ProPetro Holding Corp. (PUMP) Q2 2018 Earnings Report, Transcript and Summary

Good morning, and welcome to the ProPetro Holding Corporation's Second Quarter 2018 Earnings Conference Call. At this time all participations are in a listen only mode. A question-and-answer session will follow managements prepared remarks. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sam Sledge, Director of Investor Relations. Please go ahead.

Thanks, Brandon and good morning, everyone. We appreciate your participation in today's call. As in the past, with me today are Chief Executive Officer, Dale Redman; and Chief Financial Officer, Jeff Smith. Yesterday afternoon, we released our earnings announcement for the second quarter ended June 30, 2018, which is available on our website at www.propetroservices.com. In addition, this morning, we posted a presentation on our website that summarizes our results. 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 the listeners to review our earnings release and the risk factors discussed in our filings with the SEC. 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. Finally, after our prepared remarks, we will answer any questions you may have. So, with that, I'll turn the call over to Dale.

Thanks, Sam, and good morning, everyone. We appreciate you joining us for today's call. Following our significant success in this year's first quarter, I'm pleased to report that our second quarter financial results for another record for the company. Since going public in early 2017, we have grown the revenue every quarter and the second quarter was no exception. Driving our performance was continued strength in activity in the Permian Basin, growing demand for our fully utilized frac fleet and outstanding execution by our operations team to close collaboration with our blue-chip customer base. Key financial highlights of our record results include revenue of $459.9 million, which was 19% higher than the first quarter of 2018. Net income of $39.1 million or $0.45 per diluted share and a 25% increase in adjusted EBITDA to $96 million, which represents a margin of 20.9% and almost 100 basis point improvement from this year’s first quarter. As we've discussed during the past few calls, we expect in 2018 would be a year in which enhance well side performance and execution through customer and supply chain partnerships with differentiate pressure pumpers as the Permian transition to more of a manufacturing mode. As such, we optimally positioned ourselves through the development of an industry leading fleet, supply chain and differentiated service offering to succeed in this environment. And we believe our results for the second quarter speak clearly to the validity of our strategic efforts. The second quarter was highlighted by continued efforts of our customers to drive further efficiencies and their completion efforts. Primarily due to an increased percentage of zipper work. Also driving margins during the second quarter or incremental efficiencies in our operations and continued close collaboration with our partners to ensure maximum flexibility in our supply chain. With the opening of additional sand mines in West Texas, we are continuing to see growing demand from our customers for regional sand. During the second quarter, nearly 35% of the sand we pumped was regional as compared to 15% for the first quarter. With the outlook for even more regional sand entering the market in the coming months through both new mines and increase capacity of existing mines, we expect to see even more of our sand being sourced locally. The result for our customers has been what we're will completion cross through enhance supply chain efficiencies as the product are closer to the well side, thereby avoiding rail disruptions. In the current manufacturing mode environment, the ability to mitigate risk and avoid bottlenecks is crucial for our customers. And I want to thank our operations team, customers and supply chain partners for their flexibility and out-of-the-box thinking to help us differentiate our performance at the well side. We are also seeing a focused on our growing force in our customer base to collaborate with other surface technology innovations that will allow us and other third-party services to minimize non-productive time on location. The second quarter also benefited from continued full utilization of our best-in-class frac fleet as well as the deployment of another new build 45,000 horsepower fleet in April. This Fleet is operating under a dedicated agreement with one of our existing customers in the Delaware basin, where we now have a total of four fleets deployed. We ended the second quarter with 19 frac fleets with the total capacity of 860,000 horsepower, which was more than 5% higher than at the end of the first quarter. We previously announced our plans to build and deploy our 20th fleet in this year's fourth quarter, which is also dedicated to an existing customer for long-term use. We currently expect to end the year with fleet capacity of 905,000 horsepower more than 115% higher than the 420,000 horsepower of fleet capacity we had at the beginning of 2017. We are also seeing growth in other services, including last month's deployment of another newbuild cementing unit, which brings our total cementing capacity to 18 units. Driven by customer needs, we planned to deploy two more newbuild cementing units later this year. The result will be year-end total cementing capacity of 20 units or nearly 40% higher than at the start of 2017. We are also seeing great results from our first large diameter cold tubing unit that was deployed earlier this year. We look forward to capitalizing on additional growth opportunities in our cementing operations as well as in our cold tubing and other service offerings as appropriate. I'll now turn it over to Jeff to discuss our financial results in more detail. Jeff?

