FTS International, Inc.
Q3 2018 Earnings Call Transcript

Published: 30 Oct 2018

[Operator:]

Thank you and good morning everyone. We appreciate you joining us for the FTS International Conference Call and Webcast to Review Third Quarter 2018 Results. As a reminder this conference is being recorded for replay purposes. Presenting today are Mike Doss, CEO; Lance Turner, CFO; and Buddy Petersen, COO. Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, exceptions, 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 result to different materially from those expressed in any forward-looking statement. 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. This conference call also includes discussion of non-GAAP financial measure. Our earnings release includes further information about these non-GAAP financial measures as well as reconciliation of these non-GAAP measures to the most directly comparable GAAP measures. I'll now turn the call over to Mike Doss, FTSI's CEO. Mike?

[Michael J. Doss:]

Thank you and good morning everyone. As we discussed on our last call, the third quarter was expected to be challenging and it was. We saw the decline in our results primarily due to a lower fleet count as three of our larger customers dropped fleets because of budget exhaustion. For the quarter; our reported net income was $49.6 million, earnings per share was $0.45 and adjusted EBITDA was $85 million. Those figures include a $10 million supply commitment charge which was larger than usual for reasons that Lance will discuss in more detail later. Excluding the charge, earnings per share was $0.54, adjusted EBITDA was $95 million and annualized adjusted EBITDA per fleet was $17.4 million, down about $3 million from the second quarter. Despite the lower results, we continue to generate free cash flow and reduced our net debt to below $400 million. We had an average of 21.8 fleets active during the quarter, 2 less than expected given difficulties in securing sport market work, and we exited with 19 fleets working. Per fleet we completed 321 stages during the quarter, slightly less than the second quarter due to fewer fleets working in the Northeast where multi-well pads and zipper operations are more common. As our customers reduced activity during the third quarter, we chose to stack some fleets rather than flood an already saturated spot market or carrying the cost of utilized fleets. Activity levels appear to be stabilizing in the fourth quarter and we expect to see an increase in the first quarter. As we took fleets back to work, we will ensure that neither the equipment, labor nor capital, will be a limiting factor. Thanks to our in house maintenance capabilities, we only need a short lead time to deploy additional fleets. We believe in expected cycles in this business will be shorter than they've been historically driven by oscillation and the balance of supply and demand for frac horsepower. We run the Company in the way to be able to adapt quickly to these typical changes, with considerable emphasis on cost discipline, both OpEx and CapEx. Our focus is on free cash flow, not necessarily market share, and we think that's the best approach to maximize returns through this cycle. While the outlook for 2019 has improved recently, our fleet count and profitability are expected to decline in the fourth quarter. We currently expect to average 18 fleets and lower efficiency and pricing is expected to reduce our annualized adjusted EBITDA per fleet by approximately $3 million compared to the third quarter. The low efficiency is due to the typical white space in the calendar around the holidays. During the third quarter, we deployed a previously announced newbuild dual fuel fleet for dedicated customer in West Texas. While electric fleets have been getting a lot of attention lately, we believe dual fuel fleets are a viable alternative. Both offer meaningful fuel cost savings that dual fuel fleets can do so at a fraction of the upfront cost. We've built our new dual fuel fleet for $27 million all-in and that includes $2 million for the conversion kit. That's a significant discount to the cost of an electric fleet. Another advantage is, if the gas supply becomes unviable or is intermittent, it's not a problem. The engine can switch back and forth between diesel and natural gas with no interruptions. Electric fleets however require a consistent flow of gas which isn't practical in many locations. Next a technology update. On our last call, I discussed the opening of our National Operation Center or NOC in Aledo, Texas. The NOC is not a dog and pony show, we do actual work there. All of our fleets are monitored 24/7 by a team of experienced engineering and operations personnel whose combined knowledge allows us to resolve issues quicker and ensure greater consistency across fleets. We do two main things at the NOC; we compile job data for customers and monitor equipment data. As for job data, during the third quarter we moved all field engineering from the FracMan to the NOC. Analyst at the NOC produce job reports for customers and prepared job tickets for billing. We're working to further automate some of those processes. We continue to have technical advisors in the field, each supporting multiple fleets that are now freed up to focus on higher order tasks instead of completing paperwork. NOC analysts also constantly monitor our equipment including ECM data and data from vibrations sensors on our fluid ins and power ins. The focus here is to reduce damage accumulation which reduced both MPT and our NIM cost. We're also using this data along with our international expertise in partnership with KCS Technologies to produce significant innovations. A recent example is a newly designed manifold that enhances fluid flow efficiency, significantly reducing vibrational shock load. Smoother operation means fewer repairs. We've also developed an engine failure predictor that accurately predicts catastrophic engine failure within two minutes. And that time allows us to – our operations team to take it offline before an incident occurs. This saves countless dollars in major repairs. Another longer-term project we're working is to automate our equipment using artificial intelligence to execute a given job design. If a pump is about to fail, the system will automatically take it offline and compensate for with other pumps without human intervention. As a step in that direction, we've developed a machine-learning algorithm that uses the over 10 million vibration signature patterns we've captured so far to predict three clinical pump part failures with 92% accuracy, until we achieve our goal of full automation, the capabilities we've developed along the way will further improve our equipment reliability. As an equipment manufacturer, we are uniquely positioned to be able to develop and exploit technologies of this kind. Before I turn it over to Lance, I'd like to take a moment to thank our team for their continued dedication and competitive spirit. We've consistently been number one or number two in EBITDA per fleet over the last two years, and we have generated free cash flow to reduce our net debt in each of the last six quarter. Our goal is to continue to be the king of free cash flow in our peer group. I'd also like to thank Perry Harris, our Senior Vice President of Commercial who is retiring this week. He joined FTSI in December 2014 with our acquisition of J-W Wireline and assumed his current role in 2015. He has been an outstanding leader at our company developing strong relationships with our customers and building a talented commercial team. He will be missed. Lance?

