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Edited Transcript of USWS.OQ earnings conference call or presentation 8-May-19 2:00pm GMT

Q1 2019 US Well Services Inc Earnings Call

May 17, 2019 (Thomson StreetEvents) -- Edited Transcript of US Well Services Inc earnings conference call or presentation Wednesday, May 8, 2019 at 2:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Joel N. Broussard

U.S. Well Services, Inc. - President, CEO & Director

* Josh Shapiro

U.S. Well Services, Inc. - VP of Finance & IR

* Kyle P. O'Neill

U.S. Well Services, Inc. - CFO

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Conference Call Participants

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* Dylan Gray Glosser

Simmons Energy | A Division of Piper Jaffray - Research Analyst of oil services

* Michael William Urban

Seaport Global Securities LLC, Research Division - MD & Senior Analyst

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Presentation

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Operator [1]

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Greetings, and welcome to U.S. Well Services First Quarter Earnings Conference Call. (Operator Instructions) As a reminder, this conference is being recorded. It is now my pleasure to introduce your host for today's call, Josh Shapiro. Thank you. You may begin.

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Josh Shapiro, U.S. Well Services, Inc. - VP of Finance & IR [2]

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Thank you, operator, and good morning, everyone. We appreciate you joining us for the U.S. Well Services conference call and webcast to review 2019 first quarter results. With me today are Joel Broussard, Chief Executive Officer; and Kyle O'Neill, Chief Financial Officer. Following their prepared remarks, the call will be opened for Q&A.

Yesterday evening, U.S. Well Services released its first quarter 2019 earnings. The earnings release can be found on the company's website at www.uswellservices.com. The company also intends to file its first quarter 2019 Form 10-Q with the SEC later this week.

Please note that the information reported on this call speaks only as of today, May 8, 2019 and therefore, 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 call may contain certain forward-looking statements within the meaning of the United States Federal Securities laws. These forward-looking statements reflect the current views of U.S. Well Services management. However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management. The listeners are encouraged to review yesterday's earnings release and the company's filings with the SEC to understand those risks, uncertainties and contingencies.

Also during today's call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release.

And now I'd like to turn the call over to U.S. Well Services' CEO, Mr. Joel Broussard.

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [3]

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Thanks, Josh, and good morning, everyone. I appreciate you joining us on the call today. I am pleased to report that U.S. Well Services had strong financial results during the first full quarter as a publicly traded company. Our revenue and adjusted EBITDA of $139.8 million and $28 million respectively reflect increases of 18% and 43% over fourth quarter 2018 results.

Interest in electric frac services continues to accelerate as an increasing number of operators and investors have come to understand advantages of electric versus diesel fleets including the substantial fuel cost savings, increased uptime and reliability and other ESG benefits coming from reduced noise, improved safety and reduced emissions. We believe that electric frac technology is the future of hydraulic fracturing and we are well positioned to capitalize on the growing demand for electric frac technology.

Shifting back to our operations. Despite continued industry headwinds, U.S. Well Services remained fully utilized during the period with all 11 of our fleets working during the quarter. We continue to execute on our strategic goal of leading the industry in electric frac technology. In January, the company deployed its first new build electric frac fleet and later in the period, we upgraded our legacy electric fleet by adding a new PW generator allowing us to increase that fleet horsepower by 50% while shortening its mobilization time.

Looking forward, we're excited about the future. We deployed our 12 fleet -- or third electric fleet in early April and we expect to deploy our fourth electric fleet towards the end of the second quarter. In addition, we are scheduled to bring our fifth electric fleet online in early 2020 for Shell on a long-term contract. Currently, approximately 3/4 of our fleets are working on the take-or-pay contract. We have 5 fleets in the Permian, 5 in the Eagle Ford and 2 in the Northeast.

As many of our competitors have noted, industry pricing remains suppressed, although we believe pricing is recovering from recent lows experienced during the fourth quarter of 2018 and the early part of 2019. We're aligned with active customers who have robust completion programs and who value our top tier service quality and innovative technology. We believe our long-term partnership approach will continue to serve us well as market conditions improve.

Before I turn the call over to Kyle, to discuss our financial results in detail, I would like to address a series of strategic transactions U.S. Well Services has completed over the last several months to improve its capital structure. In March and April, we've successfully exchanged 22.5 million public warrants or nearly 70% for 2.9 million Class A common shares, which has helped simplify our capital structure and increase the float in our stock.

Next, U.S. Well Services completed a refinancing of its balance sheet with the completion of a $250 million senior secured term loan and a $75 million asset-backed revolving credit facility. These financings strengthened our balance sheet and provide U.S. Wells with a stable and long-term capital base to execute on our growth plans.

With that, I I'll turn it over to Kyle.