Thanks, Bill and good morning everyone. Looking at our sequential results for the second quarter as compared to the first quarter of 2018. Revenue grew approximately 19% to $459.9 million from $385.2 million in the first quarter, contributing to the increase was a larger fleet size as well as fewer seasonal downgrades than the prior quarter leading to an improved profitability for the company's pressure pumping and other services. During the second quarter of 2018, 96.9% of total revenue was associated with pressure pumping services, which was consistent with the first quarter of 2018. Cost of services excluding depreciation and amortization for the second quarter was $351.9 million as compared to $298.1 million for the preceding quarter. The increase was primarily due to higher activity levels and fleet size along with an associated increase in headcount. As a percentage of pressure pumping segment revenues, second quarter pressure pumping cost of services remained flat with the first quarter at approximately 77%. General and administrative expense was $14.2 million as compared to $11.9 million for the first quarter of 2018. The increase was primarily attributable to higher payroll cost and stock compensation expense. General and administrative expense exclusive of stock-based compensation and deferred IPO bonus was $12 million or 2.6% of revenue for the second quarter of 2018. Net income for the second quarter of 2018 totaled $39.1 million or $0.45 per diluted share versus $36.7 million or $0.42 per diluted share for the first quarter of 2018. Adjusted EBITDA increased approximately 25% to $96 million for the second quarter of 2018 from $76.7 million from the previous quarter. Adjusted EBITDA margin for the second quarter of 2018 was approximately 21% as compared to the approximately 20% for the first quarter of 2018. Turning to the balance sheet and capital spending, we ended the second quarter with cash on hand of $27.1 million and total debt of $105.7 million. During the period we incurred $70.5 million of capital expenditures which primarily reflecting spending on our growth initiatives and maintenance capital. Maintenance CapEx was higher than expected in Q2 and that excess was partially driven by our record level of efficiencies and operational throughput during the quarter. We expect maintenance CapEx to normalize in the third quarter based on new maintenance CapEx initiatives recently instituted along with more normalized efficiency metrics. Finally, total liquidity as of June 30, was a $131.3 million including $27.1 million in cash and $104.2 million of capacity under the recently expanded ABL. Our all possible shareholder return initiatives remain on the table proceeds from near term future cash generation will be prioritized towards debt repayment and to fund our previously announced growth initiatives. With that, I’ll turn it back to Dale for his closing comments.

Thanks, Jeff. As we look to the remainder of 2018 and into next year, we believe we are well-positioned for further differentiation and continued success. The fundamentals of operating in the Permian basin remained solid and we are seeing a strong need for efficient services. The efficiencies we saw over the full three-month period contributed significantly to our record operational and financial performance during the second quarter. And while we remain confident in the eventual shift of full manufacturing mode in the Permian, we do not expect the transition will be linear in nature. As a result, we are not anticipating continued month-over-month increases in efficiency during the second half of 2018 at the rate of change we saw in the first half of the year. Turning attention to a broader industry discussion. Lately there has been significant speculation by our peers and others about potential weakness and pressure pumping services due to crude takeaway infrastructure constraints in the Permian. While today, we have not heard about any plans from our customers to slow down their frac programs, we are keeping a close eye on the situation. If we do see a slowdown resulting in significant slack in horsepower market, we expect that we will be temporary in nature given the extensive additional takeaway infrastructure coming online over the coming months. In that environment, we would expect our pricing and utilization to remain mostly flat as we flex to accommodate our customers evolving needs. We believe we are best-positioned for ongoing differentiation relative to our peers given our industry leading execution and service differentiation and support of long standing relationships with our blue-chip customer base. You’ve heard us say a million times that our customer focused methodical approach and differentiated service offerings has served us well in the past. And we believe it will be rewarded further in the future as customers focused their work with performance leaders like ourselves. The bottom-line is that we have been in this business many years. We have succeeded through multiple cycles by taking the long-term view with our customers, while also supporting our supply chain partners and other key stakeholders. This is deeply rooted in the culture throughout ProPetro. It’s a key part of our DNA and it is why I have unwavering confidence in our ongoing success in both the near and long-term. So, with that, we will open it up for questions. Operator?

