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Good day, and welcome to the Ranger Energy’s Second Quarter 2023 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation there will be an opportunity to ask questions. [Operator Instructions] Please note, this event is being recorded. And now I would like to turn the conference over to Shelley Weimer, VP of Reporting and Finance. Please go ahead.

Thank you, operator, and welcome to Ranger Energy Services second quarter 2023 results conference call. After the market closed yesterday, Ranger issued a press release summarizing operating and financial results for the three and six months ended June 30, 2023. This press release, together with accompanying presentation materials, are available in the Investor Relations section of our website at www.rangerenergy.com. Today's discussion may contain forward-looking statements about future business and financial expectations. Actual results may differ significantly from those projected in today's forward-looking statements due to various risks and uncertainties, including the risks described in our periodic reports filed with the Securities and Exchange Commission. Except as required by law, we undertake no obligation to update our forward-looking statements. Further, please note that non-GAAP financial measures may be disclosed during this call. A full reconciliation of GAAP to non-GAAP measurements are available in our latest quarterly earnings release and conference call presentation. With that, I would now like to turn the conference call over to Stuart Bodden, Ranger's CEO; and Melissa Cougle, Ranger's CFO, for those prepared remarks.

Thank you, Shelley. Good morning, everyone. Thank you all for joining us today. We have a lot to announce and celebrate this quarter, and we are excited to speak with you this morning. I'll start by providing a high-level summary of our performance in the second quarter and then discuss reaching our net debt zero target, followed by the status of our capital returns program. We had a strong quarter with revenue of $163.2 million, representing a 6% increase compared to the second quarter of 2022 and a sequential increase from our first quarter. Our net income of $6.1 million or $0.24 per share is up from a net loss of $0.4 million in the same quarter last year and represents an annualized yield of nearly 10% based on our recent share price. We also achieved a 22% increase in adjusted EBITDA to $21.9 million from $18 million in the second quarter of 2022. We achieved strong quarterly results despite dealing with significant market volatility, which made the first half of 2023 softer than we anticipated. Declining drilling and completions activity largely in gas-weighted basins, caused more white space in our schedules due to asset movements between regions. However, we still achieved a 16% year-to-date increase in revenue compared to the same period last year, which is a testament to our service quality and the resiliency of our production-focused business model. We continuously monitor activity levels and pricing within our basins, and I'm pleased to report that pricing has been resilient. We have maintained pricing in our High Specification Rig segment, and we have also seen recent stabilization in the Wireline and ancillary service lines, which suggest the worst is behind us. Where we have strategically shifted assets from gas to oil basins, we've been able to do so at comparable rates. Our flexibility has allowed us to adapt to market conditions and optimize our operations accordingly. This would not have been possible without the constant hustle of our operations teams who have stayed focused on keeping utilization up and holding price. Looking ahead to the second half of the year, we expect commodity prices will stabilize and drilling and frac activity will begin to rebound. However, in the event a recovery takes longer than we expect, Ranger's differentiated business model and significant production focus positions us successfully to navigate volatility and provide stability in our business. Importantly, we continue to see customers push to maintain their current production levels in the oil basins amid their expectations for increased oil demand in the medium term. Activity in gas basins remain slower, but the pricing outlook for the next 12 months is improving. Our commitment to staying agile and responsive to market dynamics has proven to be a key strength for us. We remain confident in our ability to adapt to changing conditions and deliver value to our stakeholders. Now let's take a closer look at our business segment financial results. The revenue growth in our High Specification Rigs segment was slightly muted during the quarter, with a 2% increase year-over-year. However, we are encouraged by the fact that our hourly rig rates were $687 per hour in the second quarter compared to $632 per hour in the same quarter of 2022. Year-to-date, we have achieved approximately 10% revenue growth in this segment compared to last year and continue to believe we can further grow this segment in the future. In our Wireline segment, we recently observed the Wireline market is beginning to stabilize. We're also beginning to see fundamental improvements in the business, with segment revenue up 10% from last year in the second quarter on the back of increased operating activity. Finally, our Processing Solutions and ancillary services segment showed robust growth with revenue up 27% year-over-year as compared to 2022. All lines of business within this segment, including coiled tubing, Processing Solutions, rentals and fishing and plugging and abandonment services experienced solid increases. Before turning the call over to Melissa, I would like to provide an update on our net debt zero target and our capital allocation strategy. I am proud to report that our strategy of capital-light operations and maximizing free cash flow conversion has been validated by the speed at which we have paid down our outstanding debt balance. We have paid down over $56 million of debt over the past 12 months, and we ended the quarter with just $300,000 in total debt, effectively achieving our stated goal of becoming net debt zero. Congratulations, and thanks to the entire Ranger team for staying laser focused and executing at a high level every day to make this goal a reality. Our strong balance sheet gives us the ability to explore accretive inorganic growth opportunities and expand our capital returns program. Earlier this year, we committed to instituting a dividend as we eliminated our debt, and I'm pleased to report that the Board will be initiating our first quarterly dividend of $0.05 per share to be paid out beginning this quarter. In addition to the dividend, we initiated our stock repurchase program earlier this year and bought back approximately $5.9 million worth of our common stock during the second quarter, representing 37% of our quarterly free cash flow. As a reminder, we committed to returning at least 25% of our annual free cash flow to investors through dividends and share repurchases. We intend to continue share repurchases, and we'll continue to evaluate the best way to do so considering our already significant shareholder concentration. Returning capital to our shareholders is a key priority for us, and we are excited that our robust free cash flow and balance sheet strength gives us the ability to do so with confidence while also remaining active in pursuit of value-creating strategic opportunities. Case in point, I'm pleased to report that just last week, we signed a purchase agreement to acquire 15 pumps and associated equipment for $7.25 million. We have fully inspected the equipment and several are currently operating under current contracts. When Ranger closes the transaction, we will deploy these assets to our Permian and Northern regions in our high-margin pump-down service line within our Wireline segment. Financially, we expect these assets to be immediately accretive to revenue and margins with an expected payback period of well under two years. These types of tuck-in acquisitions provide great pull-through revenue opportunities for our existing businesses and allow us to further expand our margins and presence with our customers. We continue to engage with potential sellers on various strategic opportunities, but we will remain patient. We have a strong track record of making accretive deals, and we'll wait until we find the right opportunity that will result in attractive returns on investment. With that, I will now pass the call to Melissa to provide a more detailed discussion of our quarterly financial results.

