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U.S. Well Services, Inc. (USWS) Q1 2019 Earnings Call Transcript

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U.S. Well Services, Inc. (NASDAQ: USWS)
Q1 2019 Earnings Call
May 8, 2019, 10:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to U.S. Well Services First Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. 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.

Josh Shapiro -- Vice President of Finance and Investor Relations

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 open 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.

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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 conference call may contain certain forward-looking statements within the meaning of the United States federal securities law. 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 listener, is 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 would like to turn the call over to U.S. Well Services' CEO, Mr. Joel Broussard.

Joel N. Broussard -- President, Chief Executive Officer, Director

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 increase in number of operators and investors have come to understand the 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 newbuild 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's horsepower by 50%, by shortening its mobilization time.

Looking forward, we're excited about the future. We deployed our 12th fleet, or 3rd electric fleet in early April, and we expect to deploy our 4th electric fleet toward the end of the 2nd quarter. In addition, we are scheduled to bring our 5th electric fleet online in early 2020 for Shell, under a long-term contract. Currently, approximately 3 quarters of our fleets are working under take-or-pay contracts. 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 depressed. Although, we believe pricing is recovering from recent lows experienced during the fourth quarter of 2018, and the early part of 2019. We are aligned with active customers who have robust completion programs, and who value our top-tier service quality and innovative to 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 the 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 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 increased 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 back revolving credit facility. These financings strengthen our balance sheet, and provides U.S. Well with a stable and long-term capital base to execute on our growth plan.

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

Kyle P. O'Neill -- Chief Financial Officer

Thanks, Joel. 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 toward customers self-sourcing sand, chemicals, and fuel. The revenue for service and equipment rose over 30% sequentially. 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, an overall gross profit margins increase to approximately 22% for the first quarter, versus 11% in the fourth quarter of '18. Our cost 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 costs remained the most significant operating expense incurred by U.S. Wells. 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 our 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 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 expenses primarily, in this normalized SG&A expense is primarily attributable to increased head count, 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 on 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 per growth capex, with 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 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 to 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 additional growth capital, pay fees and expenses, and other general corporate purposes. This new term loan bares interest at L+8 in the quarter, and has no financial covenants.

Second, the company entered into a $75 million-asset base revolver. This facility is priced on a grid ranging from L+ 150 to 200. Proforma for these debt financings, U.S. Wells has total liquidity of $130 million to fund operations in growth initiatives. We are 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 in new customers.

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

Joel N. Broussard -- President, Chief Executive Officer, Director

Thank you, Kyle. Before we open it up to Q&A, I would like to leave you with some thoughts in U.S. Well Services position in the market. We believe it was a difficult period of this recent market downturn has passed, and an increase in 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.

The 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 crews allows us to deliver unrivaled advantages to our customers. I am proud with 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 and the most active oil and gas bases across the U.S.

...

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

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. If you'd like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Please, ask one question, and one follow-up question, and then, requeue for additional questions. One moment, please, while we poll for questions.

Our first question comes from Mike Urban, with Seaport Global Securities. Please, proceed with your question.

Michael Urban -- Seaport Global Securities LLC -- Analyst

Thanks, good morning, guys.

Joel N. Broussard -- President, Chief Executive Officer, Director

Good morning.

Michael Urban -- Seaport Global Securities LLC -- Analyst

So, obviously, I'm sure you heard Baker's comments on an 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.

Joel N. Broussard -- President, Chief Executive Officer, Director

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

Michael Urban -- Seaport Global Securities LLC -- Analyst

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

Operator

Joel N. Broussard -- President, Chief Executive Officer, Director

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

Michael Urban -- Seaport Global Securities LLC -- Analyst

Yeah, turbines, yeah. We spent some time with them this week, as well. Another comment that they made, which I don't know if it quite made sense to me. Their view was that you've got as much as maybe a third of the fleet, 8-ish-million horsepower out there that needs to be upgraded, and again, really, they only have kind of one small piece of the puzzle. The view was that you have that 8 million, rather than upgrading to tier-4 engines, the capital costs would be pretty similar to just go to electric. Do you have a view on that and where the industry is? Just that cost value proposition?

