progress we've made over the past year.

2018 full year revenues were up 38% to $604 million and our adjusted EBITDA was up 46% to $60 million. We enhanced our balance sheet using IPO proceeds to pay down debt and we put in place a new ABL facility.

Our net debt balance as of December 31, 2018, stands at $19.6 million. We plan to materially reduce our CapEx spend in 2019, which should position us to further strengthen our balance sheet. We maintained our industry-leading safety record and expanded our customer base. We expanded and upgraded our coiled tubing fleet, increasing our large diameter unit count from 6 to 10 units.

In Directional Drilling, we have steadily increased market share, while improving margins.

In Pressure Pumping, we successfully deployed our fourth frac fleet in late Q2 on time and on budget.

While we are currently managing through a challenging market environment, I want to commend our team on delivering consistent performance of the highest caliber to our customers in the field and ensuring the highest level of reliability for our fleet.

In Wireline, after struggling in the second half of 2018, we worked diligently to reposition the business and have begun to see a meaningful turnaround as we entered 2019. Across all of our business lines, we are focused on improving our efficiency and utilization levels. We have increased transparency of operating and financial data and implemented meaningful incentive plans deeper into our operating units to align goals and drive results, and our finance and accounting staff has risen to the challenge this year and done an outstanding job transitioning to public company life.

Now turning to the specifics of the fourth quarter. Yesterday, we reported consolidated revenue and adjusted EBITDA of $159.7 million and $13.9 million, respectively. While we are very pleased to have posted sequential gains in our total revenues and adjusted EBITDA, thanks largely to the strong momentum of our Directional Drilling business, we also saw the continuing effects of weakening market fundamentals in our Pressure Pumping division as well as some lingering headwinds as we repositioned our Wireline business. That said, we exited 2018 on a high note with December being the highest revenue month of the year.

I'll provide more color for each segment and offer some preliminary thoughts for 2019 before turning the call over to Keefer to discuss our financial results in more detail. Our Directional Drilling segment continues to perform very well with healthy demand for our services leading to further market share gains in the fourth quarter. Adjusted EBITDA increased to $9.4 million in Q4 from $6.5 million in Q3. Active job days increased by 14% sequentially in the fourth quarter and the number of follow-me rigs increased by 10 as QES market share improved to approximately 9%.

As we entered the fourth quarter, our number of rigs on revenue was 82. Directional Drilling continues to be a key differentiator for QES, diversifying our mix between drilling and completion services and providing an entry point for related services into many of the most active operators. Our ability to gain market share over the fourth quarter in a largely flat rig count environment is a testament to our goal of creating value for our customers through our performance, reliability and consistency in the field.

So far, the first quarter has continued to trend well for the directional business and we would expect activity levels to remain consistent with Q4 levels. Ongoing discussions with customers points to a mix of planned rig adds throughout the year by some customers, which may be offset by some rigs being laid down in the near term.

In Pressure Control, revenue was flat from Q3, while EBITDA was up slightly to $4.7 million from $4.4 million. The deployment of our 2 large diameter units was further delayed in the fourth quarter and had a minimal impact on results. With the delivery of these units, we now have 10 of our 24 units measuring 2-3/8 inch or greater.

Our Q4 results benefited from increased well-controlled activity, a general trend we have seen throughout the year. While more episodic in nature, our well-control offering is highly specialized and served by a smaller number of companies, thus offering stronger margin opportunities and we have become first call for numerous customers throughout the U.S.

In Pressure Pumping, we again staffed 4 high-pressure spreads in the Mid-Con region for the fourth quarter. In Q4, we experienced improved utilization levels offset by weaker pricing compared to Q3 with total stages pumped increasing 50% from Q3 levels. These factors combined to drive a sequential decline in adjusted EBITDA from $5.8 million in Q3 to $4.1 million in Q4.

In January, as a result of weakening fundamentals, we elected to warm stack 1 of our 4 high-pressure frac fleets and reduced headcount. We anticipate an improving market for Pressure Pumping services over the balance of 2019. However, until we see the improvement in both utilization and margins, we will continue to assess the returns on a fleet-by-fleet basis and may elect to sideline additional capacity.

