FET - NYSE

Good morning, ladies and gentlemen, and welcome to the Forum Energy Technologies Third Quarter 2024 Earnings Conference Call. My name is Gigi, and I'll be your coordinator for today's call. [Operator Instructions] This conference call is being recorded for replay purposes and will be available on the company's website. I will now turn the conference over to Rob Kukla, Director of Investor Relations. Please proceed, sir.

Thank you, Gigi. Good morning, everyone and welcome to FET's third quarter 2024 earnings conference call. With me today are Neal Lux, our President and Chief Executive Officer and Lyle Williams, our Chief Financial Officer. Yesterday, we issued our earnings release and it is available on our website. Please note that we are relying on the safe harbor protections afforded by federal law. Listeners are cautioned that our remarks today may contain information other than historical information. These remarks should be considered in the context of all factors that affect our business, including those disclosed in FET’s Form 10-K and other SEC filings. Finally, management's statements may include non-GAAP financial measures. For a reconciliation of these measures, you may refer to our earnings release. During today's call, all statements related to EBITDA refer to adjusted EBITDA. And unless otherwise noted, all comparisons are third quarter 2024 to second quarter 2024. I will now turn the call over to Neal.

Thank you, Rob, and good morning, everyone. This quarter, our FET team delivered on multiple fronts. First, we dramatically strengthened our financial position on an accelerated timeline. Second, new products continue to reflect FET's reputation for innovation and allow us to execute our beat the market strategy. Finally, our financial performance was down the fairway despite softening market activity. Let me expand on these key points. Earlier this year, we outlined a plan to organically pay off our 2025 notes and seller term loan by the middle of next year. In parallel, we explored refinancing options to accelerate that plan and meet our goals sooner. Our evaluation of alternatives included key transaction criteria. We wanted a solution that would allow us to return cash to shareholders and invest in strategic acquisitions. In addition, it was important to maintain our $250 million ABL facility for flexible growth financing. Finally, these criteria had to be met at a reasonable cost and with manageable covenants. After a patient and methodical search, we finalized a $100 million senior secured bond offering, which will allow us to pay off the 2025 notes and seller term loan when we close next week. In addition, this offering checks a lot of strategic boxes. First, it immediately eliminates the current portion of long-term debt and extends the maturity out to 2028 and 2029 for both the credit facility and our new bonds. Second, it enhances our liquidity position and by year end should give us an estimated $80 million of dry powder, an amount that we expect to grow with free cash flow. Third, it provides flexibility for deployment of cash. We are committed to maintaining conservative net leverage and a meaningful portion of our free cash flow will be used for further debt reduction. In addition, we expect to have ample flexibility for strategic investments. This could be in the form of traditional M&A or investing in ourselves through share buybacks. With a cash flow yield over 30%, it will be hard to find a better investment than FET. These strategic investments will be possible because we continue to deliver a lot of free cash flow. For example, we generated $48 million in the first nine months of 2024, putting us nearly within the full year guidance range. Therefore, for the second time this year, we are raising our cash flow forecast to between $60 million and $70 million. To put that into perspective, that's a range of $4.90 to $5.70 per share compared to yesterday's closing price of just under $14. Importantly, as Lyle will detail shortly, we believe this performance is repeatable over the long-term. The FET team continues to execute our beat the market strategy. As a quick reminder, this consists of growing profitable market share, developing differentiated products and technologies, utilizing our optimized global footprint and participating -- expanding our participation in energy transition, all to achieve our objective of creating shareholder value by growing faster than the market. One way to measure the performance of our beat the market strategy is to compare FET revenue with global rig count. For the first nine months of this year, our revenue per rig has increased 16% on a year-over-year basis as we integrated Variperm into FET. Let me provide a few highlights, starting with some exciting new products and technology we are delivering to the market. Permanent magnet motor ESPs are the most efficient pumps in the