ProPetro Holding Corp. (PUMP) Q2 2020 Earnings Report, Transcript and Summary

Good morning and welcome to the ProPetro Holding Corporation Second Quarter 2020 Conference Call. [Operator Instructions] Please note, that this event is being recorded. I’d now like to turn the conference over to Mr. Sam Sledge, Chief Strategy and Administrative Officer. Please go ahead, sir.

Thanks, and good morning, everyone. We appreciate your participation in today’s call. With me today is Chief Executive Officer, Phillip Gobe; Chief Financial Officer, Darin Holderness; and Senior Vice President of Operations, Adam Muñoz. Yesterday afternoon, we released our earnings announcement for the second quarter of 2020. Please note that any comments we make on today’s call regarding projections or our expectations, future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several 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. 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 hold a question-and-answer session. With that, I’d like to turn the call over to Phillip.

Thank you, Sam, and good morning, everyone. We were pleased with our overall results for the second quarter, given the unprecedented demand and supply disruptions the oil and gas industry face, primarily as a result of the global COVID-19 pandemic. On behalf of the entire ProPetro team, I want to thank all the first responders and medical professionals for their selfless and tireless efforts, ensuring the wellbeing for all of those who live and/or work in the Permian Basin. I continue to be amazed at our employees’ collective resiliency, given the current environment. And I want to express my deep gratitude once again for their hard work and dedication. As always the health and safety of our employees, customers, supply chain partners and other stakeholders remain the top priority of the company. And we will continue to implement best practices according to CDC guidelines and other governmental agencies to ensure safe and efficient operations for the duration of the pandemic. During the second quarter, we saw activity levels decrease rapidly in April and May, as customers responded to a continued deterioration in market conditions that began in mid-March. As such, we took swift and decisive measures to help us proactively shrink the core of our operations, save costs through collaboration and focus on innovation, we considered critical to enable a recovery. In addition to safeguarding the long-term health of our balance sheet, another key tenant in our decision making process was ensuring we protected the core competencies of our business. These capabilities support ProPetro’s clear reputation as an industry leader that provides its customers unmatched execution in an environment where its employees can flourish. As such, we took the necessary steps to streamline our operations without sacrificing our ability to respond quickly as market conditions improve, which we began to see in June. More specifically, our cost saving initiatives have included, rightsizing our workforce while maintaining our core talent, significantly reducing maintenance capital expenditures and field level consumables, negotiating lower pricing for expendable items, materials used in day to day operations and large component replacement parts, internalizing certain support functions that were previously outsourced and reducing compensation of all officers, executives and directors. Complementing these efforts, during the second quarter was continued operational and safety excellence in support of our customers’ drive to stay as active and as profitable as possible. We are working closely with our customers to ensure our collective success remains at the core of our DNA. I want to thank the entire ProPetro team for weathering the storm to the most turbulent environment in our company’s 15 year history. Finally, a significant highlight of the second quarter was completion of our previously announced audit committee internal review process and the filing of our 10-Q’s for the second and third quarter of 2019 and our 10-K for 2019. With the filing of our 10-Q for the first quarter of 2020 on July 2, we became current with our filing obligations with the SEC. I want to thank all involved for their assistance over the last year. The successful completion of these activities allow us to fully focus our efforts on the future of our business in an environment of stronger processes and controls that enhance our competitiveness. With that, I’ll turn the call over to Sam to discuss our financial performance. Sam?