[Operator Instructions]:

Good morning. Thanks for taking my question.

Morning, Tommy.

So, with revenue up almost 20% quarter-over-quarter you guys called out a more efficient job mix as part of what drove that. can you give us a little more detail there on how it changed, and then also should we infer that there wasn’t a whole lot of change in net price in Q2 and what about sand was there any noise from sand contribution quarter-over-quarter or not so much?

I can tell you that pricing was flat in the second quarter as far as the efficiency metrics. The stage is pump per fleet increased by more than 10% the pumping hours per fleet for the quarter increased 13% quarter-over-quarter and those numbers were driven by an increase in zipper stages from 69% in Q1 to 74% in Q2. And vertical stages declined from 6% to 2%. As with regards to any additional change in contribution from sand, there is nothing, and neither, I don’t have any information at this point that would lead us to think but that had a dramatic bearing on differences between Q1 and Q2.

Okay, thank you. That’s helpful. And then my second question, stepping back a little bit, you’re starting to see several different competitive strategies unfold here, where you’ve got folks like yourselves, who too have outperformed particularly in 2Q on the dedicated model. Then you’ve got others plan in the spot market who sell very choppy price and utilization trends. And then you’ve also got some of the larger players who appear to be getting pretty aggressive on price in the name of market share at the expense of margin. So, how do you guys see this competitive environment evolving over the second half of the year? And then, to what extent, do you think it will have an impact on you all or not, given what some of these other folks are doing.

Yeah, Tommy great question and a lot of different things coming out of a lot of different camps. I think we’re going to stay true to what we've said since going public and the way we brought the platform. We can control what we can control and that’s our execution on locations. I think I’ve been very clear from day one, since going public that the two things that you have to take care of in this business is staying focused on your customers and taking care of your people. But the rest of the charter is just nowhere. So, we’re going to be very clear on taking care of things on location and focusing on those things. And, I think our customers will reward us with that execution and at the end of the day, it’s all about what goes on at the wellhead. And we just need to outperform and win back the game.

Got it, Thank you, all, that’s all for me.

Thank you.

Our first question comes from John Daniel with Siemens & Company. Please go ahead.

Thanks. Good quarter. Based on your commentary about having not seen any changes yet from your customers, it would seem to me that your Q3 topline could potentially be up slightly just given the full quarter impact of fleet 2019 as well as, you know some of the small additions on cementing. Is that a fair view?

I think, I would - I think flat is a more fair view, but it very well could work out that way. You had to tamper that a little bit as we moved to more regional sand. I think that’s the one thing. At the end, we had 35% of sand top this quarter was regional sand, we know that's going to go up, which is good news for our customers, because it's going to lower their completion cost. So, I would tamper it with that.

The other thing John to add to what Dale just said is that we anticipate in Q3 probably having one additional self0source fleet.

Okay.

That would also tamper that revenue number.

Fair enough. Is there any impact to EBITDA per fleet?

No, we would not anticipate or project any difference there.

Okay. Jeff, for you the loss on disposal of assets jumped sharply this quarter. And I'm just curious if you can elaborate on what percent of that is fluid expense and just some commentary on why that increase and is that the right run rate going forward?

Yeah. Couple of things, first of all, fluid ends was about 75% of that loss on share number for the quarter. And that higher number kind of goes right in line with our comments with regards to our higher maintenance CapEx in Q2. That being driven primarily by the very high amount of throughput and efficiencies that we experienced in the quarter. But also, an additional, I would make a comment that many times we’ve talked about how maintenance CapEx is something that’s very inconsistent on a month-by-month quarter-to-quarter basis. And in Q2, I think we had something of anomaly that drove some of those higher maintenance CapEx numbers. And I can't tell you that given what we have experienced thus far in Q3, we would expect those maintenance CapEx numbers to fall back in line with previous numbers.

Okay, thank you. And then the last one for me, I don't know it's not that material, but can you just comment on the – what the margins are with the cementing business. Any change dramatically Q2 to Q1 as you deploy more capacity, just some color would be helpful?

Yes, those numbers are slightly better than frac, so we were – its somewhere in that the mid 20ish range.

Thanks guys and good quarter.

Thanks, John.