artificial lift industry today. However, their usage has been limited due to safety concerns. To help mitigate their risk, we recently added MagnaGuard to our extensive artificial lift portfolio. This tool provides reliable protection from possible execution saves our customers money by eliminating third-party services and removes a critical barrier for greater adoption of permanent magnet motors. Also, our tool can be used on all ESP brands which expands our addressable market. This is a great advancement for our industry and MagnaGuard could meaningfully enhance FET's profitability. Another area of innovation is within the offshore robotics market. The industry is driving towards fewer personnel and vessels to improve safety and reduce cost. To meet this demand, FET has designed Unity, an operating system for remotely controlling ROVs. This system can be installed on new ROVs and as an upgrade for existing fleets. This leading edge technology utilizes cloud based monitoring and supports AI tools for predictive maintenance. Initially, this technology would reduce personnel on vessels but the end goal is to have ROVs operated fully remote from a central control station. For example, an operator in Norway could control an ROV in Brazil. We will deliver our first system before year end and four additional systems in the first quarter of next year. We are excited about this technology and for what it can do for our customers. Last quarter, I mentioned a growing global opportunity outside the traditional oil and gas market. Our industry leading JumboTron XL heat transfer units have found applications in the power generation sector. We expect the power gen market to grow rapidly over the coming years with energy transition. Recently, we received sizable orders for power generation applications that can be utilized in AI data centers. This is an exciting and fast growing opportunity that expands FET's revenue potential. In addition to new product development, leveraging our global footprint is another pillar to our beat the market strategy. We can ship our products around the world to countries where our customers are investing. A good example is the shift to more unconventional activity in international markets, particularly in the Middle East and Argentina. Through our facility in Saudi Arabia, we distribute a wide range of products including casing hardware, artificial lift, high pressure pumps and coiled tubing, all of which are critical to exploiting unconventional reservoirs. In addition, last week we showcased our leading unconventional products at a large oil show in Argentina. Economic stability, slowing inflation and loosening currency controls are spurring investment and growth in the energy industry there. During our interaction with customers, some expected activity to increase 10% to 15% next year. Similar to shale plays in the U.S, service intensity is increasing and this will require equipment upgrades. Now, let me provide a few comments on our market outlook. For the fourth quarter, we believe the markets are going to be more cautious through the end of the year. Commodity prices remain volatile driven by Middle East unrest, lower demand in China and uncertainty around OPEC plus supply. In the U.S, efficiencies in drilling and completions have brought activity forward. This will allow our customers to meet their production and spending plans prior to year-end. Therefore, we expect U.S. demand to slow due to budget exhaustion and holiday disruptions. However, international and offshore activity as well as our beat the market strategy should help mitigate U.S. softness. For the fourth quarter, we expect revenue and adjusted EBITDA to be in the ranges of $190 million to $210 million and $22 million and $26 million respectively. Our fourth quarter EBITDA forecast puts us within our previous full year guidance range of $100 million to $110 million. Turning to 2025, it is still too early to provide a specific financial outlook for FET. However, as we start the planning process, here are a few baseline points. Customer indications and industry commentary suggest U.S. drilling and completions activity could be down as much as 5% from 2024. Also based on the spending cadence observed in the last two years, activity may be slightly weighted towards the first half of the year. Not contemplated in our planning process is a rebound in natural gas drilling and completions activity. If LNG or data center electricity demand triggers a meaningful commodity price increase, there may be some upside to activity. For Canada and the rest of the world, we currently believe demand will remain relatively flat to slightly up compared to 2024. Regardless of market conditions next year, our focus will remain on free cash flow and returning capital to shareholders. I'm going to turn the call over to Lyle for more details on FET's third quarter financial results and highlights.

