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Edited Transcript of TUSK earnings conference call or presentation 27-Feb-20 10:00pm GMT

Q4 2019 Mammoth Energy Services Inc Earnings Call

Oklahoma City Mar 20, 2020 (Thomson StreetEvents) -- Edited Transcript of Mammoth Energy Services Inc earnings conference call or presentation Thursday, February 27, 2020 at 10:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Arty Straehla

Mammoth Energy Services, Inc. - CEO & Director

* Donald Peter Crist

Mammoth Energy Services, Inc. - Director of IR

* Mark Layton

Mammoth Energy Services, Inc. - CFO & Company Secretary

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Conference Call Participants

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* Daniel Joseph Burke

Johnson Rice & Company, L.L.C., Research Division - Senior Analyst

* John Matthew Daniel

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

* Thomas Allen Moll

Stephens Inc., Research Division - Research Analyst

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Presentation

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Operator [1]

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Good day, ladies and gentlemen, and welcome to Mammoth Energy Services Fourth Quarter and Full Year 2019 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded and will be available for replay on Mammoth Energy Services' website.

I would now like to introduce your host for today's conference, Mr. Don Crist, Mammoth Energy Services Director of Investor Relations. Please go ahead, sir.

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Donald Peter Crist, Mammoth Energy Services, Inc. - Director of IR [2]

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Thank you, Charlie. Good afternoon, and welcome to Mammoth Energy Services' Fourth Quarter and Full Year 2019 Earnings Conference Call. Joining me on today's call are Arty Straehla, Chief Executive Officer; and Mark Layton, Chief Financial Officer.

Before I turn the call over to them, I'd like to read our safe harbor statement. Some of our comments today may include forward-looking statements reflecting Mammoth Energy Services' views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Mammoth Energy Services' Form 10-K, Forms 10-Q, current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today may also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our fourth quarter and year-end press release, which can be found on our website along with our updated presentation.

Now I'll call -- turn the call over to Arty.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [3]

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Thank you, Don, and good afternoon, everyone. The fourth quarter of 2019 was challenging on several fronts, but we are continuing down the path to transition Mammoth into a more industrial-focused company. In our infrastructure division, the recent addition of an industry veteran has brought about significant changes to the business. While it's difficult to see the changes from the outside, significant improvements have occurred over the past 3 months. The new president has been able to fill several key management positions with highly qualified people from other large infrastructure-focused companies, and the performance of the business is improving.

As the new management team gets to work, demand remains strong throughout the industry, especially in the transmission and renewables construction areas and new bidding opportunities are being pursued. The backlog for our infrastructure division currently stands at $490 million.

Turning to the oilfield service sector. The fourth quarter of 2019 saw low industry utilization and pricing across all of our operating subsidiaries. Since early November, multiple companies have announced the retirement of an aggregate of approximately 4.5 million horsepower or 18% of the pressure pumping equipment in the market with a large portion of the announced retirements being scrapped. In addition, a wide variety of equipment is being shipped overseas, primarily to the Middle East, to satisfy increased demand in that area.

Early in the fourth quarter of 2019, our pressure pumping utilization bottomed, and we saw a steady increase into year-end. The upgrading of our fleets to dynamic gas blending, or DGB, is underway with the initial converted units expected to be field tested in the coming weeks.

During the fourth quarter of 2019, we pumped 989 stages with 1.7 fleets utilized throughout the quarter on average. Today, we have all 3 of our staffed fleets operating in the Northeast.

Our sand division sold approximately 76,000 tons of sand during the fourth quarter of 2019. The average sales price for the sand sold during the fourth quarter of 2019 was approximately $20 per ton, while our blended fourth quarter production costs remained at approximately $12 per ton.

We continue to position our transportation business to grow beyond crude oil and frac sand. We recently opened an office in Southern Florida, and we are moving general commercial freight. Over the coming months, we expect this business to become a larger part of our logistics offerings.

The 2 new businesses we first discussed on our last call in November, manufacturing and engineering, are both operating and growing. Anaconda, our manufacturing operation in Oklahoma, is currently building and refurbishing equipment for both our drilling equipment and water transfer companies. Aquawolf, our engineering business, is working on projects for several customers and growing its customer base. Both of these businesses have a potential to grow over the coming years.

We continue to seek to collect payments from PREPA for the quality work that our teams performed in Puerto Rico. As you can imagine, we are limited in what we can say about pending litigation as it progresses through the courts. As many of you are aware, Puerto Rico experienced 2 significant earthquakes of 6.0 and 6.4 magnitude in recent months. The transmission and distribution infrastructure repairs that our teams performed following Hurricane Maria withstood both of these earthquakes and the subsequent aftershocks.

