Good morning, and welcome to the ProPetro Holding Corporation Third Quarter 2017 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Sam Sledge, Director of Investor Relations. Please go ahead.

Thanks, and good morning, everyone. We appreciate your participation in today's call. With me today are Chief Executive Officer, Dale Redman; and Chief Financial Officer, Jeff Smith. Yesterday afternoon, we released our earnings announcement for the period ended June 30, 2017, which is available on our website at www.propetroservices.com. In addition, this morning, we posted a presentation on our website that summarizes our Q2 results. We also expect to file our 10-Q by the end of this week. Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties. Many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC. In addition, 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. Finally, after our prepared remarks, we will answer any questions you may have. So with the formalities out of the way, I will turn the call over to Dale

Thanks, Sam. Good morning, everyone. We appreciate you joining us for today's call. Before I get into discussion about our results for Q2, I thought it would be beneficial to provide a brief overview and update on what we are seeing in the Permian. With 100% of our fracturing operations focused on the Permian as well as being headquartered in Midland, we have a good perspective on what is happening in the field, not just with our operations but also from a broader perspective. The region is benefiting from healthy frac demand that is outpacing available supply. E&P companies continue to stay active while fine-tuning completion designs that yield attractive oil economics with low breakeven pricing, and we expect that process to continue well into 2018. The current rig count and undersupply of frac capacity continues to benefit pressure pumpers in the region. Clearly, the current rig count is positive for ProPetro, but even more important is the customer-specific demand for our services due to our best-in-class operational execution. As such, even if we entered into a period of declining rig count in the region, we are confident that our frac fleet will remain fully utilized over the long term with continued opportunities for growth at attractive margins. Finally, we are seeing an evolution in the infrastructure and related logistics in the Permian, especially as it relates to procuring sand closer to where our operations are located. This bodes well for our cost structure and should also help our customers manage their completion cost. We are clearly pleased by our results during the period, but it is important to note that we would not have seen this success without the continued support of our customers. These relationships are the life blood of the company and this view has served us…

Thanks, Dale, and good morning, everyone. As Dale mentioned we are very pleased with our 2017 second quarter results. We posted revenue of approximately $214 million with earnings per share of $0.06 and almost $31 million of adjusted EBITDA. As important, we remain focused on ensuring we maintain a strong balance sheet with low leverage as well as plenty of dry powder to execute on our growth initiatives. Through these efforts, we ended Q2 with a cash balance of $25 million, minimal debt of less than $17 million and total liquidity of $175 million, including a total undrawn $150 million revolving credit facility. As such, we remain in a strong position to continue to grow the business to meet the needs of our customers. My discussion today will be focused on providing a comparison of our 2017 Q2 results to Q1, as we view that as most relevant. For those interested in comparing our year-over-year second quarter results in more detail, I would point you to our 10-Q that we expect to file by the end of the week. Revenue for the second quarter of 2017 was $213.5 million or 24% higher than the $171.9 million for the first quarter of 2017. The increase was primarily attributable to higher customer activity, fleet size and demand for ProPetro services, leading to improved margins for the company's pressure pumping and other services. During the second quarter of 2017, 95.4% of total revenue was associated with pressure pumping services as compared to 95.3% in the first quarter of 2017. Cost of services, excluding depreciation and amortization for the second quarter of 2017, increased 18% to $176.8 million from the $149.6 million during the first quarter of 2017, primarily due to higher activity levels and fleet size, coupled with an associated increase in headcount…

Thanks, Jeff. Over the last 12 years, we have endured market volatility. To ensure our success in both good times and bad, we have built a business known for its superior fleet, service quality, safety record, supported by an exceptional team. Because of this approach, our business has a proven record of being a top performer financially and operationally through any volatility. As I've stated in the past, the majority of us here grew up in the Permian, so we know the area and the people well. This includes our customers, who are the best in the region, and we will continue to work very closely with them to both understand and respond to their needs. Because of these deep customer relationships, we are uniquely positioned with enhanced visibility, as it relates to the utilization of our frac fleet. This provides us the confidence to continue to prudently invest in our business, and we will continue to do so as appropriate. Having said that, similar to what we are doing with the 2 fleets being delivered in Q4, we have no definitive plans to build additional fleets unless we have a strong, long-term commitment and visibility to meet or exceed our payback goals. I want to once again thank the ProPetro team as well as our customers, suppliers and shareholders for our success to date. We remain focused on building a strong business that will drive further value through cycles for many years to come. So with that, we will open it up for questions. Operator?

[Operator Instructions] The first question comes from Praveen Narra of Raymond James.