In Wireline, our focus has been on streamlining our operational -- our operations and improving our field level performance. Our team made material changes to reposition the strategic direction of the business and narrow the focus of our core service offerings. We have refocused our sales efforts, made adjustments to staffing levels and modified incentives, all with the goal of improving utilization, driving revenue growth and enhancing profitability. We did not expect these efforts to show up meaningfully in Wireline's Q4 results. Reversing the negative trend in Wireline will be key to our broader efforts in managing through the current weakness in the completions markets. And we are seeing evidence thus far in Q1 that our efforts are delivering the intended results.

One of our primary focuses in 2019 will be on free cash flow generation. Keefer will walk you through the 2018 numbers in detail, but I want to cover the components of cash flow at a high level and discuss our philosophy.

In 2018, we delivered adjusted EBITDA of approximately $60 million. Our total CapEx spend was approximately $65 million, of which $40 million was directed towards growth projects, the balance toward sustaining investments. One of the key measures we focus on is adjusted EBITDA less maintenance CapEx.

For 2018, we generated approximately $35 million on this basis. We invested approximately $10 million of working capital throughout the year and we generated proceeds from noncore asset sales of approximately $10 million. Our net debt as of 12/31/18 is approximately $15.7 million, excluding capital leases.

We have the most direct control over growth CapEx spend. For 2019, we have thus far planned on approximately $15 million in growth projects spread across Directional, Wireline and Pressure Control. This is down from approximately $40 million in 2018.

Given the challenging market backdrop and rising capital return hurdles for the services sector as a whole, these investments are directed toward only the most attractive opportunities, which typically means less risk and very short payback duration. The list of opportunities is much longer and we may always sanction additional projects based on evidence of a sustained and improving market backdrop. Additional projects could include investments in large diameter coil, enhancements to our snubbing fleet and technology additions to our Directional and Wireline platforms. We don't see this as limiting our long-term upside from organic growth spend. We, and the market as a whole, have access frac capacity and room for margin expansion.

We are similarly situated in Wireline and look forward to growing into our excess capacity. Utilization and margin expansion opportunity exist in Directional Drilling and Pressure Control as well. Until we gain more confidence in the market recovery, this should give you a sense of how we prudently evaluate growth capital spending.

In terms of maintenance spend, similar drivers exist in 2019 as in 2018. Pump hours is a clear driver, as are coil, drilling and wireline footage. While we are constantly looking for opportunities to gain efficiencies across our maintenance spend, this is more broadly utilization driven and we factor in this utilization-based cost component into our field level pricing decisions. The take away here is that at similar utilization levels, we should see generally similar maintenance CapEx spend levels.

Working capital is subject to utilization and pricing forces. We have more than ample liquidity to manage our working capital needs via cash flow from operations and our ABL facility. We expect to see a modest increase in working capital compared to 2018 levels.

In terms of EBITDA, we did not provide specific guidance in this area. But we will say that subject to changes in the commodity prices -- commodity price backdrop, we expect market fundamentals to improve over the course of 2019 as takeaway constraints are alleviated and supply-demand drivers for our service lines improve. We see a constructive start to a year in Directional and opportunity to turn Wireline into a meaningful contributor in the near term.

Pressure Pumping is a challenge in the current market environment, but we are preserving assets and mitigating downside. Pressure control has seen the effects of weather early in the quarter, but we should benefit from the 2018 investments in large diameter coil going forward.

The last component I would mention is asset sales. In 2018, we sold approximately $10 million in what we would describe as noncore, materially underutilized assets. We're constantly reviewing value propositions in marginal field locations. In 2018, we closed or consolidated multiple locations across our divisions. Additional opportunities are currently under review. We don't think about this as shrinking the business, but rather creating efficiencies, focus and longer-term value creation where we can reduce costs and sell underproducing assets for reasonable values we will and we will deploy the proceeds in a more productive fashion.

