11.14.21 – DEP Industry Observations: Random Anecdotes; Rig Count Up Again; THRIVE 2022 Speakers List Out This Week

Brief note this weekend.  We recap several Q3 earnings calls and summarize a few observations from recent industry discussions / meetings.

Upcoming Trips/Events: (1) Dallas on Tuesday and then to OKC/Tulsa on Wednesday/Thursday; (2) DEP Houston Christmas Party on December 7^th; (3) Husband/Wife Midland tour to host a DEP BBQ cook-off for the Bynum school on December 14^th followed by Permian meetings on the 15^th; (4) Father/son Christmas Field Tour the week of December 20^th – some place really cold and uncomfortable to make him suffer for past and future college misdeeds.

Personal Observation.  We attended a Veteran’s Day Celebration hosted by Freemyer Industrial (thank you Len).  The event featured multiple musicians, but one stood out.  Check out Tony Melendez.  He is the most amazing and inspiring performer we have ever seen.  We highly recommend Tony for any company looking to book a quality musician who can also bring hope to your organization.  He is a tremendous example how anyone can overcome their challenges.

Industry Discussions.  We had the chance to catch up with multiple folks this week. Here are a few quick anecdotes.

• Tractor capacity a headwind.  One logistics company expecting a delivery of new tractors in Q4 will receive only a portion due to OEM delays.
• A sand company ordering new tractors claims the manufacturer has a one-year lead time.
• Spare parts for tractors continue to be an issue.  Keep in mind some in the industry neglected maintenance the past two years and/or cannibalized equipment.  Now activity is ramping and the inventory of spare parts is lacking.
• Multiple Permian logistics contacts question whether the industry can meet expected Q1 customer demand.
• Labor continues to be a challenge and the industry is reacting aggressively with sign-on bonuses and higher wages to attract folks.  Just take a look at LinkedIn.  Or, consider real-time anecdotes such as USWS comment on its Q3 earnings call about its 15% wage increase.
• As for pricing, we visited with a rental company which recently implement high-single digit price increases this quarter.  It claims a similar increase was implemented in Q3 and another one is coming in Q1.
• Q3 earnings season featured many E&P players finally acknowledging rising service costs.  Those who quantified often cited expectations of 10-15%.  Key to these comments is the starting point, but if the view is a 10-15% increase relative to Q2/Q3’21 levels, that’s probably not enough.
• We visited with a private land driller who reported dayrates in the mid-teen’s during the 2020 trough.  Pricing now is in the $19k vicinity but going north into the low $20’s in Q1.   That’s a +35% move off the bottom.
• Eagle Ford E&P contact reports local sand mines raising rates by at least $8/ton (about a 20-25% increase).
• Given higher Eagle Ford demand and possibly a lack of local supply, a Northern White player reports its first shipments into the Eagle Ford in some time.  The all-in delivered cost of Northern White vs. Regional Sands is definitely more than +$8/ton.
• We are in the process of digging into eFleet / dual-fuel preferences via individual E&P surveys.  Very clear to us based on the preliminary calls thus far that the driver of the change is purely economic, not ESG.  ESG is often viewed a side benefit, but it really is all about well cost.
• Came across another new frac company on social media.  If confirmed, this would be #6.  A recent LinkedIn photo shows the company doing an 80 bpm job with about 10 pumps on location.  Profile suggests person previously worked at a now shuttered frac company.
• Here’s the value of corporate swag.  We were in Fort Worth wearing a DEP shirt.  An individual approaches us and lets us know he is building frac equipment and will soon start a new company with a vertical frac fleet, thus frac player #7.  We confirmed with the builder that this is a legitimate buyer of equipment.  Look for player #7 to go operational in a few months.
• Fluid end contact reports its forging provider just implemented a 50% price increase.  Result is higher fluid end prices which means higher R&M for the frac companies.  Presumably a lag to pass through to customers, but ultimately, this is another reason why frac pricing goes higher.

U.S. Land Rig Count:  BKR U.S. land rig count gained +4 rigs on Friday.  Now stands at 539 rigs.  We will update our land rig forecast later this month.

THRIVE 2022 – February 22-24, 2022:  Our working agenda is nearing completion and will go live later this week.  For those not speaking at THRIVE 2022, don’t fret as we will have opportunities at our Telluride Executive Series in June, our London Energy Day in June, our European Energy Conference at the Gleneagles Resort in August and potentially at our Permian Basin 2022 Cook-Off in September.  Finally, we are seeking sponsorship support for THRIVE 2022.  Our final sponsorship brochure is also expected to be finalized later this week, so please let us know if your company would like to support the event.  Thankfully, we have already been blessed with a number of early sponsors, many of whom have loyally supported DEP since our inception.  We are very appreciative of these folks as they are helping lift THRIVE 2022 off the ground.