[Lance Turner:]

Thank you, Mike. Revenue for the third quarter was $334.4 million, down 32% sequentially. This decline was driven by 25% reduction in stages completed primarily due to a lower fleet count during the quarter. The spot market for pressure pumping services trended lower as the quarter progressed, but the impact of the third quarter was minimal given our largely dedicated customer base. We exited the quarter with approximately 5% lower net pricing than where we started the third quarter. The spot market appears to be approximately 10% to 20% lower depending on the area. Well we don't think the dedicated market will move to the current spot rates, we do expect some downward pressure as customers go through the RFP process for 2019. When I talk about pricing, I want to emphasize net pricing, because you'll see larger declines in our average revenue per stage which is being offset by a lower cost of materials or other jobs design changes. The major driving force is lower sand cost, particularly because we have seen increased availability and use of regional sand. However, we don't expect a meaningful margin impact positive or negative as our customers change their job designs or sand types. SG&A cost total $19.7 million for the quarter including $3.2 million in stock-based compensation. The decline was primarily due to lower cash based incentive compensation when compared to the first two quarters of the year. In the fourth quarter, we expect our SG&A cost to increase to approximately $23 million to $24 million. The increase will be driven by the acceleration of certain stock awards related to the departure of Perry Harris. This will bring stock based compensation up to approximately $7.3 million in the fourth quarter compared to $3.2 million in the third quarter. And Mike mentioned, we recorded a supply commitment charge of $10 million in the quarter. All of our sand supply contracts were entered into in 2014 and prior. And while they allow for market-based pricing, we have some requirements on the volume of sand and the type of sand we purchase. We have actively been working with our vendors to successfully manage these volume requirements and minimize shortfall payments as more customers have chosen to source their own sand over the last two years. Over the last few months however, we have seen a significant shift to the use of regional sand and away from Northern white. This quarter supply commitment charge relates to minimum commitments under our sand supply agreements that we were either unable to meet or believe it is likely that we will not meet in 2019, which is why it is larger than previous quarters. We will continue to work with our vendors regarding future commitments under the supply agreements. We do not normally add back's supply commitment charges in our adjusted EBITDA however given that this charges for current and estimated future periods, we think it is important to consider certain metrics excluding this charge. Excluding the $10 million supply commitment charges in our adjusted EBITDA would have $95 million and annualized adjusted EBITDA per fleet would have been $17.4 million. Cash generation remains strong, which allowed us to bring our net debt down to just under $400 million at the end of the quarter. We repaid $70 million in debt to bring our gross debt down to $565 million while ending with a cash balance of $167 million. Subsequent to the end of the quarter, we repaid an additional $20 million of debt which brings our current principal balance to $545 million. This should bring our run rate interest expense down further to approximately $9 million per quarter. We will continue to delever in the fourth quarter with free cash flow that we generate and will ensure we have an appropriate liquidity cushion to fund our fleet reactivations. Our strong cash balance and our undrawn revolver, provides us with ample liquidity to quickly fund the working capital associated with putting those