Mammoth's diverse portfolio of companies across several industries, including general freight trucking, rental equipment, infrastructure construction, aviation services, engineering, equipment manufacturing and energy services, our industrial-focused business complement our oilfield-related businesses and are intended to smooth out our earnings as they grow and become a larger portion of our cash flows.

Let me turn the call over to Mark to take you through the financial performance during the fourth quarter of 2019, after which we will take questions.

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [4]

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Thank you, Arty, and good afternoon, everyone. I hope that all of you have had a chance to read our press release, so I will keep my financial comments brief and focus on certain highlights.

CapEx during the fourth quarter of 2019 was approximately $1 million. Our full year 2019 CapEx came in at $36 million, which was below our forecast of $41 million. Looking forward to 2020, we have budgeted CapEx of up to $20 million, depending on industry conditions and our financial results. Included in the budgeted 2020 CapEx is the upgrading of our pressure pumping fleets to DGB as demand warrants and expanding the capabilities of our infrastructure division.

As of December 31, 2019, we had $6 million in cash and $80 million of borrowings under our $185 million credit facility, resulting in total liquidity of $102 million net of letters of credit. On February 26, 2020, Mammoth entered into an amendment with our bank group to modify the terms of the credit facility. Under the new terms, the borrowing base has been reduced to $130 million with a $50 million unfunded accordion feature. The financial covenants have been modified to the following: The interest coverage ratio was eliminated; The maximum leverage ratio test at 4:1 was eliminated for the first 2 quarters of 2020 and changed to 2.5:1 beginning on September 30, 2020. In addition, a fixed charge coverage ratio of 1.1:1 was added beginning on September 30, 2020. As of February 26, 2020, after giving effect to the amendment, our liquidity under the credit facility was approximately $21 million net of letters of credit.

We thank our shareholders for their support. This concludes our prepared remarks, and we thank you for your time and attention. We will now open the call for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Your 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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Arty, I wanted to start on the frac sand business. Fourth quarter was really slow for Mammoth and for the industry generally. I mean your volumes and pricing were both down, and as I said, the same was true for the industry. So I'm curious about first quarter here as we get back to business. How are volumes and pricing trending today? And is there a pathway where we're back on the right side of positive for EBITDA in that segment this quarter? Or is that potentially a horizon that's beyond the first quarter?

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [3]

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Yes. The -- Tommy, frac sand, obviously, was very challenged in the fourth quarter. It has moved up significantly. Obviously, there's still pressure on pricing as we go through, but we're -- it's one of those where we are shipping quite a bit more sand than what we did previously. And it does have a pathway to make a little bit in this quarter and -- or break even as we go forward.

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Donald Peter Crist, Mammoth Energy Services, Inc. - Director of IR [4]

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Another thing I'd add to that, Tommy, is the biggest hindrance we have in that segment right now is the amount of railcars that we have under lease. We actually have about 800 or so railcars that are going to roll off by the end of the year. So as you go through the year, the profitability should get better and better as those leases roll off and we don't have that fixed fee every month.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [5]

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Got it. Shifting to the outstanding receivables balance and acknowledging you're going to be limited in what you can say. Could you, though, give us a sense of what the process and time line are in terms of the pending litigation?

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [6]

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Tommy, right now, we continue to pursue collection through the bankruptcy. As you can imagine, that's a somewhat slow process, but we are making progress there. We do have active dialogue with PREPA and have continued that dialogue throughout the process. So we remain hopeful that we'll collect the outstanding balance, but don't have a firm time line for you.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [7]

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Yes. Mark and I went down to Puerto Rico in January, and we got to see the head of the financial group that has been through these processes and who has been with us quite a bit. And they're working through things as well. But as you said, we're not going to comment much on the litigation. But we did decide to take that on, and we are progressing with that. They are wanting to get out of bankruptcy, and they're going to have to go -- they're going to have to deal with us as we go through in the future. So...

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [8]

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And one of the benefits of them being bankruptcy, if there is one, is there's a tremendous amount of public information available. So from what we've been able to glean from recent filings, their liquidity has increased a little bit recently.

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Thomas Allen Moll, Stephens Inc., Research Division - Research Analyst [9]

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Okay. And if I could sneak one more in. I was curious on the DGB conversions. Any financial payback metrics you could share there? Or any way you would frame it up for us from a financial standpoint? And then in terms of the customer or market rationale, what's the pull from the customer side? Or is this more purely a financial decision for you guys?