Thanks, Phillip. We were pleased with our overall performance for the second quarter, given the unprecedented volatile environment. This includes generating free cash flow and positive adjusted EBITDA during the period, despite a 73% decrease in revenue from the first quarter. That said, I would like to point you to our press release and form 10-Q, which will be filed in the coming days for more detailed financial commentary concerning our quarterly and sequential results. As Phillip discussed, driving our success for the second quarter was our ability to balance the need for substantial cost reductions to immediately address the financial implications of the crisis without going so far as to negatively impact our competitive advantages in the marketplace. As important was our focus on protecting the health of our balance sheet and capital structure, which along with performance at the well site will be a key differentiator as customers determine who they will partner with as market conditions and activity levels continue to improve. As discussed in our press release, our second quarter revenues included $32.6 million of compensatory idle fees. These stems from a purchase of assets, which included contractual provisions with one of our largest customers and we’re intended to supplement our financial health during times of depressed activity. We did exactly that during the second quarter, by using a portion of these fees to ensure we could retain the necessary talent and core competencies to support our operations until conditions began to improve in June. During the second quarter, we also paid off $110 million of debt and ended the period debt-free. As a result as of June 30, we had a net cash balance of $37.3 million, as compared to the $33.7 million at the end of the first quarter. Fast forward to July 31 and total cash was $22.6 million with no outstanding debt. Total liquidity as of July 31 was $43.1 million, including cash and $20.5 million of available capacity under our revolving credit facility. We would also know that the July 31 cash balance is not inclusive of approximately $32 million in idle fees that we expect to collect sometime in the third quarter. Based on accounts receivable, less customary reserves, our borrowing base is impacted by our customer’s activity levels as well as certain customer concentrations. With the increase in activity levels, we have seen since June and expect to see through the remainder of the year, we expect to see growth in our borrowing capacity. Having said that, we view having no debt outstanding while the market recovers, as a significant competitive advantage and we remain committed to executing projects with positive returns that allow us to protect that capital structure. To support the expected continued increase in customer activity levels, we now have a view of total CapEx spending for the full year 2020 of less than $100 million, of which $54.7 million was spent during the first six months. The vast majority of capital spending for the full year will be for maintenance CapEx. We would also note that we expect virtually no spending on growth capital in the second half of this year. Finally, the steady improvement in customer activity, we have seen since June supports our current view of effective utilization between seven and eight fleets during the third quarter of 2020. With that, I’ll turn it back to Phillip.

All right, Sam, thanks. While the backdrop for the oil and gas industry, both globally and in the U.S. has improved from the lows seen only a few months ago, activity levels remain historically low. In this environment, we will continue to leverage a blueprint for success that has guided us through the many cycles of our past 15 years, as a company. Our mantra has always been and still remains to take the long view. No matter where you are in the cycle, the key is to remain close – in close contact and squarely focused on the needs of your customer. This includes helping your customer solve their technical problems at the wellsite, providing them with unmatched execution, remaining disciplined with pricing and continually assessing your internal cost structure and capabilities. While it currently appears the worst is behind us. We are not relying on the substantial recovery in all demand to chart the future of our success. As in the past, we view our performance at the wellsite to be paramount. This will help drive improved fleet level returns without the necessity of increased pricing. Having said that, as Sam discussed, we will only execute projects with a positive returns that allow us to protect our capital structure, regardless of where we are in a particular cycle. Another contributor to our future success is a commitment to the continued evolution of pressure pumping technology that minimizes the environmental impact of operations through reduce greenhouse gas emissions, and other considerations, while at the same time promoting overall safety and wellsite throughput. And some, we continue to hold a strong belief that pressure pumping equipment must significantly evolve for our industry to remain competitive on a global scale. A clear example of our commitment is our substantial investment in the electric fleet technology of DuraStim. We are continuing to test and develop the technology by working alongside conventional equipment in the field to the company, ample time to collect data and various operating conditions. Although the development timeline has been longer than we initially expected, we along with our customers expect to redeploy the DuraStim equipment on a larger scale, when testing is complete. In conclusion, we anticipate and meaningful improvement in fleet utilizations for the third quarter, as compared to the second quarter. Having said that, we remain very selective in redeploying assets and crews, and we’ll only proceed if projects meet our economic targets, most of which are likely to be with existing customers. Clearly, the macroeconomic environment remains uncertain and substantially dependent on the potential spread of COVID-19 and related impact on the global economy and discipline within OPEC plus. This backdrop does not change the focus that has served us well over many years and will continue to guide our success well into the future. This includes leveraging our Permian Basin focus and relationships with customers through best-in-class collaboration, ensuring we provide customers with innovative solutions that solve their problems with unrivaled execution at the wellsite, and proactively seeking additional ways to redeploy technology, to reduce duplication and streamline processes to foster innovation. Bottom line, we clearly understand the value of unmatched execution in the marketplace. Our customer focus remains clear regardless of market conditions, focus on fostering the long-term relationship, solve their problems and leverage an economic structure that benefits both parties. With that, I’d like to turn it over to the operator for questions. Nick?

First question comes from Scott Gruber of Citigroup. Please go ahead.