fleets back to work. Capital expenditures for the third quarter were $18.6 million. This brings the total spend to $84.9 million for the first nine months of the year. The full year estimate for CapEx remains the same and is expected to be approximately $110 million. We expect the fourth quarter to be slightly higher as we continue with our expansive refurbishment program. During the course of 2017 and 2018, we will have rebuilt approximately two-thirds of the engine in our fleet. We talk a lot about our ability to generate strong cash flows through cycle due to our in-house manufacturing and our tax attributes. Cash flows from operating activities for the quarter were $129.1 million including $53.5 million from changes in working capital. Free cash flow has been positive for six quarters in a row and we expect that to continue for the near term, albeit at a lower rate in the current environment. Although the third quarter marked the first quarter of fleet decline in over two years, we've been able to maintain attractive levels of profitability and more importantly cash generation. The fourth quarter will be challenging, but the commodity price environment continues to be very encouraging. The Permian is still our strongest market where almost two-thirds of fleets are operating currently and where our commercial team is most excited about the opportunities looking into 2019. With that I'll open the call for questions.

[Operator:]

[Operator Instructions]. Our first question comes from the line of James Wicklund of Credit Suisse. Please proceed.

[James Wicklund:]

Good morning guys. Lance, you mentioned two-thirds of the fleet are in the Permian and that clearly has the best outlook, but the surprise to us earlier this year was actually weakness in the Northeast, and you mentioned three – might have mentioned three of the big customers had slowed down. Can you talk about the cadence of putting – of going from 19 – 18 fleets I guess if you average 18 for the quarter, you'll come out at 17. Can you talk about the cadence from the end of the year through 2019, realizing you don't have a crystal ball and you know lot of questions on what your customer is going to do, but where do you expect the cadence to be of putting fleets back to work and where should we – where do you hope we end 2019?

[Lance Turner:]

There is a lot of tough questions in there Jim. I think when we look to start 2019, our conversations right now the opportunities are largely in the Permian. I would also expect some level of opportunity to develop back in the Northeast. I don't expect that to happen this year, but I would expect that reset to happen in the Northeast at some point early next year. So, I think there is going to be additional opportunity in the Northeast. When we look at the end of 2019, I mean we're really not happy until we're fully deployed. And is 2019 going to be the year that allows for that, hard to say, but that's ultimately where we want to get long term.

[James Wicklund:]

But you expect to see a sequential improvement, I mean from the end of the year or from wherever the bottom is in Q4 at this point through 2019 and then to 2020, is that the expectation at least?

[Lance Turner:]

That's our expectation looking out. I think, yeah, we don't have a lot of intel on the longer term outlook, but the short term outlook are what the conversations are about right now, and that's really what gives us the – the confidence that that we're going to see an increase going into Q1.

[James Wicklund:]

Okay if I could, my follow-up question on a completely different note, you're talking about automating pressure pumping using artificial intelligence, machine learning algorithms and we're all used to predictive maintenance for equipment but this is taking it a level further. It would also seem to reduce the need for people etcetera. When does all of this go from being you know the stuff we read about to stuff we actually see in the field?