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [10]

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It's -- for us, it's part of the ESG conversion, and we spent a lot of time with our Board this past Board meeting talking about ESG and the reasons to do it. Our customers are requesting it. And certainly, we want to stay busy as we go through. And we think it makes good financial sense to do it. We currently are proceeding to convert about 30 of our units. That will be 2 of our fleets that we will have that will be able to run on dual fuel, as you know, both natural gas and diesel. So we feel pretty good about the investment that we made. We actually got that approved in the fourth quarter, and we're continuing to progress and put it. And it's ready to be field tested in the next couple weeks.

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Operator [11]

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Your next question comes from the line of Daniel Burke with Johnson Rice.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [12]

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Let's see. Could you -- Arty, again, there might be limits on what you could say. But could you address maybe the status of take-or-pay contracts with both Gulfport and on the sand side, some other parties?

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [13]

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Gulfport is still -- is in litigation, as I think you know and you realize, and we still continue to be partners. And we're still hopeful that you can solve things outside of litigation. So we're still hopeful with that situation. The other contracts continue to operate. And we've actually seen a benefit where the market is moving around a little bit on some of the other grades, and they're taking some of the things that we used to -- when there was just a pure 40/70 market, you were having to waste 20/40 or 100 mesh. And we're seeing where they're taking a few of that -- a little bit of that as well. The sand market's not robust, and I'm not going to describe it as that. But it is much better than where it was in the fourth quarter as the activities curve downwards.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [14]

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Got it. Okay. And then I guess maybe shifting over to infrastructure. It looks like a pretty wholesale reboot that you guys have underway there. Could you talk a little bit more about maybe the second level leadership changes you've made and maybe a time line on returning that portion of the business or the infrastructure segment overall to EBITDA-positive operations?

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [15]

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Yes, it -- we're really proud of the team we're putting together. I'll start a little bit with the president and just give you some -- he is an industry veteran. He's been either a President, COO or CEO since 1985 in either construction or infrastructure business and very polished president, very pleased to having -- the one thing that he brings, of course, are the relationships. And you're right, we've -- our next tier of operating guys are very strong industry veterans as well. Some of them have in excess of 30 years. Our business development guy has in excess of 20 years in the industry. Our new leaders that we brought in for 1 of our subsidiaries is 30 years in the T&D business, in the substation business and is an ex-president of another entity. We brought in a safety professional, and we're seeing immediate improvement in the area of safety, and very seasoned guy. Our VP of transmission operations has about 20 years of experience in utility areas and is a past director in some of our competitors. So very pleased, and there's more to come. And we're still building that organization. So we're very pleased with where we're heading with this group and the opportunity they just bring us with their experiences in things like renewables and in other areas that we may not have been in, in telecom and that type of thing.

This is a business that we've talked about many times that has more demand than supply for crews. And if you look at our history, we went from 30 crews at the end of '17, and we're at somewhere around the 140, 145 right now. And we're continuing to move the needle with that business. Again, it gets us out of the countercyclical of oil and gas, and everybody knows what's going on with oil and gas. And oil touched in the 40s, and gas is in the $1.60s, and we haven't entered shoulder period yet. So lots of opportunities. And the strategy that we employed as we went into this business is working because we think it will be countercyclical to oil and gas, and we think the demand outstrips the supply.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [16]

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Okay. That's helpful. And then I guess the second -- maybe the second piece of that question, I mean any thoughts about when the U.S. infrastructure business kind of returns to breakeven EBITDA or better?

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [17]

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Yes. So Daniel, if you strip out the interest on the PREPA receivable out of that segment, we expect that segment to have a shot at breakeven to possibly positive EBITDA in Q1 and then flip to positive in Q2.

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Daniel Joseph Burke, Johnson Rice & Company, L.L.C., Research Division - Senior Analyst [18]

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Okay. And I guess maybe just to cram one last one on here. We look at the liquidity position post the credit facility refi, and the operation is still kind of dancing around that EBITDA breakeven level, plus or minus, at least a couple of the segments, if not, all of the segments. I mean what other avenues do you guys have to explore to maybe give you -- provide yourselves a little bit more of a liquidity cushion?

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [19]

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One of the things that we got out of the amendment was the ability to unlock some liquidity that we've got on the fixed asset side of the business. So we've got up to $25 million that we can dispose of or enter into a sale-leaseback transaction that will allow us to unlock some of the collateral that we've got that we've been previously unable to access.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [20]

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In addition, Daniel, we'll be working extremely hard on the cost side of the equation. Obviously, you know my background from lean and elimination of waste and elimination of cost, and while we've taken some cost out, we've got more cost to come. So we will be taking cost out of that -- the system and making sure we're running at the best efficiencies we possibly can.