Collectively, these are the drivers we are focused on as we pursue our goals of free cash flow generation and preserving our assets and further strengthening our balance sheet and positioning QES for larger, strategic opportunities. On this last point, we often talk about the need for industry consolidation. This is another strategic focus of ours as an avenue to grow returns and unlock value for shareholders. We are firm believers in the efficiencies gained from thoughtful, strategic consolidation. These efficiencies can translate into near-term EBITDA creation, enhanced operating leverage and added cash flow that can be further redeployed to increase value for shareholders. In some cases, the ratio of cost synergies to the underlying EBITDA profile is quite large and attractive. We are and will continue to pursue opportunities to create value through both private and public company consolidation opportunities.

With that, I'll now turn the call over to Keefer to review our financial results.

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

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Thanks, Rogers, and good morning, everyone. Let's start things off with Directional Drilling.

Our Directional Drilling segment results were up significantly compared to the third quarter of 2018. For the fourth quarter of 2018, our Directional Drilling segment posted revenues of $60.4 million, which was up 19% sequentially and up 58% from the fourth quarter of 2017. Compared to Q3 of 2018, we increased utilization by 14%, while the implied day rate was up 4%. Rig days increased 14% sequentially and increased 47% compared to the same period in 2017. For the fourth quarter of 2018, we had a total of 5,564 rig days and a monthly average of 82 rigs on revenue, of which 74 were follow-me rigs.

Adjusted EBITDA for the fourth quarter was $9.4 million, which was up 46% from the third quarter of 2018. Adjusted EBITDA margins for our Directional business increased 294 basis points sequentially to 15.6%. We captured market share and improved pricing driven largely by job mix during the fourth quarter, which contributed to a healthy gain and profitability.

During the fourth quarter, we successfully drilled 368 wells for 48 customers on 99 discrete rigs across 33 different target formations.

While the overall horizontal rig count was flat from Q3 to Q4, we were able to increase market share to approximately 9% and exited the quarter on 82 rigs in December.

Top-tier E&P operators continue to favor the use of premium Directional Drilling providers in conjunction with high spec rigs to deliver improved efficiencies and returns. This is a long-term trend that greatly benefits QES' Directional Drilling business as we have nurtured a long and successful operating history with many of the premier E&P operators operating throughout the U.S. In addition to securing new growth opportunities, we also continue to drive margin improvements through pricing, supply chain optimization and efficiency gains.

In 2019, we plan to upgrade and automate some of our machining capabilities, which will improve reliability, output and our cost structure. This, coupled with our commitment to deploying additional kits as warranted, positions our Directional Drilling segment for growth and margin enhancement through 2019.

Now on to Pressure Control. Our Pressure Control segment generated total revenues of $31.6 million for the fourth quarter of 2018, which was flat sequentially, but up 19% year-over-year. As Rogers mentioned, only 1 of our 2 new build large diameter coiled tubing units was utilized in the fourth quarter and only for a brief time at that. The other made no contribution until January.

We experienced utilization gains in the quarter, which were offset by modest reductions in weighted average pricing. Demand for our large diameter coil remain strong. The bulk of our Pressure Control segment revenue is driven by coiled tubing activity and large diameter coil activity accounts for over 50% of segment revenue as of Q4 2018.

Also as Rogers mentioned, we saw sequential uptick in well control activity that benefited the quarter and we expect this trend to continue into 2019.

Pressure Control adjusted EBITDA in Q4 was $4.7 million and our adjusted EBITDA margin rose from 14.2% in Q3 to 14.9% in Q4 of 2018. The margin increase was largely driven by improved utilization and a greater level of high-margin well control activity.

Going forward, we're excited to have our 2 new large diameter coiled tubing units deployed in the market and generating attractive returns. Completions market activity is softened as capital spending has been cut year-over-year as operators focused on free cash flow generation and respond to a lower commodity price environment in the near term, but we are optimistic that additional large diameter assets can help to offset market declines.

Moving on to Pressure Pumping. Our projections of higher Pressure Pumping frac activity for the fourth quarter were on target as the segment experienced much higher utilization with all 4 of our spreads running for the entirety of the fourth quarter and significantly less whitespace on the calendar than the prior quarter.