Thank you, Stuart, and good morning, everyone. Let's dive into the details of our second quarter 2023 financial results. As Stuart mentioned, our revenue for the quarter was $163.2 million, an increase of 6% from $153.6 million in the second quarter of 2022 and a 15% increase year-over-year when looking at the first half of the year. These gains are indicative of the operating leverage and momentum we achieved as our business expanded last year. It also demonstrates the impressive resilience of our business when you consider the market pressures of declining rig rates and drilling activity this year. Moving on to cost of services. We recognized expenses totaling $136.3 million or 84% of revenue as compared to $130 million or 85% of revenue in the prior year period. Cost of services during 2023 have been unexpectedly impacted by employing medical costs due to an abnormally elevated number of high-cost claimants relative to the prior year. This affected the Ranger financials by $3.3 million on a year-to-date basis compared to the same period in 2022. These costs are expected to somewhat normalize in the back half of the year as stop loss coverage begins to support these claims. Despite these unanticipated costs, we still achieved a gross margin of 16.5%, representing an improvement of over 100 basis points from the prior year. General and administrative expenses were approximately $7.3 million for the second quarter compared to $11.2 million in the prior year period with the decline attributable to decreased acquisition and integration costs. We run an efficient back-office function with excellent G&A run rate as a percentage of revenue and take pride in constantly looking for ways to improve the support we provide to our operations team. Net income for the second quarter totaled $6.1 million or $0.24 per fully diluted share compared to a net loss of $400,000 or $0.02 per share in the same period last year. We are reporting adjusted EBITDA of $21.9 million, up $4 million year-over-year and a sequential increase. The year-over-year increase in adjusted EBITDA is a result of increased operating activity and improvements in pricing and operating efficiency, partially offset by the employee medical cost issue I previously mentioned. Our strong results and team efforts have resulted in generating positive free cash flow of $28.1 million year-to-date. During the first half of the year, we exceeded our 60% free cash flow conversion target despite completing several compliance certifications for our rigs that required some capital expenditures. Turning to our balance sheet. As Stuart mentioned, we have made substantial progress in reducing our total debt, which now stands at just $300,000 compared to $18.6 million at the end of 2022. Our overall financial health has improved dramatically since this time last year when we reported a debt balance of $56.5 million. The entire team here at Ranger takes great pride in having achieved this milestone that positions us to be nimble and responsive to future opportunities. As we announced at the end of May, we entered into a new ABL lending facility with Wells Fargo. The facility includes $75 million of committed liquidity with an accordion feature allowing expansion to $150 million to give us ample flexibility to grow as we need. Our borrowing base is determined from our accounts receivable balances, and we have a standard fixed charge coverage ratio covenant that is triggered based on borrowing levels. We believe this facility provides us with a more economic and flexible structure that will allow us to quickly respond to strategic opportunities as they arrive. I'll now turn the call back over to Stuart to give you some updated thoughts about the back half of the year.