Q3 Earnings Takeaways – Brief observations, not an investment recommendation.

NexTier Oilfield Solutions

• Revenue = $393M, +35% q/q including one month of Alamo, legacy business +23% q/q.
• Adjusted EBITDA = $28M vs. $5M in Q2
• Averaged 25 deployed, up from 20 in Q2
• Averaged 24 fully-utilized fleets, up from 18 in Q2.
• Recall, NEX has two deployed fleets in the Middle East, so U.S. deployed is 23 fleets.
• Exited Q3 at 31 deployed fleets, a function of the Alamo transaction.
• Annualized gross profit per fully-utilized fleet = $7.3M in Q3 vs. $4.0M in Q2
• NEX noted monthly adjusted EBITDA in September was $18-$20M with October being better.  The improvement is the reflection of the Alamo assets.
• Cash = $136M.
• Total debt = $373M.  This includes $39M of debt financed by CAT for new equipment.
• Q4 Guidance:  NEX expects to average 30 deployed fleets in Q4 but expects to exit Q4 with 31 deployed fleets.  Q4 capex guided to $50M.
• NEX assumes maintenance capex per fleet of $2.5M.
• NEX will sell its international frac assets to NESR.  No sales price was disclosed.
• Management sees U.S. active fleet at 230 fleets, consistent with us.
• Alluded to ~30 fleet growth in 2022 – not specifically NEX guidance, but when companies refer to market expectations, we generally take that as some form of embracement.
• Didn’t push back on $300M of 2022 EBITDA has a reasonable supposition.

U.S. Well Services

• Revenue = $56.5M vs. $78.8M in Q2.
• Adjusted EBITDA = negative $500,000.
• Averaged 5 fleets in Q3
• Running 4 of 5 fleets today, of which all are electric.
• USWS is finally out of the conventional frac business.
• USWS is building four new electric fleets which will be deployed in 2022.
• The first fleet will be deployed by late Q1’22 with all four fleets expected to be operational before the end of Q3’22.
• USWS noted it implemented a 15% wage increase in Q3.  Company is working to recoup this increase which should occur in 2022.
• Nice balance sheet improvement as total debt now stands at ~$220M, down from $261M at the end of Q3.
• USWS generated cash from asset sales of ~$41M subsequent to the end of Q3 which was used to reduced debt.
• No formal discussion of pending litigation, which make sense, but USWS is actively working to protect its IP.  This is something which matters and has potentially broad implications for others who are pursuing electric fleet desires.
• Capex remaining on the four newbuild fleets is between $85-$90M.

SmartSand

• Revenue = $34.5M vs. $29.6M in Q2
• Adjusted EBITDA = negative $1.0M vs. negative $21.5M in Q2.
• Volumes = 790,000 tons vs. 767,000 tons in Q2.
• Contribution margin = $4.1M or $5.19 per ton.
• 2021 volumes expected to be a record with 2022 expected to be better.
• SND will pursue the industrial market and hired a seasoned exec with industrial background.
• SND will open a new terminal in Waynesburg, PA which will help support SND’s contract with EQT.  We hope to join the terminal opening ceremony.
• Cash = $37M with $24M of total debt.

HighPeak Energy

• Q3 capex = $65M with YTD capex = $155M.
• 2021 capex budget = 245M – $270M, thus implies ~$100M in Q4
• HPK averaged 2 rigs in Q2, but recently added a third rig.
• The company will run 4 rigs in 2022.
• 2022 capex budget to range between $645M – $700M.
• HPK drilled 10 wells in Q3 and completed 6 wells.
• Q3 production = 8,168 BOE/day, but averaged closer to 15,500 BOE/day in October.
• Objective is to exit 2022 with 36,000 to 42,000 BOE/day.
• Initiated a $0.025 quarterly dividend and paid a special dividend.
• Increased borrowing base on credit facility.

Battalion Oil & Gas

• Raised 2021 capex guidance by $5M to $45-$55M.
• YTD capex = $47M.
• Secured a rig which will commence drilling in December, thus the tweak higher of the 2021 budget.
• Average daily production = 17,728 BOE/day, +14% q/q.
• Adjusted EBITDA = $23M.
• Reduced net debt by $10M.
• No discussion on 2022 capex.