Yes. Good morning. So it sounds like a nice step up here in fleet utilized in 3Q. Where did you enter the quarter? Where do you think you’ll exit in terms of fleets deployed? I’m really asking because I’m trying to assess where you think there’s sufficient momentum here, especially at 4Q is up again on 3Q, even with the typical seasonality we see towards the end of the year?

Yes. Scott, this is Sam. I’m not sure we’ll give much more detail other than in second quarter. We obviously, as we quoted in the release averaged four quarters – four fleets, 4.0 fleets in the second quarter. The trough was below that, the exit was above that. That might be an obvious statement. But the same seems to be true about third quarter as well that our guide to the seven to eight fleets was that we came in the quarter below that, and we do expect to exit the quarter above the top end of that range.

Got you. And then how should we think about, just sticking to 3Q, the mixes high calorie works, within that seven to eight fleets versus low calorie work. And how should we think about the revenue per fleet trend via ex any fees in 3Q. And how does that translate to EBITDA per fleet in 3Q?

I think the biggest hit to revenue from Q1 to Q2 to Q3 is probably more of a pricing thing than any other factor. We do the work that we’re getting back to you right now is, as you said, high calorie work, this is all still multi-well pad, 24/7 work. So it’s just kind of right back to the usual pace as what it seems.

Got you. So good place, how should we think about the fourth quarter impact of pricing revenue per fleet and EBITDA if you would?

I don’t know if I heard the first part of your question, Scott.

Well, how should you think about the fourth quarter impact of pricing, the pricing is fully reset now into 3Q. So actually think about the revenue trends and EBITDA trends on that seven to eight working in 3Q?

I don’t know, it differs from customer to customer. I’m not sure we’re going to quote the – that kind of full net effect of pricing at this point.

Can you frame in terms of you’re getting ex fees that we – kind of 10% lower than the 1Q average? Is that a starting point?

More than that.

More than that. Okay, very good. We can continue offline. I’ll turn it back. Thanks.

Thank you. Next question comes from George O’Leary, TPH & Company. Please go ahead. George O’Leary: Good morning, Sam. Good morning, Phillip. Is there any way you could underlying fleet profitability for the second quarter x the shortfall payments. Just to think about that as a starting point for the next quarter and/or how much we can expect in shortfall payments as we look to the third quarter, you guys framed kind of a back half arrange on your previous call. But just curious, what the outlook is there for the third quarter on the shortfall side?

Yes. I think we’ve put out a range of $12 million to $16 million for the second half of 2020. And I would say, we’re currently looking at probably the lower end of that range, second half.

And George on the kind of the profitability point in second quarter not to state the obvious, but if a 100% of the idle fees were to fall into the bottom line, then you would have seen our EBITDA $32 million or more. That obviously didn’t happen during the quarter. A mix of a few things but the main contributor, probably us bridging activity gap that not – that had we not known that activity was going to recover fairly quickly. And from May to June, we might have acted a little bit differently and you might’ve seen a little bit more of those idle fees follow the bottom line. I don’t know if I’ll comment directly towards what fleet level profitability was in the second quarter, but I can say that we are turning down work that doesn’t meet our economic goals. And those goals are obviously to produce enough EBITDA to cover maintenance CapEx in the near term, and therefore have a positive cash flow at the crew level. George O’Leary: Great. That’s very helpful, Phillip and Sam. Think about the competitive landscape in the Permian, I guess, how would you describe that today, right? All these assets are on wheels. It seems like the Permian is where the activity is coming back is equipment rushing into the basin, keeping that fitting behavior very fierce, even as activity increases. Are you seeing guys have to exit and attrition occur? Just curious that view on the competitive landscape from boots on the ground perspective. Adam Muñoz: Yes. This is Adam. I think we remain confident with our crews and our ability of our people to perform day in and day out in a safe and efficient manner on location. And I believe our customers see that as well. And we’ve been fortunate enough to be able to continue to work with those blue-chip customers, as we bring on these fleets on for the remainder of the year. And those guys continue to value execution. They say for working performance and the dedication of our people out there in the field as well.

George, I don’t know that our intelligence shows any people, any competitors, redeploying equipment to the Permian at this point. Although I will say, as you guys have probably heard there’s everyone recognizes, this is a basin that’s going to respond the fastest and at least on a couple of calls, I think I picked up that people have said that they may reallocate equipment to the basin, but we’re not saying it. And unless they have a track record, I don’t see them breaking in with the top tier customers that we operate for.