[Michael J. Doss:]

Well, Jim, that's a good question. You know because it is a very intense project, it takes an enormous amount of data in order to develop those algorithms. So, we're doing it in phases. It's likely going to take several years. But along the way, I think we can monetize some of our investment in it by reducing failures and automating pieces of equipment as we go forward. But it is a longer-term project. It's aspirational, but we think there is a lot of benefit there. In terms of the labor, hard to quantify what that is, I imagine it will be few positions per fleet, but we don't know that at this point, and we'll always want to make sure that we have enough staff to be able to handle any situation, but automating would certainly reduce some of the labor component.

[James Wicklund:]

So this is going to be a process over the next couple of years, rather than an event for us to look forward to?

[Michael J. Doss:]

Agreed and that's exactly right. And so, plan to give you updates as we progress over time.

[James Wicklund:]

Okay, and if I could sneak one in, you've done a great a job of reducing debt. One of the main things that you trying to do and coming into the IPO was deleverage. Where do you get comfortable and start thinking of other uses for your free cash and paying down debt, is there a metric that you look for to switch over from debt reduction to something else?

[Lance Turner:]

Yeah I think – Jim, I think there's a lot of factors in there. Ultimately, I think it will be up to us, the board what the outlook is like and certainly our debt levels. We're happy with the debt levels, we're achieving the goals that we set out, but certainly would like to see 2019 shape up. And that discussion will be had over the course of later this year and an early next year, so more to come on that topic.

[Operator:]

And our next question comes from the line Michael LaMotte of Guggenheim. Please proceed with your question.

[Michael LaMotte:]

Mike you mentioned two-thirds of fleet in the Permian now, what is the geographic distribution of the 18 fleets that you expect to work in Q4?

[Michael J. Doss:]

Sure, well currently and it's always subject to change, 12 in West Texas, 1 in East Texas, 1 or 2 in South Texas and 3 or 4 in Northeast.

[Michael LaMotte:]

Okay and then Lance on the sand commitment charge, you said that this quarter's was unusual because it included the 2019 expectation – expected increase in in the Q2 10-Q, you know the comment was that the – one vendor in the particular that was scheduled to increase significantly. I'm curious as to how you approach that 2019 charges, is that based on an expectation of kind of flat run rate activity or is that expecting some kind of ramp up next year.

[Lance Turner:]

Well so, so I think you are – you've caught on to that. It is based on a forecast and then kind of an expected usage. I think one of the – and it really always has been I think one of the things that changed this quarter was just the speed and magnitude at which the regional sand, the uptake of regional sand. And so, obviously that impacted the distribution of the type of sand we're forecasting and that is what led to a larger charge I'd say that – it's not based on a complete flat from Q4 levels because I think in the scenarios we're looking at, we do see a ramp-up over the course of 2019, and so there's some subjectivity, but I think it's probably a pretty realistic estimate at this point.

[Michael LaMotte:]

Okay and then there's no – your exposure starts to – your exposure peaks in 2019, right? These contracts wind down beyond 2019?

[Lance Turner:]

It does not go higher after 2019, but they do have a few years left, and there's a couple of different contracts that we're talking about, but the longest one I believe is we'll have six more years.

[Michael LaMotte:]

Okay, and then Mike last one for me on that – gas duel fuel, the – how many fleets are now dual fuel capable?

[Michael J. Doss:]

We have about four that are dual fuel capable.

[Michael LaMotte:]

Okay. And then are they burning fuel gas or does that need to be treated before?

[Michael J. Doss:]

It does need to be treated, and there's different ways to do that depending on whatever the situation is on the pad. You can have a trailer that is brought in to clean the gas ready to burn or if it's already treated through other facilities, but it does need to be clean.

[Michael LaMotte:]

Okay. And then – so last one on this is – would you consider – it seems to me that with all of the excess gas in the Permian in particular, the dual fuel could be competitive advantage. Would you consider making those $2 million conversions on a spec basis?