I guess on the new builds, you mentioned that they are under 2-year terms. I guess could you talk about the structure of those terms? And I think you had mentioned -- I may have missed on the prepared remarks, I think you mentioned that they were with customers that are currently running crews with ProPetro.

Yes. We've had history and work arrangements with these 2 companies. I won't get too deep into this because of the nature of their private situation. But Praveen, these are 2 companies that helped us build this company on the foundation that we have enjoyed to date. One particular customer was -- helped us finance our second spread back in 2011. The other customer basically helped unlock the renaissance that all of us are enjoying today. So we have a long track record with them. It allows us to make this spend, not any speculation, and they do exactly what they say they are going to do each and every day. So with that, we made this add with -- and accelerated the add that we had given color to the Street going into '18.

So I guess, when we think about that 2-year agreement, how should we think about that? Is that effectively an agreement where it says that if they're going to have a crew, that it's going to be this one? Or how we do think about with that?

Well that would be correct. That's part of it. These guys are very smart. They know the spend that we are making and the investment we are making, and they will see to it that we have the payback metrics, that we have to do to make the spend, and they also have a history of sharing on the upside if commodity prices were to accelerate in a more positive manner. So I guess, you could say we basically have a floor on pricing, and we can accelerate that margin very transparently with them. So I think, that's the best way to answer that question.

That's perfect. And I guess, from a follow-up on pricing. Can you give us an idea of where we are versus the 2Q averages? I assume we progressed throughout the quarter and so we ended higher than the average. Can you give us an idea where we stand today?

Yes, I can tell you that you are absolutely correct that the progression throughout the quarter was positive and that we finished the quarter in June with a margin that was in excess of 15%.

The next question comes from Daniel Burke of Johnson Rice.

I should be able to do the -- some version of the simple subtraction, but I'll ask. To the extent that you guys now have already funded engine commitments in this year's capital budget that could underpin fleet expansions looking into next year. Could you talk about maybe the investment to complete incremental fleets using those engines?

Well, those engines, you typically are going to have 18 per fleet and the investment per fleet is about $400,000. So that total subtracted from the $29 million total that we've quoted in the past month would leave, I think, a balance of about $21 million to $22 million left on each of those fleets.

Perfect, okay $21 million to $22 million to fully get out from this point forward. Okay. And then, maybe one as a follow-up. Pro forma for the 16 fleets you will have active by year-end, will you be supporting activity in the Delaware?

Daniel, obviously, any of these fleets can go to the Delaware, and we did that by my planning, but the color that we have at this point, most of this -- most of these 16 fleets are for those customers to build out and to continue to exploit the Midland Basin assets, but they have the flexibility to take those over there if there are some production numbers that they need to meet with those newly acquired assets. So I would say flexibility is the word and optionality for our customers to do with those fleets as they like.

The next question comes from Waqar Syed of Goldman Sachs.

So my question is relating to financing for the fleets. It looks like you will have -- if you look at the cash flow table, you spent roughly, I think, $120 million, so you still have about $160 million to $170 million of CapEx spend for the next -- second half. How do you propose to fund that?

It will be funded with a revolver that, as of today, is still undrawn. And we've done a lot of sensitivity analysis in a lot of -- in these projections to try to anticipate a lot of different scenarios. But in this scenario where we stay at current level margins, at say 15%, and don't even get any additional uptick at this point, we would project that with the engines and the 2 additional fleets, we max out our leverage ratio at probably somewhere in the neighborhood of 0.75 and that occurs at the point in time right after we put the sixth fleet on the ground. And we would project that using the free cash flow from the company, that you could actually pay down that revolver balance and have it completely paid off sometime in the third quarter of 2018.

Okay. And what's your view on your working capital needs for the second half?

As we put these fleets on the ground in the past, there certainly is a working capital need as you put each one down. We projected that in the past, it's probably in the short term a couple of million dollars. After you begin rolling over and turn on accounts receivable, which will be within 60 days, then that subsides and from a -- presuming the assets you're putting on the ground are positive free cash flow, then you'll get some of that back.

Sure. So in the first half, the working capital was -- used about $37 million of cash, so what you think would be needed in the second half. Would you see -- against working capital would again require more and more funding or would it be a source of cash?

Well, I mean, it's a short-term need, but in the long run, you get that back. And so I would say yes, probably in the third quarter, you're going to see a definite need based on the fact that you put -- you're going to put 4 fleets on the ground in 4 months and with the other 2 coming in the fourth quarter, but I would say that with the additional cash flow coming from those 4 fleets that you put on the ground through the end of the third quarter, that you probably overcome that in the fourth quarter and it begins paying back.