I think – this is Sam. Again, the pile on a little bit more, we’ve been through this in prior cycles and being totally focused in the Permian. In times like these, I guess one could paint it as a disadvantage if equipment starts to flood into the Permian, but having the customer and supply chain relationships that we have here give us quite a few competitive advantages that others don’t have it, not being as focused as we are.

But I don’t want you to think, George, because no one’s redeployed down here. It hadn’t been a night fight on pricing. We’ve got plenty of competitors in the basin that keeps pricing under pressure. George O’Leary: Understood. Thank you guys for the color. I’ll turn it back over.

Thank you. Next question comes from Ian Macpherson of Simmons. Please go ahead.

Thanks. Good morning, gentlemen. So I also wanted to just re-hit the line of inquiry on third quarter trajectory with just simplistically with activity up nearly double. Is that enough to overcome pricing headwinds and make a stake for decent positive revenue growth, excluding a special payments from Q2 and Q3.

We think the trend throughout third quarter, we will pass that point at which the scale and amount of activity allows you to do just that. Yes.

Got it. And then there was – if I read correctly, I think there was an uptick to your CapEx described in the press release with I think it’s attributed to more utilization recovery than maybe had been contemplated. When you budget your CapEx last quarter, anything particular to comment there with the CapEx from $85 million up to $100 million or below $85 million to below $100 million, as it relates to ongoing maintenance CapEx per fleet?

Mainly due to the pace of the activity adds throughout the third quarter, originally, we were under the impression that the activity would be added at slightly more measured rate. And with the step up in third quarter, it just kind of adds to that ongoing maintenance CapEx to support our operation.

Got it. Thanks Sam. And then last one for me, fair to assume with the conclusion of the filings and the audit that this special G&A falls off starting in Q3.

Yes, you should see, it should be a significant drop off. We still have, as you know, the shareholder litigation out there that may have some numbers reflected the issue. It should be substantially reduced.

Got it. Thanks gentlemen.

Thank you. Next question is from Cameron Lochridge with Stephens, Inc. Please go ahead.

Thanks for take my questions. I was hoping we could start maybe with a high level one on just the general market dynamics you guys are seeing. Maybe if you could peer into your crystal ball, two quarters down the road. How you see the horsepower supply adjusting as we go forward? And do we – does that factoring any attrition as we move through this downturn?

Well, good question. And hopefully attrition and equipment leaving work out that way. We’ve seen the number of bankruptcies, obviously, depending on people’s margins. Right now, maybe we’ll see more of that attrition, but I’m not sure I would expect to see a lot of consolidation or attrition happened prior to the end of the year. I don’t know, Sam might have a different view of that.

I believe fundamentally that the best equipment is the first to go back to work. So until, we reach a level of utilization across the sector, that’s meaningfully higher than we’re seeing today. I think that will remain a bit unknown. I also believe that all of our peers would echo that the threshold to reinvest in older equipment continues to go up as we continue to be demanded of us to have more efficient equipment cleaner burning fuels, lower emissions. There’s obviously interest in the electric offering that reinvesting in existing older conventional equipment, the bar continues to migrate higher. So naturally, yes, we should see attrition due to that. And the other factors that Phillip outlined a little bit hard to say how much at this point, but we think given the disruption that the whole energy industry seen that it will produce quite a bit of attrition, say over the next year to two years.

Got it. That’s helpful. Thank you. And then just to talk – go back to talking about the idle fees that you guys had in the second quarter. I was wondering, if we could talk about the third quarter fees. It sounds like maybe there were some elevated costs in the second quarter that prohibited 100% of those fees to fall to the bottom line. Do we expect those costs to continue into the third quarter? Or can we expect to see those idle fees fall into the bottom line100% margin? Adam Muñoz: On a percentage basis, we believe we should see more of each dollar of vital fees fall to the bottom line. There was quite a bit of noise in moving parts from an activity standpoint, as activity slid sharply at the beginning of second quarter and then rose in the back half of the quarter. And a lot of those costs were absorbed indirectly by the idle fees operating in more of a steady state and in almost a growth mode that we’re very accustomed to. You should see more of the per dollar effect follow the bottom line that said, I’ll just reiterate what Darin said earlier. We should be at the lower end of the range that we disclosed last quarter, probably looking at $12 million to $13 million in idle fees in the second half of this year, and pretty evenly dispersed between third quarter and fourth quarter.