Our next question comes from Kurt Hallead, with RBC. Please go ahead.

Good morning.

Good morning, Kurt.

So, Dale maybe starting with the question for you, right. You guys obviously have very strong customer relationships in the Permian, sort of you well through the cycle downturn clearly serving you well as business is ramping. Given the context that you mentioned about the Permian takeaway and your customers given no indication yet if you will and given your relationships with those customers. What – are your customers kind of already booked up with takeaway capacity and given how well you know your customer base what kind of – how many of your customers do you think a risk of not being able to take advantage of current takeaway as the new stuff is build?

Yes, I think, you know we work for and the plant is out there, and it becomes clear each day the folks we work for are pretty much going to be on state by a lot of these chatter and noise. They have been here long time for many, many years, they know how to navigate through that. We don’t see our customers acting any different than they did, for the eight years we have built this platform. This customer base has built our company, we never speculated on any capacity as we added, it’s been very seamless, very transparent. We don’t see anything that takes us away from that and we’re very fortunate to work through for those guys that have plan their business and had mitigated the risk on the takeaway capacity side.

Okay. Appreciate that dynamic. And then maybe to follow-up on one of the prior questions. Where you did talk about some revenue guidance here kind of revenue progression I should say in the third quarter and it kind of being flattish, despite the fact that you have a new crude, and some cementing fleet coming through. And part of that with sand relate, right. So, can you give us some sense, like what percent of that revenue flow through is sand, so we just we can get it kind of a more of a pure run rate, when we think just back your frac fleets and your cementing units?

I mean I don’t think we have a specific dollar effect to percentage effect to flow through, what is going to be limited to just sand, at this point in time.

Maybe we can get...

We could give more granular offline, Tommy to answer that question.

Okay, that’s fair enough; I’ll do that offline then. Appreciate that. Thanks guys.

Our next question comes from Jim Wicklund with Credit Suisse. Please go ahead.

Dale, I'm glad you brought up the potential slowdown for the first part of the call, I am surprised that nobody calls to tell you guys that’s Permian was crushing.

Thanks Jim, we can always count on you to give us…

I would have been happy to tell you if I knew that you didn’t know, Midlands is not that far from Dallas. I have gotten a lot of questions on the 20 fleet you are adding. The question has been Delta Melting’s are slowing down and the other thing is that we’re hearing the margins are going to drop by 35% over the next couple of quarters. Can you talk a little bit about the 20th fleet you are putting out with a dedicated customer? I know you can’t tell me what the margin is, but can you tell me where it is relatively to everything else you're doing these days. Are you having to bid work down 10%, 15%, 20% to get these fleets order?

Jim, there is a lot in that question, absolutely not is the answer to bidding down this. We have been very clear, but what I’ll pay back metrics are going to be for this equipment add. We’re not going to deviate from that. I think I've got a question the other day about this downturn, let me be clear, this is not a downturn. This game is just getting started. We’re in the seat of this transition and so we’ve got a lot more demand in that 20th fleet going into 2019. So, I can’t speak for others. The pricing discussions are not something we’re having at any office that we’re working for with any of the management teams. They have their fiduciary responsibility to take care of their company, but if you’re helping them meet the economic results of what rate of returns these well economics is, I don’t think you’re going to have to worry about reducing pricing.

And let me do my follow-up which is basically more of the same and I know you answered, but I need to hear it really and that is for the last couple of years every quarter, all the pressure pumping companies out there have said that they’ve gotten increased pricing through the last two years of the upcycle, because we negotiate prices every quarter and so now everybody realizes that that pricing is going to decline every quarter as every quarter you reprice every spread you have with your customers. Is that how it works?

No, sir. I think - Jim I think the first time that we probably met was at Analyst Day and we methodically laid out a plan of our pricing strategy, which is very transparent, very seamless during this recovery. And our customers helped us, and our people helped us to get to those pay back metrics and that’s what it's going to take to continue to develop this acreage out here over the long haul. If we were just running our business quarter-over-quarter, that’s another discussion. We have decades of development with this customer base. That’s the structural change in this business we’ve talked about over and over. And that’s why we’ve been so focused here in the Permian to differentiate ourselves. It’s an unbelievable thing to watch and as we’ve listened to a lot of the narrative, we’re amazed. We’re not seeing that type of panic in our organization or within our customer base.