This is Dale. I'm not as smart as Jeff, but I think you're leading into a question or -- we are not looking to dilute this equity base.

Correct. Our projections right now will definitely show, there will be no need for equity. In fact, I mean, as I have said, we anticipate being able to pay down the revolver and returning to a debt-free status by the third quarter of 2018.

That sounds good. On a different topic, number of frac stages per crew per month, how they evolved through the quarter versus the first quarter? And then also any color on pricing per frac stage in the second quarter versus the first quarter?

We did actually frac more stages in the second quarter. Some of that increase obviously is due to the 2 additional fleets that we put on the ground. I could tell you that we frac 26% more stages in the second quarter than we did in the first, but again, a portion of that is due to the 2 new fleets that went on the ground. So we were somewhat more efficient. However, I can also tell you that the percentage of vertical wells that we fracked versus horizontal wells increased from 5% to 8% and that's not an indication of any kind of trend. That's just the way that the job mix played out in the second quarter with the customers we have that are still fracking vertical wells. So you got a lot of opposing forces going on within the quarter. Obviously, fracking more vertical wells make us a little bit less efficient. So there was an increase in stages fracked, but it -- when you look at the pricing that went on in the first quarter, revenue increased 24% and we can tell you that probably about 10% of that revenue related to the additional 2 fleets that we put on the ground, and the remainder of that is due -- of that revenue increase would be due to price -- a combination of pricing and efficiency.

[Operator Instructions] The next question comes from Sean Meakim of JPMorgan.

Maybe just a follow on to that last question thinking about assessing the different components of the margin. How can we translate some of that mix into incrementals in the back half. I mean, is it fair to say that we should be able to maintain the types of levels we saw in the second quarter? And just a follow-on to that is to think about is there are any expected costs associated with pulling forward those 2 fleet deliveries?

No. There won't be any additional cost related to the fleet deliveries, and I think our general impression is that our cost structure -- I think, we've kind of weathered that storm. The 2 biggest items there may have been sand and payroll, labor. But I think that we feel like it going -- as we progress through the third quarter and into the fourth that our cost structure has stabilized somewhat. I'll let Dale talk about where he thinks pricing would be for the second half of '17.

Yes, I would, as we've given color to the Street, and also, the transparency in which we visit with our customers on a daily basis, we feel very good about where we are, and I think all of us in the space are watching commodity prices. And I have been someone that said for a long time, it's a collaborative effort between you and your customer to look at a long-term transparent, both economically, benefiting from the economics and breakeven economics of these wells. We feel really good about where we are from a margin, and we feel very confident with the customers that we have, that we will share in the upside of their economics. So I'll leave it at that, Sean.

Okay. So -- but Jeff it sounds like fair enough to think that incrementals can stay fairly strong in the back half then?

That's a fair statement, Sean.

Okay, thank you for that. And then just speaking about potential for further new builds, I mean, you each laid out the parameters very well and it's consistent with what we've heard all along, but just thinking about -- it sounds like the gating item and then would be further customer commitments to get you to add new spreads. And so what's the time frame you think that's realistic that we could start to have those conversations with customers? I mean are there one’s going on today or do you think maybe it is something that will be more aligned with your customer budget feed and maybe getting closer into the fall?

Well, I -- we're having those discussions on a daily basis and you said it perfectly, when their appetite for what we do increases, and the color and visibility for their budgets are aligned and their shareholder base, it's a -- we know the way they act in the cyclicality of this business. So we will move as fast as we can and you guys have -- we have seen the color of our competitors and the lead times for new build capacity. We're not sitting here at a 6-month to 8-month time frame to add capacity. So we have all optionality on the table for our customers and our company.

The next question comes from Daniel, John of Simmons & Company.

I guess, I'll dig into the new engine purchases. Let's assume you make the decisions that all of them, this is hypothetical here, would be used for new fleet expansion? Given the pending transition to Tier 4 compliance, do those engines have to be installed on a new unit before year end?

They have to be loaded on a trailer.

Before year-end?

They don't have to be -- before year-end, they do not -- that's included in that $400,000 price I quoted.

Got it, okay. And then when you refer to the $30 million in savings, is that savings concept, is that in the scenario where every engine is used for replacements?

For replacements, no, no. In fact, the number probably really comes more from a thought of a new build in the sense that we've been quoted a price increase for a Tier 4 frac plant trailer, that's probably 35% higher than what we're paying now. And so when you to take the 86 engines times that 35% increase, that's how you get to your $30 million.

I see, okay, so not a P&L impact directly.

Correct.