[Michael J. Doss:]

Yeah, I'm not even sure it's needed to do it on a spec basis, because we have conversations with customers that are interested in the technology and if they have high confidence, I wouldn't consider that necessarily speculative if they have high confidence, we're willing to spend the $2 million to make it into a dual fuel and even if it doesn't work in one particular situation, it's still a good long-term investment to have that capability.

[Operator:]

And our next question comes from the line of John Daniel of Simmons & Co Energy. Please proceed.

[John Daniel:]

Mike, one of the things you mentioned in the prepared remarks was that – maybe it was Lance, some of the fleets that you have will be undergoing the RFP process and so, pricing could move lower. Can you tell us how many of those 18 fleets you expect will go through the process?

[Lance Turner:]

Well, I mean ultimately, all of them have or will go through the process. That doesn't mean they are all competitive RFPs. Lot of our customers are happy with the service and they just continue that process on, but that discussion about pricing is revisited particularly when the calendar year changes, if not, on a quarterly basis. Yeah I said RFP season is starting now, and so the ones that we haven't secured through excellent operational execution will start now and go over the course of the next call it three months. And that's kind of where we look forward to the – the fleet reactivation in Q1.

[John Daniel:]

Okay. I'm not trying to throw you a curve ball here, but as you know there is some undisciplined competition out there. So, on the one hand you've got visibility for some customers looking to pick-up fleets in Q1, but I mean presumably there is risk that one of those competitors goes aggressively after one of your 18 fleet with the customer. I'm just trying to – I don't want to get out of our skis in terms of recovery being built into Q1, Q2, so to the extent you can help us in terms of the speed of your recovery and then knowing that you are going through an RFP process, should we assume that EBITDA per fleet migrates lower in Q1 because of competitive tensions, or is the higher activity taken higher and that's a long question?

[Michael J. Doss:]

Yeah, that is a long question. There is lot of components there. There's a lot of unknown as far as where pricing will end up. We know it's going to be competitive. We plan to be competitive and defend our dedicated work and we've also got a number of target accounts that we know we're going to need to be competitive on all aspects of the RFP including price, and so we're – the commercial team is very focused on making that happen. And so, as far as the prediction, as far as first quarter, I think we're confident about the fleet count going up, little less confident in terms of what pricing will do, but we don't think it's going to go anywhere near where spot market pricing is currently.

[John Daniel:]

At this would over-under versus Q4?

[Michael J. Doss:]

Curious, in term of profitability, I'll put you on a stop, but I'm just trying to manage expectation or two.

[Lance Turner:]

You know, well this in fourth quarter, as we all said that extra white space with the inefficiencies, we do expect a rebound in efficiency in the first quarter absent usually severe weather, so we don't have that. We'll see an increase in efficiency and some additional margin on top of that. I would say flat to slightly up is my current guess today.

[Operator:]

And our next question comes from the line of Connor Lynagh of Morgan Stanley. Please proceed with you question.

[Connor Lynagh:]

I'm wondering if you could talk a little bit more about the sand commitment charges, I'm just trying to understand I mean are there basically the longer-term contract? Are these with companies that have developed local capacity, in other words, do you see any flexibility for shifting the contract terms to other mines these companies own or are these northern white suppliers as you don't have the potential to negotiate on those terms? Just trying to understand your flexibility there?

[Lance Turner:]

Yes, so Connor, that's a good question. The companies we are dealing with and one company in particular does have regional mines and so we're negotiating with them. The original contract was written with northern white in mind and so as they idled facilities and as demand shifts towards the regional, we're negotiating with them to get that – get those volumes transferred.

[Connor Lynagh:]

Okay, got it. And just wanted to clarify when you talk about the degradation in EBITDA per fleet in the fourth quarter, what's the starting point, is that your EBITDA per fleet excluding the commitment charges or including?

[Lance Turner:]

That would be excluding.

[Connor Lynagh:]

And then, just maybe a higher level one here, you know it seems in your prepared remarks you pointed to stabilization in the market which seems interesting compared to peers who have been talking about long holiday break or whatever it is we are calling it. Can you just comment about what you think might be driving the divergence versus what other companies have been saying?