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Kyle P. O'Neill, U.S. Well Services, Inc. - CFO [4]

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Thanks, Joel, and good morning, everyone. Revenue in the first quarter was up 18% sequentially to $139.8 million as compared to $118.4 million for the fourth quarter of 2018. Revenue contribution from consumables declined quarter-over-quarter as we continue to see a secular shift towards customer self-sourcing sand, chemicals and fuel.

The revenue for servicing equipment rose over 30% sequentially and it was adversely impacted by scheduling gaps as certain of our fleets transition to new customers during the quarter.

Cost of services for the first quarter increased by approximately 4% to $109.7 million as compared to $105.8 million in the fourth quarter. Our cost of consumables declined by approximately 12% in the quarter. And overall gross profit margins increased to approximately 22% for the first quarter versus 11% in the fourth quarter of '18. Our costs of service during the quarter were impacted by elevated lodging and equipment transportation expenses that resulted from transitioning fleets to new basins and the deployment of our new build electric fleet. Labor cost remained the most significant operating expense incurred by U.S. Wells, and we believe that labor will remain elevated throughout the deployment of our third electric fleet late in the second quarter. As a reminder, we began staffing for a new fleet deployment several months beforehand in order to ensure proper training of our staff and employees.

SG&A for the quarter was $8.6 million as compared to $19.6 million for the fourth quarter of 2018. After adjusting for stock-based compensation and transaction-related fees, SG&A expenses were approximately $6.5 million for the first quarter as compared to $4.6 million for the fourth quarter. The increase in SG&A expense is primarily -- in this normalized SG&A expense is primarily attributable to increased headcount as well as higher professional and legal fees associated with becoming a public company. Adjusted EBITDA for the first quarter was $28 million, 43% increase over the $19.5 million of adjusted EBITDA generated during the fourth quarter of '18.

Turning to capital expenditures. During the first quarter, U.S. Well Services spent approximately $25.7 million and $22 million in maintenance CapEx and fleet enhancement, respectively. Fluid ends accounted for approximately 31% of our maintenance CapEx.

On an accrual basis, U.S. Well Services spent $107.5 million for growth CapEx related primarily to the construction and deployment of our new build electric frac fleets. To complete our remaining 2 electric frac fleets, we expect to incur an additional $80 million to $100 million of growth CapEx throughout this year. These numbers may increase as new contracts are executed requiring us to build additional fleets.

As of the end of the first quarter, cash on hand was approximately $19.4 million. As Joel mentioned, earlier this month, U.S. Wells enhances capital structure and liquidity position through the completion of 2 debt financing transactions. First, we entered into a $250 million senior secured term loan facility, the proceeds of which will be used to refinance existing debt, provide the additional growth capital, pay fees and expenses and other general corporate purposes. This new term loan bears interest at L plus 8.25% and has no financial covenants. Second, the company entered into a $75 million asset-based revolver. This facility is priced on a grid ranging from L plus 150 to 200. Pro forma for these debt financings, U.S. Wells has total liquidity of $130 million to fund operations and growth initiatives. We're pleased to have completed these transactions and believe that the company is now well capitalized and positioned to continue delivering on behalf of its existing customers and growing to meet the demands of new customers.

With that, I'd like to turn it back to Joel, for some closing remarks.

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [5]

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Thank you, Kyle. Before we open it up to Q&A, I'd like to leave you with some thoughts on U.S. Wells Services' position in the market. We believe that the most difficult period of this recent market downturn has passed and that increasing service intensity coupled with the aging and attrition of legacy U.S. pressure pumping fleet, will continue to bifurcate the market, differentiating the top tier service providers with high-quality equipment.

U.S. Well Services fleet is among the youngest and most technologically advanced in the industry. We are a leading electric frac service provider and our intellectual property, equipment and operating crew allows us to deliver unrivaled advantages to our customers. I am proud of the work my team has done in maintaining an unwavering dedication to excellent service quality and I believe, we will continue to succeed in aligning with the highest-quality operators in the most active oil and gas basins across the U.S.

With this, I'll turn it over to the operator for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from Mike Urban with Seaport Global Securities.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [2]

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So obviously, you pretty heard Baker's comments on interest that they're seeing from their customer base in electric frac. I was wondering if you could elaborate a little bit on how you see your position relative to some of the other folks that might be attempting to break into the market kind of the strength of your IP and what it might be difficult for competitors to replicate?

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [3]

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Yes. Mike, we've pumped our first stage in 2014 with our first electric fleet. We have 5 years of successful years of building, deploying and operating the electric fleet. We have 19 awarded patents and 75 pending, which range from power distribution when it comes to electric fracturing from fracturing with -- using field gas to frac with. We feel really confident on our IP portfolio and it seems sooner than later we're going to have to start defending it.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [4]

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So you think you are starting to see some folks potentially trying to infringe on what you've done already?

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [5]

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Yes. I mean all of our peers are talking of it. As you mentioned, Baker. I think Baker was pointing towards their generators, selling generators more than actually fracking.