Okay. Let me sneak one last one in inflation. Midland has been notorious for the last year about the difficult in hiring people and you talked about how you don’t have a problem hiring people because they’re friends we already work with, but in general have you seen an inflation pick up, slow, stall, what’s been the impact to your inflation measures over the last couple of months?

Jim, we’re not seeing any inflation, and nobody has doubled their horsepower in the last 12 to 14 months like we have. Our people have a great track record of hiring and retaining and maintaining people and our people are happy, we’re paying them well, it’s a great environment to work in. So, we’re not seeing any inflationary issues as we move in for the year and beyond. And to the extent we’ve had any increase in any hourly rates on a sporadic basis. We’ve been able to cover that with additional revenue, payroll cost as a percent of revenue have not deviated as we’ve gone through the last six to 12 months at all, it stays in that 9% to 10% of revenue range.

Thank you, Jeff. Dale, thank you very much. Appreciate it guys.

Thanks Jim.

Our next question comes from Praveen Dara with Raymond James. Please go ahead.

Hi, morning guys. Dale, I wanted to clarify on this because I was throwing down a little if I got it down properly or not, but towards the end of the prepared remarks you were talking about the month over month efficiency gains for the second half of the year, obviously 74% zipper fracs is great, were you suggesting that the percentage increases slow or are you suggesting that we could see that revert downwards?

We’re just saying it won’t be at the same rate from an upward trend that that rate of change but not yarding down.

Right. Okay, great. Just wanted to make sure I got that correctly. So, some of your customers kind of reported that raising [indiscernible] which is great, but they talked about increasing pad sizes and so I guess I was curious from your perspective of the average size that you guys tend to be working on of a pad and if you could how long you guys are staying on location?

Yeah, it's 4 to 6 and probably on location 20 days at a time or 20 plus.

Okay, great. And then last one for me, can you talk about the build decision from here on an incremental fleet and I guess you could talk about how you think about how the electric frac fleet to kind of play into that decision-making process?

Yeah, I think your kind of touching on a couple of points from a guidance perspective as we add capacity. I'll answer that one first. Obviously, we've not given any guidance, we have inbound demand for several spreads in the first half of 2019 for sure. And it's gaining pace and those conversations are ongoing. So that's going to be talked about it a different time. Our focus is to pay down there again. And balance that with customer needs. As far as the electric fleets, we're watching that we're working with our manufacturer, in that arena, we think it's actually going to be an opportunity to do a lot of neat things. Probably not something to talk about on this call, but look forward to that and probably invoicing, any technology that lowers costs, increases efficiency and extends the life of this equipment as we go into manufacturing mode, and even larger scale. I hope that answers your question Praveen.

Yes. That's great. Thanks a lot. Great quarter guys.

Thank you.

[Operator Instructions] Our next question comes from Sean Meakim with JP Morgan. Please go ahead.

Thanks. Hey, good morning.

Good morning, Sean.

So, Dale, you’ve been pretty clear on your confidence in your customer’s ability to get the product to market. As we look towards your-end, do you see any, we’re still lower utilization, maybe just some greater seasonality with completion programs wrapping up early on the calendar year basis? Or does that not seem to be an issue for your customers this year, maybe just regular whether it’s the only concern you have?

I think that’s correct. I think whether would be the only disruption we see. I think all of our customers are moving forward and with their plans and even adding. But the holidays and whether really the 2 situations going into Q4.

Okay. That’s helpful. And then thinking about the fleet we talked a little bit about perhaps for the profitability to look like on the 20th. But just maybe across the fleets that you’re running today, you’re averaging about 20 million of fleet of EBITDA on annualized basis. How wide is the band across the portfolio fleets from the lease profitable to the most?

As on a month-by-month, quarter-by-quarter basis, there is a difference between the top and the bottom. But I can also tell you that sometimes what’s the bottom one month is the top the next. So that’s why kind of looking at it across the board and looking at an average per fleet is probably the best way to evaluate.

Okay. If you said, it didn’t sound like there is maybe tremendous variance.

No. It’s not a tremendous variance, but it does vary month-by-month.

Sure, thing on job next anything else is going on? Okay. Very good. Thank you, guys.

Thanks Sean.

