FTS International, Inc.
Q4 2020 Earnings Call Transcript

Published: 5 Mar 2021

[Operator:]

Thank you, and good morning, everyone. We appreciate you joining us for the FTS International conference call and webcast to review fourth quarter and full year 2020 results. As a reminder, this conference is being recorded for replay purposes. Presenting today's prepared remarks is FTSI's Chief Executive Officer, Michael Doss. Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, expectations, anticipations or predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the company's actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties are discussed in the company's annual report on Form 10-K and in other reports the company files with the SEC. Except as required by law, the company does not undertake any obligation to publicly update or revise any forward-looking statements. The company's SEC filings may be obtained by contacting the company and are available on the company's website, ftsi.com, and on the SEC's website, sec.gov.

[Michael Doss:]

Well, thank you, and good morning, everyone. Let me begin by saying that I'm glad to be back to doing earnings calls. So, I couldn't be more excited to introduce a far stronger and more nimble FTSI. We emerged from our financial restructuring on November 19 and eliminated $488 million of debt and other liabilities. I'd like to thank everyone involved in that process for a job well done. I'm particularly pleased that we were able to complete the process efficiently and preserve some value for our prior shareholders. Now with 0 debt and $94 million in cash, we have more financial flexibility than ever. And we are 100% focused on our customers and on creating long-term value for our shareholders. For today's call, I'll start by going over our financial results for the fourth quarter and full year 2020. I'll then cover several operational accomplishments and conclude with some comments on our outlook. I'll be discussing our financial results on a combined basis. That is by combining the predecessor and successor periods that we are required to report. The predecessor period runs through November 19. Revenue for the fourth quarter was $49.8 million, up from $32.1 million in the third quarter. Both the second and the third quarters of last year were low points in terms of industry activity due to weak commodity prices resulting from the effects of COVID-19 and the Saudi-Russian oil price war earlier in the year. The increased revenue in the fourth quarter was due to more active fleets, 10.5 average fleets compared to 7.3 in the third quarter. We completed 5,243 stages in the fourth quarter, that's up 60% from the third quarter. Our revenue continues to reflect mostly equipment charges with only minimal pass-through commodities. This is a function of our customers' preferences, and we remain agnostic, instead focusing our attention on margin dollars and operational performance. We provided sand and last-mile freight on only 2% of stages in the fourth quarter and none in the third quarter.

[Operator:]

. And we'll get to our first question on the line from Ian MacPherson with Simmons.

[Ian MacPherson:]

I appreciate all the color there on the operations. It sounds like things are going very well. I'd love to hear a little more on simul-frac. How much of a step-up in horsepower per fleet is normal for conducting a simul-frac? And then have you -- what type of maintenance savings do you think -- or efficiencies do you think you derive from that from pulling less on the horsepower in that configuration?

[Michael Doss:]

Yes. It's not a significant difference in maintenance costs. But in terms of equipment, it's roughly 1.5 fleets worth of equipment, and that will vary based on the rate and pressure requirements. But the 2 locations that we currently have about 1.5 fleet worth of equipment.

[Ian MacPherson:]

Okay. Good. And then I was just reflecting on your new balance sheet after you've come through. Congratulations on that. And clearly, your new valuation is at a significant discount to the public peers based on your new balance sheet. I'm sure that's something that you're looking at and thinking about strategically. Do you think that the landscape is right for continued consolidation? And how do you see you all participating in that regard, if so?

[Michael Doss:]

Well, as you mentioned, with our clean balance sheet and liquidity, we're now in a position to be able to productively participate in consolidation, whereas previously, I think there was always a question about the debt maturities and what was going to happen with the company. So I think we're in a great shape to consider opportunities. We're interested. And so we think there's a couple of potential combinations that could occur out there. I can't really speculate on that. But other than just to say that we are interested, and we think that consolidation, either with us or other players in the market, will continue to happen over the next year or 2.

[Ian MacPherson:]

Do you think that the pricing power in the business right now, which is improving, but it's obviously improving off of a low valley and is far from where you would like for it to be? Do you think that consolidation is a needle mover for getting a better competitive structure and more pricing power that's needed for your business?

[Michael Doss:]

Potentially. It would depend on what type of commercial synergies are involved. For example, if it's -- if it helps improve geographic diversification, access to different types of customers, there could be some benefit on that. I don't think consolidation itself will do a whole lot for pricing unless it was at the industry-wide level. I think if the industry itself became a lot more consolidated with fewer players, I think you'd see more pricing discipline. But just for any particular company, I think the real benefits would come from the cost savings involved, elimination of duplicate expenses and just having more purchasing power and so forth.

[Operator:]

. We'll get to our next question on the line from Stephen Gengaro with Stifel.

[Stephen Gengaro:]

I guess two things. One, when you talk about the DGB Tier 4 assets and looking into them a bit, when you think about an investment decision like that, what are your key parameters as far as sort of visibility on demand and returns, et cetera?

[Michael Doss:]

Well, I think for us, one of the benefits is gaining access to a new customer. And so a customer that has high utilization which is critical to profitability. Certainly, if we were to build a fleet for a customer, we would want to have that fully utilized. We'd want to have a contract with some term associated with it and also good Ts and Cs. And so it's just -- it's an opportunity for us to build a bit of a high grade, if you will. And so I think in terms of return, I think having a 2- to 3-year payback is a reasonable starting point. And then we would just consider the other benefits that would come along with that, particularly in terms of customer mix.