Thank you, Neal. Good morning, everyone. Let me start with additional details on our debt refinancing. After having explored opportunities in the U.S. Including high yield markets and private debt placement, we ultimately secured financing in the Nordic high yield bond market. The Nordic market has been quite receptive to the oilfield services industry both onshore and offshore. Also, the size of our offering fits well with typical Nordic issuances. And as a side benefit of this process, we were able to share the FET story with a broad audience of international investors. We issued $100 million of notes at par with a 10.5% coupon. The yield compares favorably with our existing long-term debt and market comps. With our new capital structure, FET's blended interest rate will reduce by 130 basis points for the first quarter next year. Also, the yield is favorable to recently announced private debt and Nordic market issuances. This pricing reflects investor confidence in the strength of FET's low leverage, free cash flow generation and asset light business model. In addition to pricing, we are pleased with the Nordic bond terms. The notes have five year tenure and a two and half year no call period. During the life of the bonds, we will be subject to financial covenants of a maximum net leverage ratio of 4x and minimum liquidity of $25 million. Given our commitment to maintain a low leverage ratio, we do not believe these covenants to be overly restrictive. Importantly, as Neal highlighted, the bonds provide flexibility to execute our strategy. First, the bonds not only permit the company to use cash for acquisitions but also include provisions for a follow on offering. This feature provides up to $150 million of incremental capital to execute strategic acquisitions provided our net leverage remains below 2.5x. Second, the bonds permit distribution of cash to shareholders. Specifically, the bonds allow shareholder distributions of up to 50% of prior year adjusted free cash flow when our net leverage ratio is below 1.5x pro-form a for the distribution. We will calculate the amount available for 2025 after filing our 10-K next quarter. However, assuming our free cash flow guidance of $60 million to $70 million for 2024, we would have $30 million to $35 million that could be distributed once our leverage is below the incurrence threshold. That is over 15% of FET's current market capitalization. Our 2024 free cash flow results are compelling and repeatable looking forward. Let me explain. Next year, we expect interest payments of about $20 million or less cash income taxes around $15 million and capital expenditures of around $10 million or $45 million in total for these items. Assuming flat EBITDA year-over-year and before changes in net working capital that would yield free cash flow between $50 million $60 million. This provides ample dry powder to reduce our net leverage over time, while executing our growth strategy and returning cash to shareholders. We anticipate communicating a shareholder return framework on our February call. In addition to improving our balance sheet, FET printed a clean tape operationally. Revenue and EBITDA results landed within our guidance range and were consistent with our first half results, despite a softer U.S. market. Our third quarter consolidated revenue was $208 million up 16% year-over-year and EBITDA was up 55% over the same period. EBITDA margins year-to-date are 13%, the strongest in nearly a decade. FET orders were $206 million, up 14% for a book to bill ratio of 99%. Both segments achieved higher orders as did six of our seven product lines. Allow me to highlight three product lines in particular. We secured drilling related capital equipment awards in support of new land drilling rigs for the Middle East region. These awards included iron roughnecks and catwalks and contributed to a 38% increase in drilling orders. Subsea orders were up 19% as utilization of ROVs increases, demand for FET's subsea product offering continues to strengthen. Our customers that support the construction of oil and gas wells and offshore wind turbines indicate high utilization of their equipment with no sign of decline. As a result, our pipeline of new subsea booking opportunities is as robust as we have seen in a number of years. Our production equipment product line doubled orders from the second quarter. Included in the order book was a large U. S. desalting project which will utilize FET's forumix technology. Despite a softer U.S. land market, the outlook for production equipment remains solid as the business maintains nearly a year of backlog. Turning to segment results, the Drilling and Completion segment revenue increased 6%, primarily due to higher project revenue recognized from ROVs and launch and recovery systems. In addition, our quality wireline product family grew revenue by 20%, setting another quarterly record. Partially offsetting this segment's revenue were lower power end and hose sales. EBITDA was $15 million, up 26% on higher revenue and favorable product mix. The segment improved EBITDA margins by 190 basis points to almost 12%. The Artificial Lift and Downhole segment revenue was $84 million, down 5%, and EBITDA was $17 million, down 12%. Lower casing hardware volume coming off a strong second quarter in the Middle East and lower valve product sales contributed to the decline. However, segment EBITDA margins were nearly 21%. With over nine months since the closing of the Variperm acquisition, let me provide you with an update on the business. Project timing has a more pronounced impact on Variperm’s results than the traditional rig count measure. With the Canadian markets heating up, lead times for tubulars are delaying pipe deliveries from our customers, ultimately deferring Variperm revenue. Despite a soft start to the year, Variperm’s orders have trended up each quarter this year and the outlook remains strong. In the second quarter, Variperm’s revenue was up 2% with meaningful EBITDA and margin contribution. They are maintaining a strong market position while delivering free cash flow above our budgeted level. And speaking of cash, we generated $25 million of free cash flow in the quarter, up $3 million sequentially. We ended with $33 million of cash on hand and $59 million of availability under our revolving credit facility, with total liquidity of $92 million. Our net debt was $199 million down $26 million from last quarter. Using annualized first nine months EBITDA, net leverage ratio was 1.9x. This is a good start and we remain committed to further reducing net leverage. Finally, let me provide a few details for modeling purposes for the fourth quarter. We anticipate corporate costs to be approximately $7 million down slightly from the third quarter. Depreciation and amortization expense should be roughly in line with the third quarter. We expect interest expense to be approximately $5 million and income tax expense to be approximately $3 million. Let me turn the call back to Neal for closing remarks. Neal?