[Michael J. Doss:]

Sure. I think it's mostly a function of our customer base as opposed to a commentary on the market overall.

[Connor Lynagh:]

So there is no commentary there?

[Michael J. Doss:]

Well, just like in the third quarter, I think we were disproportionately impacted by a few of our customers making decisions to drop fleets. I think what we are talking about for the fourth quarter is just a function of the customers that we work with. Our experience is to stabilization and some reactivations in the first quarter, and so that's really the basis of our commentary.

[Connor Lynagh:]

Got it. I appreciate the color.

[Operator:]

And our next question comes from the line of Mark Bianchi with Cowen. Please proceed with your question.

[Mark Bianchi:]

Thank you. Guys looking at the margin that you offered for fourth quarter, I know, it's really tough to break it out, but can you give us a sense of what you are assuming for kind of utilization or throughput of the deployed fleets? Just want to get a sense of maybe how much seasonality in whitespace you are factoring in there, and to try to think about that is it migrates in first quarter?

[Michael J. Doss:]

Well, so some of that is in the average 18 fleets working, and so squeezing out some of the whitespace by just reducing the fleet count slightly to get through. But in terms of stages per fleet which is probably the best indicator of what that means. Lance, were you thinking low 300s for fourth quarter per fleet?

[Lance Turner:]

Yeah. To somewhat low 300s to where we hit in Q3 somewhere in that range. October is strong currently, but October is usually the strongest – always the strongest month of Q4. So, it will be at or below Q3 level as what I am thinking.

[Mark Bianchi:]

Right. And maybe just as you talk about the opportunity set for first quarter and the reactivations, could you put some numbers around that? I know there is lot of uncertainties with the negotiations and everything, but just want to get a sense of when you guys say there is a few opportunities, what that looks like?

[Lance Turner:]

Well so, that's yesterday as in our fleet count going to between 20 and 22. Now there is a lot of uncertainty because there are things in process. Obviously when we get much more than that in process, but just a probability waits the opportunities that we're working on. We are talking about an increases in two three fleets from fourth quarter.

[Mark Bianchi:]

Got it. Okay. And higher level question, we've heard a lot about efficiency and frac crews catching up to rigs. You guys gave us a stage count which is really helpful for us to track. You had some mix that affected in this quarter. Can you talk about on a like-for-like basis how you are seeing efficiency evolves and where you see that that going in 2019?

[Michael J. Doss:]

Well, I think we have some room for improvement on that because this year the percentage of jobs we are doing on zipper has been slightly less than some of historical periods. And that's more of a function of the jobs that we happen to work on at any given point in time as opposed to the market, which is overall moving towards more multi-well pads in more zipper operations. And so, one thing we've seen is stage length has remained relatively consistent. But one thing we always focused on is trying to increase our pumping hours per day, which is mostly managerial challenge to make that happen. I think if our mix moves more towards zipper operations, I think you'll see an increase and efficiency for us per fleet.

[Operator:]

Our next question comes from the line of Scott Gruber of Citigroup. Please proceed with your question.

[Scott Gruber:]

So I'm going to ask the 1Q profitability question in a different way, I apologize, but a lot of moving parts here. If there is no pricing change on the fleet and activity trend higher, do you expect that some of these opportunities materialize for you to put a couple of spreads back to work? I would assume the stages per fleet improves some, so we just consider operating leverage – could you guess for us where EBITDA per fleet could go in 1Q?

[Lance Turner:]

If there is no price decline from Q4 levels, I think it would be slightly higher than Q4 levels which Mike guided here I think in that mid teen area. Q1 is always contingent upon the weather. And so your efficiency can get hit really hard or you can have a pretty mild weather –winter if you will. So I'd say that's probably the biggest unknown, but certainly as you get into Q2 and Q3, I think your question will be more relevant as you would expect to see that efficiency pick up and add a couple of million per fleet over a low quarter.