Our next question comes from George O'Leary with TPH & Company. Please go ahead.

Good morning, guys. Good quarter.

Thanks George.

I guess, the efficiencies were impressive in the 13% increase in hours pumped quarter-over-quarter was certainly impressive to see. How many fleets do you guys still have doing 12-hour work that you might be able to convert to 24 or all your fleets now doing 24-hour for your customers?

The majority is all 24 hours. So, we’ve got a very, very high percentage and it's operating on 24-hour now.

Okay. And then just curious clearly you guys are executing well for your customers and we're certainly hearing feedback from the operators themselves at least at our shop. There is a bifurcation in performance in the field. And as we've talked to historically, there is the potential for you guys to walk up some longer-term type contracts versus the dedicated agreements that you guys average is certainly serving you well now. But have those discussions continued? And any update there on the potential just on long-term contracts possibly with some very large customers?

George, when you talk long-term, the majority of these people were working for now, we've been working for last eight years. So, I think kind of where you're going would we be open to that. If that's what our customers need on their side of the equation or those type of contract, we work with them to do so. This customer base has already proven its commitment to us. And we're very comfortable where we are with them. And I think as long as we execute safely, efficiently, we'll continue to have whatever opportunities are out there with this customer base. So that's not something we're trying to push. It's a lot better when it comes from that side than if we're forcing that issue. We're very comfortable with the terms in which we're operating with this customer base.

Right, I appreciate the question. Dale, Jeff or Dale for one of you, I'll sneak one more if I could. Just on that the maintenance program side. You guys said you made a little bit of changes or planning to do some changes that maintenance program that may smooth that out or reduce it going forward. I guess, could you elaborate on kind of the blocking and tackling there, what specifically you guys are aiming to do? Is it changing meddlers, as you changing vendors just changing the program itself in the way that you handle maintenance. Just curious from what color on that front?

Yeah, I think in the first half of the year, we initiated a program of really gone through a very detailed analysis of the vendors and the products that they're selling us and whose product last longer quite frankly. I think some of that will come to fruition here in the third quarter. In addition to evaluating those products, I think we've also added some monitoring technology to help identify some problems in advance of failure and perhaps save us some dollars. And we are also experimenting with balancing some horsepower across fleets that would permit us to actually operate the equipment on a lower gear and thus potentially save some maintenance CapEx dollars.

Thanks very much guys.

Thank you.

Our next question comes from Daniel Burke with Johnson Rice. Please go ahead.

Yeah, good morning guys.

Good morning.

Hey Jeff, maybe stay with the topic of maintenance CapEx with one last one. But when you talked about those go forward expectations normalizing. Does that mean the 6% of rev mark is still appropriate or the lower sand revenues and more pump hours swing that ratio?

We're not changing our guidance on that at this point in time. I will tell you that first quarter we were pretty much right on the mark. Second quarter was higher than that. And on a year-to-date basis, we're probably booking numbers that are a point or so above that. But with the initiatives that we put in place in the first half of the year that we think will come to fruition here in the second half of the year. We're backing on that to not change our guidance for the total year.

Got it. And I guess just a small point. Can you discuss or adjust the non-fluid end related loss on disposal in the second quarter?

It's just some other related things, I mean you've got power in some engine replacement a small model transmission replacement. Meaning anytime that we actually with higher or dispose of an asset prior to the end of its book life that generates a loss on sale. And with as many pumps as we have now operational, the amount of power end engines, or transmissions is very, very small. But obviously on occasion, you’re going to actually have a bad component and have to retire it and replace it prior to end of its depreciated life.

Got it, that’s helpful and then maybe one last one a much softer question. But as you guys look at your experience in the Delaware over the last six to nine months as you have ramp there, I mean any learnings you can share with us, how it’s different, whether pressures or timeline location, pad size, size of stage pumps.

There is a step up in pounds of sand pumped prefer it and a little higher pressure. So far with the areas we’re working. Nothing to cause us issues, or concerns, just that’s the difference in the Delaware.

Fair enough. Okay, all right Dale I appreciate that color. Thank you, guys.

Thank you.

Our next question comes from Dave Anderson, with Barclays. Please go ahead.