However, in order to maintain utilization in the face of a declining macro market, we are forced to reduce pricing, which caused margins to compress from Q3 levels. We expect pricing sensitivity will likely remain elevated for some period of time given the abundance of capacity still in the market and lower completions activity. We elected to warm stack at spread in early January as our calendar did not support 4 crude spreads.

We will continue to monitor market conditions and will actively manage our fleet count to mirror market demand so as to preserve equipment and capital. The Pressure Pumping segment generated total revenue for the quarter of $54 million, reflecting an 8% sequential gain and a 9% gain over last year's fourth quarter.

For the fourth quarter of 2018, Pressure Pumping frac-ed a total of 1,363 stages compared to 908 stages in Q3 of 2018 and 1,056 stages in Q4 of 2017. The increase in stages compared to Q3 was driven by the higher utilization of our 4 spreads.

Offsetting the improvement in utilization, we saw our average revenue per stage decreased 25% sequentially due to increased competition and a declining commodity price environment. Adjusted EBITDA for the fourth quarter was $4.1 million and adjusted EBITDA margin for Pressure Pumping was down 4 percentage points sequentially, falling to 7.6%. The decrease in adjusted EBITDA margin was primarily driven by pricing concessions made to keep our spreads active. We ended the quarter with 267,000 total hydraulic horsepower and 241,000 hydraulic horsepower dedicated to our conventional and unconventional frac operations. We currently have 3 spreads working in the spot market and as discussed on prior calls, this type of work is susceptible to a good deal of volatility. To counteract these issues, we are continuing to work with our customers to mitigate scheduling changes and achieve greater uptime and operating efficiencies.

While the Pressure Pumping market will certainly continue to be challenging in the near term, we are staying attuned to market conditions and will seek out acceptable rates of return, while also remaining open to making further adjustments to the business as conditions warrant.

Lastly, we'll close out the segment discussion with Wireline. The Wireline segment continued to experience challenges during the fourth quarter as we've made a concerted effort to reposition the segment. While we certainly made progress on that initiative at the end of Q4, we still experienced sequential declines in both revenue and adjusted EBITDA.

Wireline revenue for the fourth quarter was $13.7 million, which was down 28% sequentially and down 18% from the fourth quarter of 2017. From Q3 to Q4, we experienced a 23% decline in revenue days and a 6% decline in day rate. Wireline adjusted EBITDA for the fourth quarter of 2018 was a loss of $1.3 million.

While macro fundamentals for the Wireline business remain difficult, the bulk of our restructuring efforts are now behind us and should yield meaningful benefits in Q1. We fully expect the business will be a positive contributor to our consolidated results in the first quarter.

Now I'll turn to our consolidated results. For the fourth quarter of 2018, revenues were $159.7 million, representing a 6% sequential gain and a 22% improvement year-over-year. Consolidated G&A expenses were $22.3 million, reflecting a flat sequential comparison and going forward, we'd expect these costs to remain marginally flat.

Consolidated adjusted EBITDA was $13.9 million in the fourth quarter of 2018. This was up about 8% from $12.9 million in Q3 of 2018, but down 26% from Q4 of 2017.

Fourth quarter interest expense was $626,000, which was consistent with third quarter interest expense of $574,000 and down from $3 million in the same period of 2017.

The provision for income taxes in the fourth quarter of 2018 was a negligible amount and related primarily to state margin taxes. Going forward, we expect our cash tax exposure to be comprised primarily of these state-level taxes.

Now I'd like to briefly discuss our cash flow, balance sheet and liquidity position. During the fourth quarter, operating activities provided cash of $2.9 million, while investing activities used $7.9 million.

Capital expenditures totaled $11.8 million during the fourth quarter of 2018 compared to $11.9 million in the third quarter of 2018 and $7.7 million in the fourth quarter of 2017. Approximately 47% of capital spending during Q4 was growth oriented, including the 2 large diameter coiled tubing units, while the remainder was tied to ongoing capitalized maintenance of our existing equipment fleet.