Thank you, Lyle. We delivered solid financial results this quarter despite uncertainty around commodity prices and activity. And we continue to fortify our balance sheet, generate free cash flow and execute our strategy. As we close out the year, I want to express my gratitude to the entire FET team for their hard work and dedication. Gigi, please take the first question.

[Operator Instructions] Our first question comes from the line of Dave Storms from Stonegate.

Just hoping we could start with maybe some of the puts and takes on the guidance range for free cash flow. Is that mostly just driven by enhanced profitability or is there more to that story that we should be aware of?

I think Dave, if you're thinking about the kind of look forward on what cash flow might be, really there all we've done is look at what are our kind of fixed cash obligations on a go forward basis. So interest about $20 million or less next year, cash income taxes of $15 million and CapEx kind of in that $10 million range where we've been before, so about $45 million. And then assuming everything else remains constant, so EBITDA constant, net working capital constant that gets us to that $50 million to $60 million range. I think there are obviously levers that we could pull that would enhance that. One of those would be growth, our beat the market strategy that Neal talked about, helping us to grow faster than the market, and obviously any ability to continue working down our net working capital would be a plus to that number.

Understood. Thank you. And I know in both the release and on today's call, you mentioned that the new debt situation still gives you the ability to be strategically acquisitive. What's the kind of profile that would piqued your interest? Would it look a lot like Variperm or would you go in a different direction?

Yes, Dave, this is Neal. I think Variperm obviously was a home run acquisition, fantastic margins, differentiated product, a niche market, one that fit well with our portfolio. So another acquisition like Variperm, absolutely. As we look out, we see a lot of acquisition opportunities kind of in the pipeline that are that have been sitting there. We're going to be very methodical and choosy as we look through what acquisitions make sense, but it's been part of our history of FET of how we've grown and it will be a lever we'll continue to push for growth as well.

Understood. Thank you. And then just one more for me, more of a macro question. The upcoming U.S. election, a lot of the -- some of the rhetoric has been around potential tariff increases. How are you thinking about the potential impact to the international demand outlook should the U.S. tariff rate increase?

I guess I would characterize it more as a rather than demand issue. I look at it more as a supply of our raw materials that we'd be most concerned about and it's something we've actually been living with for a while now even going back to the first Trump administration there were tariffs on raw materials that we regularly import. So we've diversified our supply chain, have multiple suppliers that provide key raw materials. That's really been our focus there on the tariff side.

That's all very helpful. Thank you for taking my questions and good luck on the fourth quarter.

Thank you, Dave.

One moment for our next question. Our next question comes from the line of John Daniel from Daniel Energy Partners.

Hey, Neal and team. I just want to follow-up on one of the prior questions on M&A. I guess, if you look at the, call it, frac capital equipment market, which is hitting a little bit of an air pocket right now. Do you look at that as an opportunity for where you might focus on acquisitions or would you rather stay more towards production related or drilling related stuff?

Yes. I think our -- what we'd like to do is keep expanding our activity based consumable sales. I think the capital is a little harder whether it's as you said frac or similar in drilling too. So, again, what we really like the Variperm acquisition and other acquisitions we've done whether it's global tubing or quality wireline or multi lift solutions, those are businesses that sell on a per well basis and those are exciting and those are ones that we want to continue to participate in. But we'll be looking for opportunities obviously that the frac capital equipment. We've introduced some new technology there and we've had good success and we'll continue to do that. But yes, there's the frac capital space is a little tough right now.

Okay. And then you cited global tubing. It seems like every time you look at LinkedIn, another one of the coil guys is doing some drill out on like 27,000, 28,000 plus feet. I'm curious, how is all of that impacting the demand? I mean, I'm assuming it's positive, but if you could just elaborate a bit more on what you're seeing there?