Hey Dale, so it seems like most E&Ps this quarter been beating productions going to further ahead on their spending prices and expected. Couple of questions around that, I guess number one, is that the case that you see with your customer base. Two, what do you think is driving, this is the just greater efficiency on kind of the industries. And three, I think you already answer this question, but is there a concern I may - your budget little bit earlier than expected or do you think they have to revise those budgets up.

Yes, Dave we don’t think that’s a big issue, with this particular customer base, that we have, and I think you are seeing that in some of the announcements coming out and expanding their budgets. The efficiency is real obviously all of us are running at a high level and probably a little higher than what the industry expected. I think your probably main goal here, do we see any slowdown from a micro perspective to perpetual of people laying equipment down in Q4, and we do not see that on the horizon for us. I cannot speak for other customer basis within our peer group.

Separate question, you’re primarily on dedicated fleets, I think your all – all of your fleets are on dedicated agreements and obviously dedicated is not the same thing as take or pay, I think we all recognize that, but there is clearly the stickiness of this relationship, I wonder if you could talk a little bit about. In terms of your supply chain and the efficiency and how that concur some lower pricing from others. I am just wondering, I guess I am getting as the customer come – if someone comes to one of your customers for example is 20% lower pricing. That customer I think give something up. Can you talk about -- I am sure there is a point where pricing always benefits? But can you talk a little bit about kind of how, about what you’re bringing to the customer, why that relationship is stickier because I think some, we have seen some other drops in dedicated cruise, but maybe you could talk about why you view the dedicated model differently from a customer standpoint.

I think if you look historically of how we transparently crest [ph] our services. And we methodically collaborated with our customers, its complete transparency. They never had to wonder where we were. They could plan their business, they knew what our pricing was going to be, through the cycle and the most important thing is here, they helped us build this platform. That equipment was built for this customer base. We have 19 of the 50-ish fleets running for this customer base. We’re a part of their completion, operations and as long as we profound, and execute in the manner in which our people are doing at this time, we have not been the one pushing price on a quarter-over-quarter basis. We’re looking internally to help, get to that margin that we had to have to invest and expand our business. And we’ll continue to run our business that way. And we can’t control like everybody else does or says. We’re willing to the market is going to be what it’s going to be, and we hope to have overtime in some small way help this customer base be successful and exceed expectations. So, that’s a lot of stuff, but I hope that helps in some way confuse or help understand our methodology.

No, I think what are you saying is, you’re trying to be more of a partner and more than extension of your customer and trying to work through them, I think that's kind of what you're getting at which makes a lot.

It’s a structural change, the old paradigm of the service company taking advantage of the producer, when it can and the producer taking advantage of the service company when he can, or she can. That model is over as we see it today, in this manufacturing mode. And it’s continuing to be more evident, as time goes on. And, we like where we are and where we’re going, and we do not have as much uncertainty about the future as others.

Dale, you’ve said in your prepared remarks, you’ve talked about collaborating with other surface technology innovation to minimize efficiencies. Can you expand on what you’re talking about there? I’m not sure, if I know exactly what are you talking about.

Couple of things, there is some technology that’s helping wireline providers get on and off. The wellhead much more efficiently which helps speed up the process in between stages. The other particular one, I mean another one is the different manifold systems that allow to us to not have to see iron from wellhead, one wellhead to another during the change of where the well stages. Those are two of the biggest movers today from a surface innovation standpoint.

Are there more of these innovations coming down the pipe that you are seeing out there?

We think so, and we think this is a very innovative industry. Sometime the rate of change is not as fast as we would like but it’s mainly innovative and it adapts very quickly. So, that will continue.

Great, much appreciated. Dale, thanks. David.

Our next question comes from Ken Sill with SunTrust. Please go ahead.

Nice work in the end, very interesting call. On the higher loss on disposable assets. It sounds like we’ve got here is this more just kind of it was lumpy because stuff happens or is this an indication trend that maybe this should be driven more as a percentage of revenue or maybe we should see a change in depreciable lives on some of these assets, as far have these consistent losses on disposal.

I think, I kind of already said, but the -- I think this one quarter from where we sit today and what we’ve seen thus far in the third quarter. We believe that the second quarter was something as anomaly. We see in third quarter these numbers more normalizing back to the closure to the 6% of the revenue number that we’ve actually always given guidance to. So, we don’t think that second quarter was necessarily a trend, but more of anomaly certainly it was probably highly driven by the high amount of throughput that we had in the second quarter.