In total, we spent $65 million on gross CapEx for 2018. And for 2019, our forecast calls for $40 million to $50 million of gross CapEx with roughly 1/3 of that amount earmarked for growth spending. These amounts can be flexed upward or downward if necessary based on market conditions. When evaluating potential opportunities, we plan to be highly rigorous in seeking greater clarity on project paybacks and to evaluate gross spending on a case-by-case basis.

We continue to have a strong balance sheet and ended the fourth quarter with a total debt balance of $29.5 million and $13.8 million cash on hand, yielding a net debt balance of $19.6 million when you include our capital lease obligations.

We ended Q4 with $60 million of net availability under our revolving credit facility and total liquidity of $74 million. We view our balance sheet strength as a key asset for QES and going forward, we plan to preserve and improve this position.

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

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [5]

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Thanks, Keefer. In closing, I'd like to highlight a few key points. QES is in a very strong position as it relates to our balance sheet and liquidity. With a scaled back CapEx profile, we are positioned to further enhance our capital structure and allow flexibility to pursue a wide range of strategic M&A opportunities. QES has a diversified platform in terms of service offerings that span both drilling and completions and we are active in all major unconventional basins. This is proving to be helpful as we manage through near-term market weakness.

In 2019, we look to build on our gains in Directional Drilling and turn Wireline into a meaningful contributor. We look forward to realizing the benefit of our 2018 investments in our large diameter coil fleet and we will manage through the current headwinds in Pressure Pumping, preserving our assets for improved market conditions. We continue to pursue strategic opportunities that will enhance our existing service offerings, add size and scale to the QES platform, capture much-needed operating and capital efficiencies, improve our flow in equity and liquidity and drive long-term shareholder value.

Finally, I'd like to thank all of our coworkers across QES for their continued efforts and personal commitment to safety and serving our customers.

With that, we'll 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 the line of Taylor Zurcher with Tudor, Pickering, Holt & Company.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [2]

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Maybe starting on Wireline, you guys clearly have been undergoing sort of a structural realignment in that segment over the past several months and you talked in the script about seeing a bit of a turnaround here in 2019. So I was wondering if you could give us a bit more color as to how things have progressed with the changes you put in place thus far in 2019? And how that -- how we should think about that impacting -- those changes impacting revenues and margins for that business moving forward?

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [3]

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Yes. Thanks, Taylor. First, I guess, let's step back and think about in Wireline across really all of our businesses, what are the things that we control? What are some of the things we control? One of them, staffing levels. And the other thing is performance in the field, and so we stepped back and we said "Look, we need to approach those in a manner that yields higher utilization and improve margins." And so as we step back and look at our business, what we found is that we were, at a high level, overstaffed for lower utilization work. And so we trimmed our staffing. And I think here we don't need to be staffed to answer every call that comes in for our services. What we want to be is staffed for more consistent levels of higher utilization work and so that's what we've done. So clearly that means, a focus on higher utilization, unconventional customers with steady workload. So we've done that. Now we have also focused our efforts where it makes sense on conventional and industrial work in certain specific locations where that is the market that we serve. And so we're not out of that business by any means, but we've also pushed the KPIs and incentives deeper down into the organization focused on specific locations and districts and we are seeing very clear and meaningful results. I'm not going to give any guidance other than say, it's been a drag on earnings over the prior quarters. And we expect it to be a meaningful contributor going forward. We expect to build on those gains. And the last thing I'd say is, we've got a lot of employees that listen to our call. I mean, I want to thank that team for grinding it out and turning this thing around really quickly and doing -- and recognizing what needed to be done. So hopefully, that's helpful, Taylor.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [4]

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Yes, that is. A follow-up is on the Pressure Pumping side. I realize that it's the whole market, not just the Mid-Con, is pretty challenging today. But as you think about that business moving forward, do you see opportunities to potentially redeploy some of those -- some of your frac spreads from the Mid-Con to other neighboring basins and plays? And I only ask because it feels like pricing and likely demand in some other neighboring basins is likely better, but I realized you've got a lot of infrastructure in place in the Mid-Con. So curious if that's an opportunity you guys are thinking about moving forward?