Yes, I think it's really two aspects to it. The first is the wells are going longer. You tipped obviously need longer strings of coiled tubing, so that's higher selling price or more dollars per string. You also need heavier wall thickness that can allow you to get to thicker wall thickness, excuse me, that allow you to push it out to the end. But I think most importantly, we have a team of engineers that specifically designs our strings and with our proprietary taper designs to actually reach out to the farthest -- as far as -- farthest laterals that we can find. And when we do that, we're maximizing the weight on bit. So I think that's what's exciting for us as we have the people, the process to really help our customers reach their goals.

Have you had to do any changes to the plant to accommodate the longer strings or was that are you good there?

No. We're good there. We are pushing limits and we'll but with the -- I think being one of the newest manufacturers, I think we designed around heavy installations. And one other benefit we had is when we upgraded to quench and temper, we made our quench and temper line continuous. So it's all in one step. I think we're we have a patent around that. So we believe we're the only manufacturer that manufactures coil tubing quench and tamper continuously.

Got it. Okay. Well, thanks for including guys.

Thanks, John.

One moment for our next question. Our next question comes from the line of Daniel Pickering from Pickering Energy Partners.

Lyle, I want to make sure that I understood what you said around Variperm, did I hear you say that Q3 was a 2% increase from Q2 or was that a year-over-year number?

That's correct. It was a sequential number, Dan.

Okay, thanks. And so it sounds like we can look through your prior disclosure and the consolidation, et cetera. Are we kind of creating this coiled spring effect with some of these project delays in Canada? Do we think that we have kind of a snapback Q4 there? Or do we think we're pushing some of those projects out into 2025?

Yes. Dan, I think the short answer is I think we are pushing some of these projects out into 2025. If you remember on our earlier call, we talked about delays that happened with the TMX pipeline. And the good news is the TMX pipeline opens up Canadian crude market to the world market on the West Coast and put a pretty nice bump in the underlying crude oil price in Canada. End of last year, beginning of this year, there was uncertainty as to when that timing was going to occur. A lot of operators began to defer projects and as a result suppliers’ primarily tubular suppliers delayed manufacturing. So when that TMX did come online early this year everyone's okay great we're back to the right races. There is a supply chain lag that has yet to catch up. And so that's really what we're seeing as far as the delay really year-on-year for Variperm. And I do think that the activity we'd see continue and pick up in 2025.

Yes. Just to be clear, our customers procure and supply those tubulars for us. So that we're waiting -- we're really waiting on our customers to get their supply chain back in and out again.

And does that -- as you look to Q4 for Variperm, is that kind of a flattish? It sounds like you're kind of running at a flat rate Q3 versus Q2. Do we hold that level in Q4 then?

That feels right. Yes.

Okay. Got you. Thank you. I appreciate that. And then, just want to make sure I understand the kind of ebbs and flows here on the balance sheet. So while, we're sitting at the end of Q3 with, call it, $232 million of debt, we've got confirm these numbers for me, roughly $60 million of the convert outstanding and then the seller notes another $60 million. So we pay down $120 million of debt with our new debt and your cash flow in Q4. And so basically, we end the year kind of at the same cash balance, maybe a little bit better than we said at the end of Q3. Is my math kind of tying there?

It is. And I would look at maybe total liquidity there, so the cash balance and or balance on our revolver because that can be a little fungible between those two. And so yes, I think we would expect to end the year maybe a little bit lower. So we ended with 92 of liquidity at Q3. I think we'll be a little bit lower than that kind of when you do the math on paying down the rest of our debt, right? So you're right on the $120 million of debt that we will pay off with $100 million of new debt. So we'll use $20 million of our cash less revolver, some fees to get that finished up. So it should put us right about just a little bit below the $92 million for year ending liquidity.

Got you. And then I appreciate the outlook for ’25 on the free cash side. It sounds like I want to make sure the way you were describing cash is essentially in a flat revenues, flat EBITDA environment. Maybe, Neal, if you could take a couple of minutes and just talk about where you kind of what product lines or you feel best about as you go into 2025 given kind of your order, your momentum, the things you're seeing from the customers?