Joel N. Broussard -- President, Chief Executive Officer, Director

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

Michael William Urban -- Seaport Global Securities LLC -- Analyst

That's all for me. I'll turn it back.

Joel N. Broussard -- President, Chief Executive Officer, Director

Thank you.

Operator

Our next question comes from Dylan Glosser, with Simmons Energy. Please, proceed with your question.

Dylan Glosser -- Simmons Energy -- Analyst

Good morning, gentlemen.

Kyle P. O'Neill -- Chief Financial Officer

Good morning.

Dylan Glosser -- Simmons Energy -- Analyst

So, just to follow-up with Mike's first question, as we've 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?

Joel N. Broussard -- President, Chief Executive Officer, Director

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

Dylan Glosser -- Simmons Energy -- Analyst

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

Joel N. Broussard -- President, Chief Executive Officer, Director

6 months.

Dylan Glosser -- Simmons Energy -- Analyst

Great, thank you. And if I could just squeeze one more in, just to confirm. If you take the maintenance capex from Q1, and applied run rate to that, you get about 88 million, and then, plus the 3 of growth in Q1, plus taking the midpoint of the 90. 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?

Kyle P. O'Neill -- Chief Financial Officer

Yeah. I mean, I think Q1, we definitely saw elevated maintenance capex. 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 relatively short periods. So, what we see when we look back at kind of our trended maintenance capex, we'll have a bunch of engine rebuilds 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, is result of the increase service intensity. But we think it's going to turn back down to where we have been guiding in Q4.

Dylan Glosser -- Simmons Energy -- Analyst

Thanks guys, I'll turn it back.

Operator

As a reminder, if you'd like to ask a question, please press *1 on your telephone keypad. One moment, please, while we poll for questions. Our next question comes from Ted Link with GEOS. Please, proceed with your question.

Ted Link -- GEOS -- Analyst

Hey, guys, congrats on the new quarter. I just have a question. I know you guys haven't provided an EBITDA guidance for the year. 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?

Kyle P. O'Neill -- Chief Financial Officer

We're not providing guidance right now, but as we said, in Q4, we expect to see an improvement in Q1, and throughout the course of the year, continue to build off that number.

Joel N. Broussard -- President, Chief Executive Officer, Director

Ted, some of that bill comes from the 3 new fleets we're going to be deploying, too -- of total fleets that we've deployed, 3 new electric fleets, which 2 have been deployed, and one to be deployed, as I mentioned, in the press release.

Ted Link -- GEOS -- Analyst

Yeah. And you feel comfortable with the 11 fleets that you sort of had in service this quarter, that in the stability of that business over the course of the rest of the year?

Kyle P. O'Neill -- Chief Financial Officer

Sorry, I didn't quite catch that one.

Ted Link -- GEOS -- Analyst

You guys had 11 outside of the 3 fleets you're bringing on, the fleets that you have on the field right now, do you feel comfortable that they can perform similarly over the course of the rest of the year?

Joel N. Broussard -- President, Chief Executive Officer, Director

As of today, yes.

Ted Link -- GEOS -- Analyst

Fair enough. Thanks a lot, guys.

Joel N. Broussard -- President, Chief Executive Officer, Director

Thanks for joining.

Operator

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

Joel N. Broussard -- President, Chief Executive Officer, Director

Thank you all for joining the call.

...

Operator

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

Duration: 20 minutes

Call participants:

Josh Shapiro -- Vice President of Finance and Investor Relations

Joel N. Broussard -- President, Chief Executive Officer, Director

Kyle P. O'Neill -- Chief Financial Officer

Michael Urban -- Seaport Global Securities LLC -- Analyst

Dylan Glosser -- Simmons Energy -- Analyst

Ted Link -- GEOS -- Analyst

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