[Scott Gruber:]

So moving into 2Q where we move beyond weather, ex-pricing you'd expect to be up a couple more million, is that correct?

[Michael J. Doss:]

Right. But like I said, there is lot of assumptions in that question that it's just tough to answer at this point.

[Scott Gruber:]

Right. I am just trying to separate the operating leverage from the pricing and I know pricing is going to be a factor here. I appreciate the color. And then how should we think about the stage count per fleet and given what you know today into 1Q in operating some typical weather risk?

[Michael J. Doss:]

Just basing it off of previous quarters and Q3 at about 320, I'd say it's probably between 300 and 320. Somewhere it's hard to say where obviously we are going to work on pushing it about 320 to the best of our ability, but will be limited in certain situations in holidays, and customer year-end budgets, and so we'll do our best.

[Scott Gruber:]

I appreciate the color. Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of Dave Anderson of Barclays. Please proceed with your question.

[Dave Anderson:]

Just touching on the follow-up question on the supply commitment on the contract, so it's a six-year contract; A, could you just talk about what the volumes are associated with that? And B, I'm just wondering do you have any price exposure? Obvious, there is a lot of northern white sands falling pretty fast. Just wondering if you are potentially looking at potential higher losses if the pricing kind of falls in. Can you just kind of walk through some of the dynamics of that contract? And you've highlighted $10 million charge going four from 2019, but is there a possibility that could be even worse as we head into the year as we see kind of more and more Permian in-basin sand coming online?

[Michael J. Doss:]

Sure, Dave. Let me give you some parameters on that. So the volumes are 3.2 million tons per year and this is one of the major contracts that we have that has six remaining years. So it's originally a 10 year contract years ago and now we have six years left. And so, also it's a market based pricing, and so there is no fixed price things where we can get tripped up in or the price does reset and follows the market generally. And as far as the outlook for further charges, we think that we are negotiating an outcome that is going to minimize the charges. I mean we'll still have some small charges on a go forward basis, but the $10 million is a bit of a catch up for this year and next year. And so, I think it will be much lower and manageable from this point forward.

[Dave Anderson:]

Okay, great. Thanks. That's all for me.

[Operator:]

And our next question comes from the line of Chase Mulvehill of Bank of America. Please proceed with your question.

[Chase Mulvehill:]

I've got few questions, so bear with me. I've guess I hate to come back to the frac sand contracts, but on the frac sand contracts, how much of that was cash of that $10 million was cash?.

[Lance Turner:]

None of the $10 million with cash at this point.

[Chase Mulvehill:]

But can you talk about – go ahead Lance.

[Lance Turner:]

I don't have an estimate when it will convert to cash at this point.

[Chase Mulvehill:]

Okay. And you've got 18 active fleets in the fourth quarter, how many of those are actually spot and I apologize if you said that earlier.

[Lance Turner:]

Right now we are operating about two-thirds dedicated, one-third spot, and so that's higher than previous quarters and we'd be probably closer to 90% dedicated.

[Chase Mulvehill:]

Okay. So we'll roll forward into 1Q, would you expect it to go more towards the 90% dedicated?

[Lance Turner:]

Yeah. It'll be flatter, but I expect it to creep up more dedicated as we secure. If we activate fleet, it's going to mean that we have more dedicated opportunities would be my guess.

[Chase Mulvehill:]

Okay. And you talked about having some line of sight potential fleet reactivation in the first quarter. Could you maybe quantify that and talk about whether it's more kind of a January and February or is it more kind of late March?

[Lance Turner:]

What we are talking about now is reactivations in January, February and most likely January. Lot of capital budgets for the E&P companies they tend to go on a calendar year basis, and so we are talking about work that will be starting up in January.

[Chase Mulvehill:]

Okay. And then as the fleet start up, you'll have some working capital commitment as you reactivate these fleets. How should we think about the cash impact of working capital for each fleet that you put back to work?