Yes. I think it's still really early. And the indications now that we're hearing from our customers obviously is Q4. We think in the U.S. We're going to see a slowdown at the end of the year.

Yes, sloppy. Sure.

Yes. And typically in Q1, we've seen that pick up. So I think the U.S. would kind of rebound a little bit in Q1. So I think for that part of it, I think we'll see our consumable business whether it's case to wireline from quality wireline, coiled tubing, I think that will and as well as our drilling consumables product lines picking up. I think exciting though for us is we are seeing a good pipeline of inquiries for our subsea business. So I think we've talked about the utilization being pretty high for the fleets out there. So we are seeing a lot of inquiries come through. So we're hopeful we could have a nice backlog coming into 2025 and going further out for deliveries of ROVs. We talked a little bit about our Unity system, which is exciting technology. So we want to expand on that development and continue to grow our subsea business.

Okay. And if we think about the puts and takes as we go into 2025, feels now like Variperm should have this kind of catch up. It's obviously a higher margin business. Do we in a flat revenue environment, do we -- how much margin expansion do you think you guys could potentially see just based on mix alone?

Yes. I think higher obviously, I think a higher contribution from Variperm would help with mix obviously in a flat revenue market. Our goal though is to continue to grow revenue in a flattish market. Again, that's our beat the market strategy. So we think there are number of product lines whether it's in our downhole, casing hardware or multi lift solutions, artificial lift. We think we can grow market share just by better bundling, better customer account management, just more boots on the ground to grow that market share. Because a lot of times, good example our multi lift solution, it's an insurance policy. And we have some customers, some operators out there who live without insurance. And so our goal is to convince them that insurance is a good thing for their pocketbook, good thing for their well. And so I think that's just a continuous opportunity that we're going to remain focused on.

Great. Last question, I think I ask it about every other quarter. I just want to check-in again. If you look at the business mix, the things that you've rationalized your portfolio over the past couple of years, kind of the product lines that we see you're -- right now you're comfortable that that's where you want to be so no meaningful divestitures from here?

We'll continue to look at all our business. We want to expand our margins, right? I think we had mentioned in Lyle’s part of the script we talked about having the highest margins in nearly a decade. We're roughly 13%. I think mid-teens is where we want to go. And so if we had more of a tailwind in revenue growth, I think our operating leverage could get us there. In a flattish market, we need to both grow revenue with our beat the market strategy, but we also need to look at cost and portfolio rationalization. So that's a continuous process that we follow. And so I don't want to say we're always satisfied. We're never satisfied. We'll keep on that.

Okay. Thanks guys. Appreciate it.

Thanks Dan.

One moment for our next question. Our next question comes from the line of Jeff Robertson from Water Tower Research.

Neal, I think you mentioned in your thought process around 2025 that U.S. drilling could be down about 5%. Did I hear that right?

You did.

Do you get any sense that there is an increased focus on optimizing production and spending for those types of products? And if that's the case, does that drive demand for FET to gain market share? Because some of your products are more efficient and maybe what else is out there in the market?

Yes, I think that's absolutely an opportunity. Again, I think our customers whether it's the service companies or operators are looking for efficiencies and operating cost reductions and that's where a lot of our technologies are focused. I think part of our view on could be down next year is partly based on commodity price, partly based on the consolidation of the operators as they look at their acreage and decide what they want to complete. So that plays a part in it. I also think as I mentioned we're really assuming no rebound in natural gas. And I think that has some -- that's kind of a wildcard, right? We could have a cooler winter. We could have more demand from electricity for AI, power gen applications, LNG. So, we'll keep an eye on that, but we want to go in with kind of a realistic look at ‘25 and it's still a little early and things can change here. We have an election next week. We have -- we'll keep looking at demand indicators but that's where we are today.

Do would an increase in natural gas related activity increase demand for some of your products and that could have effect on the margin mix?

It does. And this is a really general comment, but natural gas drilling and completions activities seems to be usually higher pressure and higher pressure will wear out our consumables more quickly. And so that's what we've seen in the past as we go to gas is just maybe a higher turn of consumables.

Then just a question on the Unity system for the ROVs. Would that system increase the type of work those ROVs can do? Or it just make it easier to operate them from like you said remote locations?