Thank you. Our next question comes from Jacob Lundberg from Credit Suisse. Please go ahead.

Good morning guys. I was just curious, maybe a little early, but could we start getting an initial view on how you think activity could trend in the fourth quarter? I’m not sure, if you’re having conversations with customers around, whether we’ll see the recently typical seasonal decline in the fourth quarter or independent of any customer conversations, if you have any view on that.

Well, my view is the conventional wisdom on fourth quarter on budget exhaustion may not happen mainly because I think most of the operators have just recently retooled their capital budgets for the second half of the year. And so I don’t think you’ll be facing that same dilemma that we’ve seen. Having said that, we still have Thanksgiving, we still have Christmas. So there is some seasonality involved. But I think my view, at least to the people I’m talking with is I think the activity stay strong. I don’t know if that’s because operators have hedged their production out when they took the opportunity. So they know they can at least continue to operate in a profitable scenario for them. So at least to, I’m talking to, I feel pretty confident unless we have a big hit on COVID spread that affects demand for OPEC coming off their reduction and starts putting more oil into the market, creates a crash. I see activity staying pretty steady and it may even stay pretty steady with those two criteria that I just laid out just because the productions hatched out, but that’s at least a view that I take.

Okay. Thanks. And then just pivoting here, wondering, if we could get some comments on how efficiencies trended in the second quarter for the fleets that were active out in the field, what did efficiencies look like relative to 1Q? You’ve obviously been operating at very high levels of efficiency recently, and then what’s your outlook for the second half? Adam Muñoz: Yes, this is Adam. Our efficiencies remained relatively the same, which high performing efficiencies. And we continue to see that as we bring on these the new fleets and reactivate deployments with new – with the pretty much the same customer base. We’re partnered up with a great customer core that allows us and helps us provide those efficiency at the wellhead. But yes, we have nothing to show that efficiency should drop off.

All right.

The crews has been all ProPetro employees, so they hit the ground knowing exactly what they need to do and how they do it. So there’s not really dealing with a different workforce today than we were prior to the downturn. That’s correct.

Understood. Thanks guys. I appreciate it.

Thank you. Next question is from Kurt Hallead of RBC. Please go ahead.

Good morning. Just wanted to make sure I understand a couple of dynamics correctly. When you look at the second quarter, right? If you back out the $32.6 million that you generated from that shortfall, it looks like your baseline revenue per crew would be about around $18 million per crew. So I just want to make sure I understand that correctly. And then if we do the same thing for EBITDA, it’ll put your EBITDA a little bit over $1 million on that adjusted basis. So again, just really want to get kind of a starting point to make sure I get that starting point, right? As we go into third quarter and kind of build on your commentary for improvement from there, it is? Am I understanding that dynamic correctly?

Yes. Kurt, this is Sam. I think, you’re definitely – you’re in the right direction. And the only thing I would add to that, I would just reiterate our early comment that, there were decisions made during the quarter, knowing that we had line of sight to balance an activity. So there were probably, a few more costs that we bore that – had we not had line of sight to that activity balance, we would have probably stripped out of the system.

Got it. Okay. And now obviously, with the pricing dynamics to where they are in the business, right? Even though you gave us some general sense of what that pricing dynamic could be? You’re going to get better EBITDA per crew in a third quarter, then you had in the second quarter, but it’s still going to be pretty substantially below the first quarter. Is that a reasonable assumption?

Correct.

Okay. And then lastly, for on the second half of the year, when we think about free cash flow looks like you’re putting yourself in very good position to continue to build your cash base through the second half of the year. Is that is that how you guys are seeing the world too?

Yes. Yes.

Awesome. Okay. That’s it for me. Thank you.

Thank you. Next question is from Sean Meakim, JPMorgan. Please go ahead.

Sean, we have you.

Yes. Can you hear me?

Yes.

So just to clarify a point you made earlier on efficiencies. Seven, eight fleets in the third quarter active versus four in the second, which I’m just curious, would you characterize those as fully utilized? So in other words, do we have just seven to eight fully physically crewed fleets? Or how many physically crewed fleets do you have in the field to generate that number of active crews?