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Michael William Urban, Seaport Global Securities LLC, Research Division - MD & Senior Analyst [6]

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Yes, turbines, yes. And we've spent some time with them on -- this week as well on other comment that they made, which I don't know if it quite made sense to me, but their view was that you've got as much as maybe 1/3 of the fleet or 8-ish million horsepower out there that needs to be upgraded. And again, really, they only have kind of one small piece of puzzle, the other view was that you've had that 8 million rather than upgrading the Tier 4 engines, the capital cost would be pretty similar to just go to electric. Do you have a view on that and where the industry is and then just that cost value proposition?

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [7]

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Yes, Mike, I agree with you. Quarter-over-quarter from first -- third -- fourth quarter of last year through first quarter of this year, our fleets have pumped 30% more stages and service intensity keeps increasing and customer demand on pumping hours per day increases. This is -- we feel it's unsustainable with traditional diesel units along with transmissions and the future is electric as many other industries have switched to electric including the drilling rig business and the mining business.

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Operator [8]

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Our next question comes from Dylan Glosser with Simmons Energy.

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Dylan Gray Glosser, Simmons Energy | A Division of Piper Jaffray - Research Analyst of oil services [9]

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So just a follow-up with Mike's first question. As we have seen new electric offerings from companies such as AFGlobal and others? Can you speak to the learning curve of electric frac? I'm just trying to get a sense for how quickly these new competitors can get up and running.

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [10]

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We feel that there's a long lead time on some of the supply chain. We've had a big learning curve since 2014. And even our now fleets that are coming out, we keep improving them and we look at it we're 5 years ahead of all our competitors.

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Dylan Gray Glosser, Simmons Energy | A Division of Piper Jaffray - Research Analyst of oil services [11]

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Yes. Absolutely. In regards to lead time, can you remind us if a customer were to contact you today and want a new gen fleet tomorrow, when is the earliest that you guys could have that fleet delivered?

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [12]

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6 months.

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Dylan Gray Glosser, Simmons Energy | A Division of Piper Jaffray - Research Analyst of oil services [13]

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Okay. Great. And if I could just squeeze one more in just to confirm. So if you take the maintenance CapEx from Q1 and apply run rate to that, you get about $88 million and plus $30 million of growth in Q1 plus taking the midpoint of the $90 million, that gets you to about $210 million of full year CapEx guidance. Am I getting the right number there? Is that the right number to think about?

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Kyle P. O'Neill, U.S. Well Services, Inc. - CFO [14]

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Yes. I mean, I think, Q1, we definitely saw elevated maintenance CapEx. I think an important thing to remember about maintenance CapEx is that the big components are pretty lumpy. And if you look at the history of U.S. Well Services, we've deployed multiple fleets in a relatively short period. So what we see when we look back at kind of our trended maintenance CapEx is, we'll have a bunch of engineering builds within a concentrated period or a bunch of transmission rebuilds, repairs within a concentrated period because of the way we deployed fleets. So I think Q1 is a little bit higher than expected because of that factor. We also -- obviously, maintenance CapEx is going up as a result of the increased service intensity. But we think that it's going to trend back down to where we had been guiding in Q4.

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Operator [15]

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(Operator Instructions) Our next question comes from [Ted Link] with [Geos.]

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Unidentified Analyst, [16]

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I just had a question. I know you guys haven't provided an EBITDA guidance for the year, but can you -- it seems like there's a decent amount of bid offer out there with respect to what people are expecting you to do. Can you talk maybe a little bit about how you expect to build on that Q1 number over the course of the year?

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Kyle P. O'Neill, U.S. Well Services, Inc. - CFO [17]

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Yes. We're not providing guidance right now. But I think, like we said in Q4, we expected to see an improvement in Q1 and throughout the course of the year continue to build off that number.

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [18]

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And [Ted], some of that build comes from the 3 new fleets that we're going to be deploying too -- total fleets that we have deployed, 3 new electric fleets, which -- 2 have been deployed and 1 will be deployed as we mentioned in the press release.

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Unidentified Analyst, [19]

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Yes. And do you feel comfortable with the 11 fleets that you sort of have in service this quarter that -- and the stability of the -- of that business over the course of the rest of the year?

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Kyle P. O'Neill, U.S. Well Services, Inc. - CFO [20]

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Sorry, I didn't quite catch that whole...

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Unidentified Analyst, [21]

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You guys had 11 -- outside of the fleets that you're bringing on, the fleets that you're having in the field right now, do you feel comfortable that they can perform similarly over the course of the rest of the year?

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [22]

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As of today, yes.

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Operator [23]

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There are no further questions at this time. I'd like to turn the floor back over to management for closing comments.

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Joel N. Broussard, U.S. Well Services, Inc. - President, CEO & Director [24]

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Thank you all for joining the call.

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Operator [25]

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