I think it will be a combination. Again, it's still early. So it's a good system that we're giving to the operators and they'll have to become proficient with it. I think there may be some opportunities that they -- with the programming and with the AI that they could go more quickly, let's say. And whether it's they're setting up a node and moving from spot to spot, could they do that more quickly in an automated system or in a remote system quite possibly. So I think that's a potential. We're still early as I think we said in our notes. We're delivering our first system at the end of this year and four more next. We'll continue to get feedback there.

Are those going to different operators?

The first order the -- first five I think are going to the same operator. So we'll get I think pretty good consistent feedback there. I believe that's the case, Jeff.

And lastly on the MagnaGuard, does that apart from increasing safety, does it also have any effect on the run times of ESPs?

No. I think it's really more of the safety. It's when they shut down and they have the sand fallback, what it'll actually do is the magnet motor actually send a current up the cable and that's where the electricity risk comes out. The MagnaGuard acts as a break and doesn't allow that motor to turn and by preventing the motor turning, prevent the electricity from the current from being generated. So that's really the safety feature. So I think what we look at it as is, I've talked to customers who really like permanent magnet motors, right. The efficiency that they have, the lower electricity usage that permanent magnet motors have that they all see that as positive. If we can help them overcome the safety risk, which is real and which is concerning, obviously, electrocution is a scary event in the field. We can prevent that, that we can really help the adoption of permanent magnet motors.

Thank you.

Thanks, Jeff.

One moment for our next question. Our next question comes from the line of [Eric Carlson].

Cash flow continues to be strong. I mean, when you produce 25% of your current market cap and cash over the first three quarters. It looks like it's starting to get to the point where it can open the door for opportunities. I guess, when we just think about free cash flow durability, and you kind of guide me to this a little bit, obviously, it helps that, like, year-over-year interest expense from ‘25 to ‘24 kind of based on what you said is and you're probably down a third, maybe a little bit more. And can you just refer well -- I think you mentioned a 1.9x net leverage ratio. Is that as of the kind of the close of the high yield bonds [inaudible].

Yes. That's a great point. So 1.9x, Eric is using year to date EBITDA annualized. So we have the full impact of Variperm being in there. And I think that's the point. And you're spot on about the cash. It's exciting for us. It was -- we felt like an ambitious goal early in the year to set out the range that we set out, something we needed to do. The fact that we're already at the bottom end of our range, which we raised last quarter and therefore raised again this quarter, we feel like that's a good track record. And we did want to lay out guidance going ahead. So this isn't a one-time wonder where we're monetizing a bunch of EBITDA or anything like that I'm sorry monetizing a bunch of working capital. It really is something that we think is durable. And then as you mentioned, as we continue to generate cash, our new debt structure will allow us to pay down more debt. So we're refinancing $120 million of debt with $100 million of new bonds for the five year tenure and leaving some on the revolver. So as we generate cash, we'll drop that revolver balance as well, so we can further reduce interest expense and have a good virtuous cycle. So we're really excited about the look ahead on cash, something we're committed to. And we think we'll as you mentioned open up opportunities both for delevering importantly for M&A which is still out there is a great way for us to grow and finally for the ability to return cash to shareholders.

Yes. So would the expectation be high yield that closes next week? I would assume you guys are going to try to issue a redemption notice for the existing long-term notes, and then that that's like a month long process. And then what is the process on the seller note? You can just pay that in cash whenever you'd like.

Yes, very similar. There's a redemption process and all that is kind of happening simultaneously. So we'll pay off all the -- we'll pay off our existing debt when we close the bond issuance here next week. So that's all kind of in process.

Okay. And then, so 1.9x net leverage, the new high yield notes, you need to get to 1.5x to be able to kind of do that 50-50 return cash to shareholders. That's correct, right?

That's right. So we need to be at 1.5x leverage pro-forma for the – pro-forma for a share buyback or for any kind of a distribution. And given our guidance, we should be somewhere in the 1.8x to 1.9x range at the end of this year. And then think about that cash flow, obviously one of the reason we wanted to look ahead with cash is that continues to get better over time. And then the question for us and the challenge is how do we get do even better than that? How do we increase our EBITDA, so that we can pull that net leverage ratio down or how do we generate more cash? So those can come through our beat to market strategy, gaining share, margin improvement that could come through mix. I think Dan's question alluded to that or cost management, all of which boosts our EBITDA number. And then asset monetization, so that $50 million to $60 million number did not have any working capital drawdown there, which would obviously enhance cash and lower our leverage. So all those levers we've got our hands on and working to pull those as hard and as quickly as we can.