[Stephen Gengaro:]

And then when you -- just sort of from your perspective, so when you look at these dual fuel fleets or these e-fleets, and maybe this even ties in a little bit to my other question, which was sort of about pricing around simul-fracs and how you get compensated for that, but do you believe that you'll start to see this bifurcation in the market where these higher-quality assets will command a more material premium?

[Michael Doss:]

Well, that's a good question and certainly on the minds of a lot of analysts and investors in the space. And just my personal opinion, I'm not totally convinced that it is a significant bifurcation. I give you electric fleets, as I mentioned in my comments, I think there's a lot of innovation on the come in that space, and so there are some interesting ideas. Still relatively early innings, and so I think the fleets that are out there still are a bit of a niche. I think as far as Tier 4, I think when we -- when a frac company wants to have large independent E&P companies as customers, they are going to have ESG mandates and so they're going to be looking for every opportunity to reduce emissions. And so Tier 4 definitely fits into that, electric fits into that. And so I think there will be some bifurcation, but I still think the larger market is well served with existing equipment.

[Stephen Gengaro:]

Okay. Great. And if I could slip in one more. You mentioned your maintenance CapEx per fleet numbers. And I think you said you basically had 13 active fleets today in the press release. As you look forward to adding fleets, I'm sure there's a tier to this. But how do we think about reactivation if you went from 13 to 15 or 16 and then 16? More like, how do we think about is there a material reactivation cost in the near term? Or does it just get more significant as you kind of get deeper into your asset base?

[Michael Doss:]

Yes. It's the latter. And so as we get deeper in -- if we were to go back up to 25, 26-plus fleets, those last few fleets would probably cost $6 million, $7 million, $8 million in terms of rebuild costs and refurbishment expenses that we need to incur. On the front end, going from 13 to 14 to 15 to 16, maybe $1 million or $2 million per fleet. And a lot of that would be expensed fluid ends, for example. So not a lot on the front end. And I will say that if we did get into a market where FTS is running 25, 26-plus fleets, that's got to be a strong market, and the economics would provide a very quick payback on those reactivation expenses.

[Operator:]

We'll proceed to our next question on the line from the line of Sean Mitchell with Daniel Energy Partners.

[Sean Mitchell:]

I want to go back to what Ian was talking about on the simul-fracs. I think you mentioned 1.5 additional fleets, so in terms of horsepower. What about people on the job in terms of how many -- is a reduction in personnel available for efficiency gains? And then the second question would just be around the labor market in general. You guys obviously are growing the fleet count, which is great to see, and I think some others are seeing similar activity pickup. What's the labor market look like? And can you give us any color on that front?

[Michael Doss:]

Yes. Sure. Just going to the simul-frac, in terms of resources required on location, it's not -- so it's 1.5 fleets worth of equipment. Repair costs per hour are slightly less. And then I think if you look at labor, it's roughly about the same number of crew members on location, maybe 1 or 2 more just given the additional pumps, but not dramatically more. So you're getting a lot more volume spread over a smaller cost. And so a lot of those economics flow through to the customer. But we are -- but we do think there's pricing improvement potential on the simul-fracs as a result of that. The performance is good. It's not widely practiced, but we think it could gain some traction. And it helps the customer, and it helps us as well. And so in terms of labor, haven't had any difficulties with crewing up our recent fleet reactivations. It's -- there's still ample workforce available. I think if we were to see another significant leg up, I think everyone is a little surprised that we've got as many fleets working at the industry level now as compared to what we may have thought 3 or 4 months ago. So that was a big leg up. Before we see another leg up, which we're not anticipating, then I think we will see some greater attention in terms of wages and ability to hire. Anything else, Buddy? Buddy, do you have any further comments on that?

[Buddy Petersen:]

I think the one variable component on the labor piece is because there's additional assets required to get to location, it takes a little bit more labor. It's a little more labor intensive, rigging up and rigging down. But during the normal course of operations, it's the same. So we manage to kind of flex around with some of our other fleets that may or may not be in a move situation and offset it that way.

[Operator:]

Mr. Doss, we have no further questions on the line. I'll turn it back to you.

[Michael Doss:]

Okay. Well, thank you everyone for your interest. Yes?

[Operator:]

I apologize. Before concluding, if it's okay, I have 1 question that just queued up. And we'll proceed with the question from the line of Andy Clark with SES .

[Unidentified Analyst:]

I was wondering if you could discuss the profitability outlook into Q2. It sounds like Q4 was burdened with start-up costs and 4-month go pricing. Of course, Q1 has the weather impact. So any color on go-forward profitability would be helpful.

[Michael Doss:]

Yes. It's hard to give a lot of crystal guidance on that because we're currently negotiating across a number of customers right now for pricing for second quarter, but it's definitely headed up into the right in terms of -- we've already achieved some pricing improvements already agreed on. And so I mentioned the single mid-digit EBITDA number for the first quarter results. Still kind of a transitional period in first quarter. I think, second quarter, I think we'll -- quite a bit higher, double-digit number for EBITDA.

[Operator:]

Mr. Doss, we have no questions on the line. I'll turn it back to you once again for any closing remarks.

[Michael Doss:]

Okay. Well, good deal. Well, thank you, everyone, for your interest in FTSI. We look forward to speaking with you again next time.

[Operator:]

Thank you very much, and thank you, everyone. That does conclude the conference call for today. We thank you for your participation and ask that you disconnect your lines. Have a good day, everyone.