Sean, I’ll clarify. I know a lot of companies in our sector calculate full utilization in different ways. We define fully utilized fleet in one month is 25 working days in one month or 75 working days in a quarter. So if you just take the seven to eight in the third quarter, multiply it by 75, that’d be the total number of working days in the quarter. There might be more fleets staffed and active than that at any given time. But the output effectively is the seven to eight fleets.

Got it. Okay. Thanks for that. And then to follow on with the maintenance CapEx coming in a bit stronger as you’re trying to handle this work in the third quarter. Any costs associated with restarting those crews to get to the seven, eight that would run through the income statement. And I’m just curious if any of those crews are expected to utilize DuraStim pumps.

Any kind of reactivation costs are very minimal. As Phillip said earlier, all the employees that we’re putting on these reactivated fleets are former or current ProPetro employees. It allows us to get through an orientation process quicker. There’s no – there’s little to no retraining involved. There’s familiarity with the equipment, the leadership kind of up and down the chain there. So the equipment having not been stacked for very long or been rotated in, in some aspects to what the active – the crews that were active in the second quarter, it’s about as seamless as it could be. So the cost would be very minimal.

And then on DuraStim pumps.

Yes, as we mentioned – Phillip mentioned, we did have two pumps deployed during the second quarter that worked within a conventional fleet. We continue to see improvements there. But just not ready for a larger scale deployment quite yet.

Got it. Great. Thank you.

Thank you. The next question is from Chris Voie of Wells Fargo. Please go ahead.

Thanks. Good morning. Just wanted to follow-up on the per fleet economics a little bit. Based on your comment about the potentially $32 million EBITDA, if you had the full drop through. I guess, my math on the GP per fleet is a little different from what I was thinking. But if you were to annualize that I think the read-through would be that GP per fleet in the second quarter was probably a bit north of $10 million, just on a run rate basis, if you exclude reactivation stuff like that. Is that fair?

It’s probably pretty close.

Okay. And then, so with the pricing headwind in the third quarter and fourth quarter, I think your economics on the GP level would be a little bit lower rather than higher in terms of per fleet basis?

No. I don’t think and maybe I misspoke earlier. I don’t think we’re expecting pricing to change meaningfully. The big – the step down was in second quarter and we would expect pricing with our current customers and projects to hold through the rest of the year to flat.

Okay. That’s helpful. And then if you wrap all that together and take in the assumed level of, I guess, idle fees in the third quarter, would you then – is it likely that EBITDA remains positive in the third quarter?

Yes.

Okay. Thank you.

Thank you. The next question is from Marc Bianchi of Cowen. Please go ahead.

Thank you. I wanted to hopefully understand the dynamic of the idle fees a little bit better. So you had the $32 million in the second quarter and it goes down in the back half here. But my understanding is, it’s going down because you’ve got economically favorable work to be doing. And I would think that, if you didn’t have that, you’d continue to collect more fees. So really the question is, if activities looking better, throughput’s better. Why wouldn’t your third quarter EBITDA be better than your second quarter EBITDA?

Well, on the idle feet front, the step down in idle fees is mainly due in part to the fact that the idle fee provision in our agreement is not necessarily a linear one-time or price. We can tell you that we collect more, early – earlier and less later. That’s mainly the effect of idle fees. So, it kind of blunts the blow and then kind of maintains from there on out. So does it factor into our decision to redeploy any of those assets I think is what you’re asking. And to some extent it does, yet we’re in the business of helping our customers solve problems and complete their projects. And that’s not always as Phillip alluded to in his scripted remarks where we have to take a long-term view on that, because we think we’re going to be in this business, in this area for a long time. That’s when you see us working with kind of the same customer base over and over again. Our goal obviously is to produce positive returns at the company level. We think we have line of sight to doing so. Adam Muñoz: So some of those crews were plugged in idle fees are anticipated to go back to work soon. So you have a natural reduction.

Correct. Activity was also – activity associated with the customer where those idle fees are generated is higher quarter-over-quarter as well.

Yes. So if the crew count didn’t change, I guess, from second to third, can you just say, what the idle fees would be, like what you would be entitled to in the third quarter? Just maybe help give us an idea of how much of the idle fee reduction is due to just finding economic work versus just that taper of how it’s allocated throughout the year.