[Lance Turner:]

Well, I think a lot of depend on the pricing and inefficiency of that fleet, but I think that – and whether we provide the sand, whether they provide the sand, but I think $4 million to $5 million is probably a pretty good number. I think the best approach is kind of taking our working capital and divided by the number of fleets that we are operating. And that's about what I would expect as we reactivate fleets on average, and so $4 million to $5 million should be a comfortable range and the maximum if we provide the sand et cetera.

[Chase Mulvehill:]

Okay. And then how much of the sand you pumped in fourth quarter? Did you source yourself?

[Lance Turner:]

In the third quarter, it was still roughly half. And so, we'll continue to monitor that, but roughly half as we look forward.

[Chase Mulvehill:]

Okay. And then as you think about adding fleets from here, how do you think about your customer base in whether you – they will allow you to source the sand yourself for the jobs that you are pumping?

[Lance Turner:]

I think the biggest thing that we've worked over the last couple of years is we can accommodate either one and we don't really see a trend on whether one is more profitable than the other. So the amount of visibility that's in the sand market ensures that our customer will want to get a market based sand costs. And so, I think we are in different. To the most extent, we'd obviously love to provide it and manage the logistics and manage the downtime associated with it, and utilize our contracts, but I think we are positioned to do either. And so, I don't think we have estimates or furlough on what we have on new fleet that we pick up, I think we'll accommodate whatever the customer needs.

[Chase Mulvehill:]

Okay last one and I'll turn it back over and thanks for letting me squeeze in. The zipper frac mix, what was your zipper frac mix in 3Q?

[Lance Turner:]

So, we've seen zipper frac or zipper wells actually decline a lot based on our customer mix, and so we'll probably – we're under 50% zipper wells, and that's down from two to three quarters ago. And so, we'll expect to get that up as more and more customers are designing multi-well pads. But just given the customer mix and where they are on the program, we are doing quite a few single wells that has that zipper well percentage down to under 40, or under 50, 40, 50.

[Operator:]

[Operator Instructions]. Our final question for today's presentation comes from the line of Stephen Gengaro of Stifel. Please proceed with your question.

[Stephen Gengaro:]

Thank you. Good morning, guys. Two things, one I know this is back to the profitability question a bit, but when you think about fleet reactivations, what's the annualized EBITDA per fleet threshold that you would deploy fleet under? What kind of visibility would you need to think about deploying a fleet?

[Lance Turner:]

Well, we don't have a certain threshold of adjusted EBITDA per fleet in order to reactivate. We obviously want to do well relative to where pricing is in the market given that our CapEx is low and our cost basis is low for the fleet. They provide a very good return. We're just disappointed whenever you see big changes in spot market pricing as far as not going and making radical bidding behavior in order to keep fleets utilized, but on the – the straightforward dedicated work, we anticipate good returns but they'll currently have a specified threshold.

[Stephen Gengaro:]

Great. Thank you. And then just my second question, when you think about your balance sheet, and obviously you've delevered and you have continued to do so in the fourth quarter. Your cash balance and your revolver in place, what kind of cash balance should we think about sort of necessary to run the business. I think you mentioned $4 million to $5 million per active fleet as working capital, I mean is that are reasonable way to think about it and where are you comfortable kind of letting the cash balance drift lower to?

[Lance Turner:]

Well, I think a lot of that depends on the environment. I think with – given the fleet count where we think it's troughing in Q4, we're going to want to build more liquidity cushion, because we know that we're going to make that investment in working capital in – as we reactive fleets. And so, we – yeah we've been comfortable with about $150 million as working capital is released, we've been inching that up and that's why we're at $160 million plus this quarter. Yeah, that could come down, sub $150 million in a good environment and we've got fleets deployed and we're realizing profitability on those fleets. And so, I can't see it getting below $100 million just because the revolver is so cyclical as well, so we always want to be protective and make sure we've got the interest CapEx, so we can accommodate anything that comes our way.

[Operator:]

And there are no further questions in the queue at this time. I will now turn the call back to you, please continue with your presentation.

[Michael J. Doss:]

Well, thank you for joining today and for your continued interested in FTS International. We look forward to speaking with everyone next quarter.