Great. Yes, so that kind of puts you towards, I mean, next year, when you can kind of think about getting to, I don't know, call it 3.0, kind of fix the balance sheet, look good, then kind of take on the return to capital, whether that's buybacks, dividends, pay down debt or even go out and buy something. But I guess my last thought was, I mean Variperm, I mean has helped a lot and kind of a home run. I think you bought that at 3.7x trailing 12 month EBITDA. At least that was when it was announced.

That's right.

And now, FET as an entity, if you kind of did the pro-forma number looking at Variperm trades at probably 3.6x at $14 a share and a 35% free cash flow yield plus. It seems like it would be hard to come up with something better to do with cash than buy more of what you already own, which is obviously buying back your shares. So I guess when you think about --obviously, there's a difference between M&A because you kind of have the flexibility with the new high yield notes. It seems like so if you could find something that could incrementally add to free cash flow, without considerably overleveraging yourself, obviously, like, the hurdle rate is a little bit different there because you have more flexibility to do so. But when you think about that, like, what does something -- if you can buy your own stock for the value it is now versus go and buy somebody else for what -- I mean, I guess, are there things out in the market right now that you can find in the private markets or carve out from somebody else in the you can find that kind of hurdle rate that makes M&A transaction make sense versus just being patient getting to the middle of next year, the first third of next year, and then just saying, I'm going to buy my own stock and I'm going to take kind of my destiny into my own hands versus let the market do it for me?

Yes. Eric, I think as you were talking there, I think you laid out really the evaluation that we do, right? I think when we look at acquisitions, is that investment in the acquisition going to increase our free cash flow per share or are we better off using that capital to buy our shares? And I think that will be the threshold that we analyze going forward. And again it is hard to find something as attractive as our own stock. 30% to 35% free cash flow yield, it's hard to buy companies like that. If we find one though, it'd be we may snap that up if it's better, but all signs I think right now point to we're probably one of the best investments that you can make.

That's helpful. Yes, I don't think I have anything else. The only other thing I would say is, I listened to the precision drilling call. I mean, they seem pretty bullish on Canada going into next year. And then I didn't see it in the release. I'm sure it'll be in 10 year your quarterly filing. But I know that the Middle East was kind of a revenue growth outlier relative to kind of activity growth, kind of year-to-date through Q2. Is that still kind of holding true? And if you could just talk maybe a little bit more on the opportunity set there, it would be interesting because it feels like one of the markets that kind of could be a pretty big driver.

Yes, Eric. We're excited about opportunities internationally. You mentioned Canada, and the market does seem to be more bullish there as far as adding rigs. As we've get deeper into the oil sands journey, there are a lot of rigs outside of the oil sands in the Montney and other places generating gas and that seems to be a big piece of the uplift there, oil sands being more steady, which we like that. Also you mentioned the Middle East and we did have a really good Q2 and we're excited about what that looks like forward. So the Q3 revenue for us was a little bit softer than the second quarter, and that's really just timing of deliveries of product. But the opportunities there in the Middle East seem to be really strong. And I know Neal can chip in on that as well.

Yes. In fact I'll be there being in the region next week and spending time with customers. And as we're kind of doing our pre work with my teams, there definitely seems to be a lot of opportunities that we're chasing and hopeful to be closing in the Middle East and beyond again. We think the unconventional story is expanding. We're getting a lot of tailwind from that as we export our technology, Argentina and the Middle East as well. So it's exciting. I think we're fairly early there. And again with our footprint for a company our size, we're able to play very well.

Great. That's all helpful. Another good quarter. Keep the cash coming.

Thanks, Eric.

Thank you, Eric.

Thank you. At this time, I would now like to turn the conference back over to Neal Lux for closing remarks.

Thank you, Gigi, and thank you all for your support and participation on today's call. We look forward to our next meeting in February to discuss FET's fourth quarter and full year 2024 results. Thank you.