And then notwithstanding the expansion of the cementing business which you highlighted in your release, can you speak to timing, magnitude of further expansion efforts with the other product lines, sort of where you would like to be 12 months from now, et cetera? More conceptual.

Yes, John, I think those adds are pretty small in magnitude at this point. We will continue to be opportunistic, but what I would say to that, we won't do anything further that will give stress to our CFO. And so we like those -- that business and others that we are in. But -- and we will continue to be very flexible there. But not much color on more adds on those other offerings.

Fair enough and then I'll just squeeze one in. Can you say have you bought any trailers for the 86 engines?

Well, that's included in the price. Yes, our supplier is actually taking care of that, yes.

The next question comes from Will Thompson of Barclays.

Maybe just on the new build cost of $650,000 per horsepower listed in the slide deck. Is that an average for fleets 11 through 16 or are we just talking about fleets 15 and 16?

No, that would be an average for everything we put on the ground in 2017 and with that engine purchase, we think that we could maintain that for 4-plus more fleets, if we so desire. We're not giving guidance for that, but if we desired, we could maintain that price.

So you think you'd still build it around that $650,000?

Correct.

Okay. And then Jeff you mentioned a 2 or 3-year payback based on EBITDA, I just want to make sure -- to clarify that. Is that EBITDA, less CapEx, how do we think about the...

That's purely EBITDA. If you factor in maintenance CapEx, obviously, that's more of an extended period. At current, CapEx levels -- maintenance CapEx levels, that's probably that's a number that approaches 4 years, I think, that as we progress through the stainless conversion and other emphasis, that we are putting on maintenance and trying to minimize those costs, I think, we would hope to think that we would get that 4-year number down to 3.5 years with continued improvement.

Okay. And then just a clarification on the sort of a Tier 4 mandate that -- so if those engines are bolted onto trailers, do you have to make a decision whether it's going to be part of the maintenance program or new build by year-end or how do we think about taking the engine off the trailer for it to replace an older engine?

Yes, those can be used for whatever purpose you have them, either new build or replacement.

Okay. So you still have flexibility there.

The other deal in that regard is the third option with those engines, we feel very -- and it is the reason why I've made it an easy decision, as we really do believe that those engines will have a market value, that we could -- if need be, if we wanted to, we can probably sell those engines.

One last for from me. Just thinking about the evolution of in-basin sand and the implications there, how does that change the competitive dynamics within the Permian? How do you guys think about how that could change how some of your larger vertically integrated peers will be operating in that basin?

Well, I'll just -- I think, the way to answer that, since we live here and play in those sand dunes, we know that better than most. And if there's going to be a competitive advantage, we're going to be right in the middle of it. And the way we've ran our business from a sand logistics and supply chain side, we have probably more flexibility, to play there than most. So I think, that's a long way around an answer of -- I like our ability to take advantage of that better than anybody that we -- in the space that we play in.

[Operator Instructions] The next question comes from Matthew Johnston of Nomura.

Just one quick one from me. Dale, I wanted to get your current thoughts on horsepower per fleet for ProPetro and where you see that kind of evolving over the next 12 to 18 months? We've heard from a bunch of your peers that their own horsepower per fleet requirements keep drifting higher with higher service intensity and the desire to add some redundancy at the well site. I think you guys are probably starting at a higher level than most of your peers, but just curious if you see any scope or potential for your own horsepower per fleet requirements to drift higher over the next 4 to 6 quarters?

Matt, I think, we're very confident in that 45,000 number. And it -- I'll just speak to us specifically, that 45,000 number is what we're comfortable with and how well our people have maintained our equipment. So there is a lot of reason to add capacity on location if you're having lot of trouble with your horsepower. But I don't see anything from our customers and the changes within their well design and frac designs that would request expanding that horsepower on location. We've got a lot of situations where maybe the rates are not being as high in certain areas as they were, so that gives us another reason to feel pretty good about that 45,000 number. Hopefully, that's gives you the color you were looking for.

And this concludes our question-and-answer session. I'd now like to turn the conference back over to Dale Redman for any closing remarks.

Thank you. I'd like again thank all of you for joining us today. I would also like to reiterate the importance of the manner in which we're growing our business. As there is a lot of pause within our sector to talk about building new frac capacity, I can confidently tell you that we have a battle-tested business model that has successfully produced structural through-cycle returns. Our decision to continue to organically grow is championed by our best-in-class utilization, best-in-class customer base, low new build cost, the finest employee base in the country and a history of performance in the field that is second to none. We view these decisions as accretive and will continue to closely examine additional opportunities for growth. Thank you all again for joining us, and we look forward to speaking to you soon.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a great day.