Yeah, and that’s what I was wondering which is the loss on disposal line because the R&M line is buried in your cost of goods sold. So, something kind of popped out because it was -- the stuff run out faster and the dispose of -- that’s was triggering losses. You write it after replacing.

Correct. That's correct.

And then another question I have got. Just philosophically, so your customers help to build this. You look at a rate of return, you’re not pushing pricing, greed is a powerful motivator. And I know several of your customers that I go talk with, they're all like pressure pumping prices are coming down, we’re going to get it cheaper. I guess part of your strategy is to self-selects so those aren’t the customers you are working with or is that just, if it gets bad enough that’s what happens. But we’re looking at as a temporary slowdown, not a correction.

I think what you’re seeing is differentiation in philosophical views of how to run these service companies. There is a lot of ways to play it. We don’t have all the answers. But we’ve been doing it in a long time. And we like consistency, visibility and all those things help us plan and run our businesses which -- that’s just who we are, I mean everybody has to understand who is driving the boat and it’s the E&P companies. They don’t have a problem with us making money and providing them with good equipment and good people. That's what's been drive this. And if the customer is wanting to reprice everything quarter-over-quarter, we've got to pay for this equipment and it takes two years on an EBITDA basis and 3 years on a free cash flow basis. We've got a work for those customers that allow us to do that. These fleet costs $30 million to $35 million and we've got to pay for them. That's a simplistic view of how we view pricing.

It makes sense to me. Fairly the risk reward doesn't all agree with us on this one. Final question, how big does the cementing and other business have to be before you guys start breaking it out as another segment?

I mean they did the frac segment right now or the frac operating segment actually endorse the cementing obviously. And so, it would be quite a while before we would break cementing out as a separate segment.

Okay. That's kind of what I thought, but it asks question. All right, thank you.

Thanks Ken.

[Operator Instructions] Our next question is a follow-up from John Daniel with Simmons & Company. Please go ahead.

Hey Dale. I'm going to draw you a bit of a long-winded softball question here. Someone in line with what George's one of George's observations, but unlike your views nonetheless. So, there are emerging concerns about frac efficiencies and the potential impact of these efficiencies on your industry with some worry that we might not need as much horsepower as we all expect. But it's also my impression that not all frac companies are created equally and one can argue that comparing relative utilization and or fleet profitability metrics would support my impression. So, first, tell me your thoughts on frac efficiencies? Specifically, are we now fracking faster such that it's a potential industry problem? And then second, if we are in fact seeing these efficiencies, is it fair to apply those efficiencies across all frac providers again because the relative utilization profitability suggests not everybody is created equally, just your thoughts?

It's a pretty long softball question. John, I think the best way to answer that your point not all horsepower and not all of frac teams are created equal. Just as all E&Ps don't have the same views on a lot of issues. I think how we would answer that is they will continue to be efficiency on location. That horsepower it is going to be run a little harder when you don't have as much time to do routine repair and maintenance. So that's going to cause all of us to adjust and adapt. And here is really probably the way that answer it as others have pointed out. The efficiency is a very good thing for all and ball. And the more efficient all of us are, the better the economics are for our customers. And the more willing they are to be helping us succeed. So, I do not, and we do not as a company look at efficiency as a bad thing. So, if anybody is that probably a tail to assign that things may not be so good there. That's not the way we look at this at all. And we're going to push efficiency.

And that's good. Because at the end of the day if you're the E&P company you need that. But as you alluded earlier in the call about some customers coming to you now talking about opportunities in 2019 for potential expansion. I'm wondering when they come to you, is it because they are going to expand their program, or because maybe they've had a bad mill if you will with another frac provider and they want some change. And I'm just.

Yeah, I think it's because they want to add capacity with someone historically that's helped on work seamlessly on location. And we're not the only one. There are a lot of people trying to do that as well. But we're going to continue to gain that market share because of our ability to execute day-in and day-out. It's really that simple, John,

Okay. Fair enough. That's all I have, guys. Thank you for your time.

Thank you, John.

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

Thank you. Again, I just like to reiterate, and thank all the people that help and that have helped build perpetual I want to again thank our people like our customers and our supply chain, partners. And good luck, God bless. Have a great day.

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