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Operator [21]

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(Operator Instructions) Your next question comes from John Daniel with Simmons Energy.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [22]

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Just a quick question. Just a -- one on just the Northeast operations, not any particular product per se but just the visibility you have in the operations up there, just given where gas prices are and just how you see that playing out over the course of the year.

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [23]

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John, right now our visibility extends through the end of Q1. We do have limited visibility into April. But for the activity in the Northeast, right now, what we're seeing is very cautious operations from the E&P companies that we work with in the area, and we've got -- like I said, we've got pretty firm visibility through the end of Q1, and then it starts to fall off on our visibility.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [24]

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Yes. I mean we're -- we -- John, of course, just like you do, we watch closely our customers and what the E&P budgets and -- to a T. They're all cutting budgets and they're cutting activity given the prices of the commodities. So we are anticipating a pretty rough after the first quarter, and we'll continue to match. If our businesses aren't EBITDA positive, we're going to look deeply at them. We closed down -- temporarily shut down 3 businesses last year until it comes back, and we -- each and every business, that's one of the things we do, is look at each one as a portfolio company. If they don't make money, we look seriously at them and what they're -- where they're going.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [25]

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Okay. You mentioned that there's more talk at the Board level about ESG, and we all hear a lot about the desires for E&Ps to pursue or look at the dual fuel alternatives. Are they mostly talking about anything else within your business from an ESG perspective? Or is it just on the frac side, where you tend to focus on it?

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Donald Peter Crist, Mammoth Energy Services, Inc. - Director of IR [26]

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John, I would say that it's across the board. It touches all aspects, not only the pressure pumping side. But the coil side and the infrastructure side has been big for a long time as well. So just because a lot of our followers are in the oil and gas space, the ESG has been all across the industry. So -- and it's only ramping up. So we will roll out additional measures to improve our scores in the coming months. And we're taking it very seriously here, just like our customers do as well.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [27]

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Yes, I would echo what Don's saying about taking it serious. And we, for a long time -- every week, we measure. If we have a cup or a gallon or a 2-gallon spill, we talk about it. Even if it's in containment, no matter what, we discuss and we make sure that every one of them has a root cause. We look at the root cause and why it happened and make sure that it doesn't happen again. So we've been doing this for a long period of time, and we will continue to do that. We are getting pulled by our customers. Our customer -- it's very important to them.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [28]

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I guess where I was going in is I just didn't know if there's other -- within other product lines, if there's any pressure by customers to do something from an asset enhancement, if you will, to be -- like does dual fuel extend to having natural gas pickup trucks or dual fuel pump down yet? So just -- that's where I was going in terms of just other assets, where you might have to spend money. How about we put it that way.

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Mark Layton, Mammoth Energy Services, Inc. - CFO & Company Secretary [29]

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We haven't seen that pressure yet. But those are natural areas to look at in the future, particularly in regards to pickups.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [30]

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Yes. I'd also remind you that we have an avenue within our T&D group, as we get into renewables and all that type of thing that will make a significant difference with ESG and beyond.

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John Matthew Daniel, Simmons & Company International, Research Division - MD & Senior Research Analyst of Oil Service [31]

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Okay. And then I guess just a final one. You guys have always been a bit entrepreneurial looking at new opportunities. Is there anything that you can do or see as an opportunity on the flaring side, Arty?

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [32]

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John, we haven't seen it. We haven't seen it yet. I haven't -- we haven't done anything there. That's mostly controlled by our customers and just haven't focused on that side of it. I know it's a huge issue with the emissions and everything, but we just haven't pushed that aspect.

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Operator [33]

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That concludes our question-and-answer session for today. I will now turn the call over back to the presenters.

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Arty Straehla, Mammoth Energy Services, Inc. - CEO & Director [34]

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Thank you very much. We want to thank everyone for dialing in today. I want to personally thank our team. We believe the future is bright for Mammoth and our team members as we intend to strategically develop our service offerings to grow and deliver shareholder value in the years to come. Thank you to our shareholders for your support and interest in our company. Given the current oilfield market conditions, we are working hard to control costs and transition Mammoth into a more industrial-focused companies. This concludes our fourth quarter conference call. Good day.

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Operator [35]

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Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. Have a wonderful day. You may disconnect.