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [5]

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Yes. No, clearly, first thing I'd say is, look, I think we've built a strong diversified platform that doesn't live and die by the performance of our Pressure Pumping segment. So we're very pleased with that. And the second part of your question is, are we looking at other opportunities? Absolutely. It's interesting, over the balance of the second half of '18, the Mid-Con was kind of looked as an improved market relative to other opportunities, let's say, in the Permian. So we saw some marginal capacity move in. I'd say that had an impact. It doesn't take a lot to make the market oversupplied. And so yes, we are looking at, and we're pricing, work in other regions. We've got good infrastructure in the Permian, the Eagle Ford, in the Rockies. And so -- look, I wouldn't be surprised at all to see us move equipment into those regions.

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Taylor Zurcher, Tudor, Pickering, Holt & Co. Securities, Inc., Research Division - Director of Oil Service Research [6]

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Okay. Got it. And I'll squeeze one more in on the M&A commentary you provided. Clearly, consolidation is likely -- or something you want to be -- take apart and moving forward. I was hoping you could give us maybe some goalposts to think about as it relates to M&A and consolidation for QES. You talked about both public and private company opportunities, but at the top of the list, are these sorts of opportunities, should we think about these mostly being smaller bolt-on type things? Or are there additional service lines that you're not in today that maybe you think about getting into moving forward? Just any kind of framework as to how you'd rank or think about the M&A opportunities moving forward?

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [7]

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Sure. We're looking at both private and public. And one thing that we recognize is that we step back and look at opportunities in both of those areas. We rank them and we rank them across a lot of different categories. But if you wait -- sit back and wait for the best optimal transaction to occur, you may not get anything done. And so, you got to be flexible in this environment. And then, let's look at the -- let's talk about the framework. I appreciate you're using that in your question. I mean, we think about it -- what are we trying to achieve here? And we think about that from the lens of our investor base and from our customer base. And from our investor base, we believe as we consolidate and grow, we need to get to a level to access the equity markets in a more meaningful way. We need to create liquidity. I'm not going to give you a specific target here, but we do need to get to, over time, get to an EBITDA level, let's say, in excess of steady, quality EBITDA level in excess of, say, $200 million, preserve our balance sheet, create a market cap that will allow much larger institutions to get in and out of our equity, access those equity markets when we need to, when we want to. And so, that gives you a sense of how we think about being relevant from a shareholder perspective.

And from a customer perspective, what I'd say is, we expect to see continued consolidation. You're already starting to see it across the upstream operator universe. So we expect the size of the wallets to get bigger on average, the number of kind of single rig operators probably will decrease over time. And in order to be relevant to that evolving customer base, we need to be at scale in the core basins across key service lines. And look, we like the service lines that we are in today and we also are very open to adding complementary service lines, production-related service lines, fluids, things that complement our snubbing offering, which would be some workover capacity for snubbing. But we're very active with conversations today on the private side and on larger more transformational deals, but I wouldn't be surprised to see us do some bolt-on transactions and we'll just whittle away at the value creation proposition, but we're going to do it in a smart way. And look, we've got a great experience and confidence that we can get the synergies and efficiencies out of these type of transactions. And we proved that in the Archer transaction.

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Operator [8]

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

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Harris Newell Pollans, BofA Merrill Lynch, Research Division - Research Associate [9]

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So I just wanted to start off with Directional Drilling. You guys really solid quarter in 4Q. Can you talk about how exactly you're able to gain so much share in 4Q? What's really underpinning those share gains with your revenue up 18%, 19% quarter-over-quarter against a flattish rig count? And how do you see that kind of trending in 1Q versus a declining rig count? Do you think you'd be able to kind of continue to take share? And what's really kind of underpinning because that was definitely highlighted in the press release?