It has much more to do with the taper and the customer’s that those idle fees are associated with.

Got it. Okay. Thanks a lot, guys. I’ll turn it back.

Thank you. The next question is from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, gentlemen. Two things, one sort of a bigger picture perspective, as we look out and depending on everybody’s models, but let’s say 2022 is somewhat of a normalized year. And activities back – let’s say, it’s 300 frac crews working on the industry. Maybe the market’s a little bit smaller than it’s been. But can you earn the types of profitability per fleet that you’ve had in the past? Do you think – I mean, you get a good medium to long-term proxy that you could get back to those high teens to $20 million plus EBITDA per fleet numbers in that type of environment.

Stephen, this is Sam. That’s a great question. Maybe our opinions might differ around the table here. I don’t want to say it’s impossible to get back to those numbers. I think right now it’s hard to see the road to get there, especially from a time perspective. As we continue to talk about and mention each quarter, we do believe that the equipment offering of our sector has to continue to evolve for us to continue to move in that direction. That will definitely play a part. Another huge player in the efficiency game in our business, which then helps us produce profitability, is what our customers do. The planning and the other services that they align around us, all of that has been going in the right direction over the last say, two years. We need to continue to see improvements there. I guess, I say all that to say is that we are not going to depend on pricing to get us there. We think there are other things that need to happen in and around our business to get us – to help get us back to that level. And that obviously takes time.

Okay. That’s fair.

No, I was just going to say it depends – that’s a lifetime away 2022, and it depends on how many people, how many competitors fall out along the way. And I think you might get a pretty good sense that we’re going to have less competitors in the space. We’ll probably have less operators in the space. So I’m a little more bullish maybe than Sam in that. I think that the high performing, high efficiency companies working for the blue chip top tier companies are going to see some improvement, because I think maybe they’ll be less capacity in the market and a demand for higher performing companies. I like our position where we stand today with a protection on the downside with idle fees, if we swim down in our ability to perform at the highest levels on the upside. So, I might be a little more bullish, but if we ask two more people, you’re probably going to get two more opinions.

Yes. Thank you for the insights. I appreciate it. The other quick one and I apologize if I missed this earlier. Your receivables was a massive positive for work – for cash flow in the quarter. If activity is ramping a little bit, do you think working capital is fairly neutral for the balance of the year?

Yes. I don’t – I also don’t know if I’d say if it was a big positive for the quarter. It’s been pretty balanced and we’ll continue to manage it in a balanced way moving forward. We don’t expect to see any large swings. Yes, I agree.

Okay, great. Thank you, gentlemen.

Thank you. The next question is from Blake Gendron of Wolfe Research. Please go ahead.

Thanks. Good morning. So I wanted to pick up here into the back half and the potential spot market, we’re seeing oil start to creep up a little bit here. I’m assuming the larger customers are going to lock in more dedicated arrangements for 2020, and we’ll see what the pricing shakes out to be. But with the smaller customer base, if we do see – start to see some activity in tendering from those folks, what kind of lead times are you seeing? And are you seeing some of your competitors bidding on jobs with unmanned equipment right now?

I think we always see aggressive bids come across, especially on the spot market. As Sam mentioned earlier, we’ve kind of turned down a lot of those types of jobs, especially if it doesn’t make sense of fully activating a fleet and carrying that personnel for short term gain, I guess, if their gains even there to be made.

Got you. But are those customers requiring that those – that bid on the work have the actual fleet staffed already? Or is there somewhat of a speculative nature to this where they have enough time to staff a fleet if they win the work?

Yes. I think they are allowing enough time. I think those operators are – including the timeframe of their work with the request for quote. So, yes, so if need be, I think people would be able to staff up, I mean, if they have access to the people and the equipment. I couldn’t speak for the competitive market out there and what condition their equipments being maintained and their access to people to perform.

And I think that’s one of ProPetro’s key differentiators is being the largest in the Permian Basin, having great contacts throughout the community for us to staff up is a relatively short period. I think but – or at least I’m hearing several operators are very concerned because they’re feeling like the activity now is picking up. And as they pickup crews they’re going to see lower and lower efficiencies because of just the quality. The assumption is the best people are out on the active crews now, but we have a great wealth of personnel to draw from. And I think that sets us apart because we can staff quickly. I had a call from an operator that wanted to staff up in two weeks and was concerned. We couldn’t do it. And we told him it wouldn’t be a problem and we’re operating today and it’s not a problem.