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [10]

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Well, thanks, Harry. Yes. I mean, look, we're proud of our accomplishments over time and it's not just recent. It comes from a lot of investment in this area. It comes down to really one thing, and it's performance. It's not -- we're not gaining market share due to price. We're gaining it through performance. And we're working our way into a bigger chunk of, let's say, call it, the top 20, 30 operators across onshore U.S. And what we find is, once we can get in the door and prove our performance, we stack up really well against some of the other -- some of their other performance on other rigs. And that's -- generally what that means is that'll lead to another rig, or another rig. And look, we're not just focused on the top 30. Clearly, it is a focus, but we're seeing our relationships with smaller operators pay off as well, but it's an investment in performance and people. I don't know, Keefer, what would you add to that?

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Keefer M. Lehner, Quintana Energy Services Inc. - Executive VP & CFO [11]

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That's it.

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [12]

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So yes, look, Harry, you asked about how we see this going forward. Look, we see -- we have seen some of our customers large and small drop a few rigs here and there. I mean, what we found thus far and we've mentioned this before, we've had pretty good demand for our service in this division. And one of the things we've tried to do is move our average pricing up. We look at our pricing across customers and how we try to bring the low guys up to the median and push the median up over time and just do it in a quality, measured way and we've been able to do that. That's what has allowed us to grow margins to a large degree. But as we see a rig go down, we've had opportunities to backfill that with other new customers or other rigs in other regions with the same customer. And so, how that continues to play out I'm not sure, but that's the way it's played out thus far.

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Harris Newell Pollans, BofA Merrill Lynch, Research Division - Research Associate [13]

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Got it. That's helpful. And then, I mean, you referenced specialized technology and better pricing, I understand you're going to getting the lower price guys up to the median there and the margins expanding about 300 bps. Do you -- does that -- does pushing the specialized technology, does that imply you're doing something on an automation front? Or are you cutting people on the cost side in Directional Drilling? What's kind of underpinning the margin expansion there? And how do you see that kind of trending in 1Q?

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [14]

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Yes. Look, we are very focused on the cost side. And yes, we have invested and are investing in some automation and some more machining. Look, every month, we look at where the dollars go out of the system. And clearly, they go out to headcount and we want to make sure we have the best drillers and MWD engineers and staff, support staff. And so, that's one component, but the rest is the repair and maintenance and we have a lot of third party cost there. And so, automation is a big part of that. It's actually something we are investing in as we speak. And yes, we are deploying more specialty tools. We would expect to continue to deploy more specialty tools over time, but we're attacking it from both sides of that equation.

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Harris Newell Pollans, BofA Merrill Lynch, Research Division - Research Associate [15]

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Got it. That makes sense. It's great, you get moving along in the automation front. And then kind of touching on the M&A, you've mentioned earlier. There was a lot of good commentary there and you talked about increasing scale through consolidation and I think the whole industry has to see some of that, but what exactly is your strategy? I understand bolt-ons, but which service lines do you have that you think you need to increase scale most in? And are there any service lines you're thinking about potentially selling or that could maybe do better under somebody else's hood? So if you could expand there.

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [16]

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Look, I think, every service line that we're in would benefit from added scale. So I think, we've got a great platform in DD to do some consolidation there and -- but look, I don't know what else to say other than every one of our existing service lines would benefit from scale. I mean, what we're challenged with is -- we hear a lot of talk about M&A and we need willing participants. Folks -- I mean, look, we wake up and look in the mirror every day. We understand what's driving value. Clearly, we're focused on performance every day, but there's some other aspects to our story that are hurting us in terms of our long-term value proposition; liquidity, size, scale, the things I've talked about from a shareholder perspective. But it's interesting, everybody has got their unique take on their own valuation and how they're uniquely undervalued. And the go-it-alone strategy, whether we're on top or whether we're being consolidated, the go-it-alone strategy for most of the market here isn't going to be pretty over the long term. And so, the industry has got to wake up to that. I think investors are looking for folks to wake up to that and we're very realistic. We look in the mirror every day.

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Operator [17]

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There are no further questions in the queue. I'd like to hand the call back to management for closing comments.

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Rogers Daniel Herndon, Quintana Energy Services Inc. - CEO, President & Director [18]

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Okay. Thank you, operator. And thank you once again for joining us on the call and for your interest in QES. We look forward to talking to you again next quarter.

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Operator [19]

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