Interesting. Well, it’s good news that it is a factor, I guess, in relation to some of your more undisciplined competitors. Wanted to shift gears to sand. Have you seen a trend with respect to sand sourcing? Obviously, it depends on the specific customer. But among the larger ones with more durable programs moving forward, are you seeing a major shift where they’re internalizing that procurement or is it pretty much the same as you’ve seen over the last few years? Adam Muñoz: I would – this is Adam. I would say it’s fairly the same with the large guys, especially the people that have entered that market or entered into that self sourcing concept early on in the game they’re continuing to do so. We have seen some reallocate that portion back to the service company, just depending on who they had partnered up with out there in the sand mines on their ability to perform or supply the product in a timely manner in a high quality, I guess.

Yes, understood. One more if I could. On the facility that you have, you paid down a bunch of debt. I’m just thinking in terms of uncertainty from here, obviously a lot of oil demand side drivers that could throw a wrench into things. Any sort of onus on you to renegotiate the facility such that it’s not tied to receivables for the borrowing capacity, so you can maybe protect yourself to the downside on liquidity here.

This is Darin. The facility we have is somewhat norm in our industry and really haven’t seen people get much out of that. Some of your options would be to maybe put a little more permanent pieces, could potentially put a more permanent piece of debt into your structure. But right now, I don’t think we see any owners to need to go out and do anything with our facility at the moment.

Got you. Thanks, guys. I appreciate it.

Yes. I’ll go back just to follow up on that. Again, the reason I like our position is if we see that down slowed, we’ll have protection to the downside that others do not. And so I think that gives us a better range of freedom, not to have to go out and seek out a term loan at some onerous interest rate just to provide liquidity – source of liquidity.

Right, right. Totally fair. I appreciate the insights guys. Thanks.

Next question is from Waqar Syed of AltaCorp Capital. Please go ahead.

Thanks for taking my question. In terms of maintenance CapEx per crew, where is that trending today? Could you help us on that?

Yes. Waqar, great question. As we deployed a couple of different equipment strategies to minimize maintenance CapEx and second quarter, we’ll be doing some of that in third quarter as well. I think our goal on an annualized basis would be to get that number below $6 million. And we think we have the ability to do that this year – back half of this year.

And how much of that would be fluid?

About half would be fluid.

Half, okay. And is your target to be – on EBITDA per crew to be above that maintenance CapEx number? That’s what you said before.

Yes, sir.

Fair enough. And then, we’ve been hearing about these simultaneous fracs. Were you able to do any of those jobs in the quarter or year to date?

We’re currently not doing any of that right now, but looking into many different applications along those lines right now.

Okay. Would you be able to share any of the – any R&M data that you’ve collected from the DuraStim fleets that you’ve been running or DuraStim equipment that you’ve run? Adam Muñoz: Yes. Waqar, this is Adam. Just from this last deployment that we had here in the second quarter, we saw many improvements from its previous deployment, enough that we felt comfortable to go ahead and start making some modifications to some additional pumps to possibly deploy it even at filling a not full fleet basis, but maybe a little larger square – larger scale of three to four pumps. And continue to just test it side by side with conventional equipment.

Waqar, this is Sam. I’ll just add to that. From a equipment component standpoint, especially on the pumping portion of the DuraStim units, we are seeing some good indications in terms of wear and tear on expendable items and certain equipment parts.

All right. That’s all I have. Thanks.

This concludes our question-and-answer session. Now I’d like to turn the conference back over to Mr. Phillip Gobe, CEO. Please go ahead, sir.

Okay. Thanks everyone, once again. We appreciate everyone joining us this morning on the call. A couple of thoughts before we exit. ProPetro has a well known reputation in the industry of leveraging a team of skilled and experienced professionals with unsurpassed technical capabilities. We have retained the critical skills to deliver efficient and safe operations, and we’re well positioned to respond to improving market conditions. Bottom line, we have the best people in the business, rock solid balance sheet, a blue chip top tier customer base and the best rocks in the business, which gives ProPetro a distinct home build advantage. Thank you again for joining us. And we look forward to talking with you again on the third quarter call. Have a good day.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.