Thanks, Melissa. In evaluating our results for the first half of the year and considering our expectations for the back half of the year, we forecast that Ranger can still achieve the lower end of our original guidance ranges for profitability. That said, the shifting of assets and resources did create some white spaces here on the revenue side, and we have narrowed and lowered our guidance ranges accordingly. We now expect revenue to be between $660 million and $680 million and adjusted EBITDA to be between $92 million and $97 million. We continue to expect our free cash flow conversion rate to be approximately 60% and achieve between $55 million and $65 million of free cash flow for the year. Capital expenditures and leases are expected to remain at $25 million to $35 million. Overall, our guidance continues to reflect strong revenue growth and greatly improved profitability as of our efforts to improve utilization and fixed cost absorption. We expect this to remain true through the second half of the year, with the third quarter representing a peak in activity. And barring an early winter, we have the opportunity to deliver year-over-year growth in the fourth quarter as well. While commodity price pressure and rig count declines have affected all in North America on [indiscernible] this year, Ranger has successfully navigated these challenges because of our outstanding teams and production-focused service lines. Additionally, as we have mentioned before, we are seeing efforts by many large customers to consolidate service providers with an emphasis on service quality, safety and multi-basin scale. Given Ranger's geographic reach and reputation for safe and high-quality operations, we are in advanced conversations with several customers on projects and can meaningfully boost our utilization in the second half of the year and over the next 12 to 24 months. We hope to share more on these projects in the near future. In conclusion, we want to extend our appreciation for your continued interest in and support of Ranger Energy Services. We firmly believe that we have a business that will create value over the long term, and we remain excited about the opportunities that lie ahead. Now we would like to open the floor for any questions. Operator, please compile the list.

Thank you. And we will begin the question-and-answer session. [Operator Instructions] Our first question comes from Don Crist from Johnson Rice. Don, please go ahead.

Good morning, guys. How are you all?

Good morning, Don. How are you?

Good. I wanted to ask about demand, Stuart. Obviously, a lot of your operations are workover related, not new drill related. And I kind of wanted to dive into the demand picture. And how is the demand on the workover side moved since the second quarter when oil was at – in the high 60s versus the low 80s now. Has that market moved a lot over the past couple of months?

Yes, I'll start off. So I'd say it's definitely improving as the oil prices have firmed up. Again, I think as we've talked about in the past, it really depends on where you are. So the natural gas basins haven't really started to – I mean, they're starting to come back, but are still pretty soft. The oilier basins are quite strong. So it's puts and takes. I would also say when you kind of go look in production-related work continues to be strong. We've seen a little bit of softness on the completion side, which isn't a surprise. But overall, we're seeing pretty steady demand, and we are starting to get customer inquiries for more work in the back half of the year.

Okay. And I wanted to ask one question on the guidance. There's a sentence in the guidance paragraph that says the third quarter should be pretty good. I'm assuming that, that means that we should see a pretty good step-up in the third quarter versus the second quarter and then maybe a little bit of moderation in the fourth quarter. Am I thinking about that correctly?

I think you are, Don. Yes, that's exactly right. For us, third quarter has historically been our strongest quarter, and we expect that to be the case again this year.

Okay. And if I could sneak in just one more. On the M&A, congrats on getting your first M&A transaction done in quite a while. Was that done with cash or shares or a combination of the two? Or how should I think about that?

It was done with all cash, Don. And the reason is we think that's the most accretive thing for our shareholders.

Okay. I appreciate it. I will turn it back for now.

And our next question comes from John Fichthorn from Dialectic Capital. John, you may go ahead.

Thanks, guys. Nice job on the share repurchase. Nice to see you exceeding the 25%. I guess my first question is how do you think about that? And – so is it now 35%? Or is it just dependent on price? Just give us some ideas how you continue to think about the capital return either through share buybacks or through targeted acquisitions like the one you've done – just did?

Thanks for the questions, John. Good morning. I think we'll continue to be opportunistic. And I think it does depend on where the stock is trading. What I would say is that we're obviously very bullish and very optimistic about the long-term prospects of the company. And if Ranger is trading at discounting levels, we will be actively purchasing shares.

Yes, just speaking from a shareholder at 4x free cash flow, I would continue to say you're trading at actively discounted levels even here. So don't let your meat loaf, as we like to say. On the second, you mentioned maybe some large contracts or negotiation. Are those at all in the guidance? And can you give us an idea understanding that – we have no idea if they're going to close or not. And with all the standard caveats, what kind of like size we're talking about?

Yes. So right now, they are – I wouldn't say that – they're not really in the guidance. But if you think about the deployment schedules for something like this and for some of our larger customers, it would be an increase in rigs. But they'll probably be deployed over, call it, six to nine months. So I think you would really start to see the real impact of it next year.

Great. That’s all for now. Thanks a lot.

Thanks, John.

We now have a question from Jeff Robertson from Water Tower Research. Jeff, go ahead.

Thank you, Stuart. A follow-up on the comments you made about customer consolidation that you just addressed. Are those types of contracts, kind of basically one-year type contracts as operators come up with their budget cycles? Or do they potentially give longer visibility into revenue?

Right now, the discussions are around probably a one-year contract. They obviously have an evergreen kind of nature and feature in them. What I would say is the nature of the contract that we've been talking about is – has kind of a floor in it and sort of minimal amounts of work. And again, I think what we're seeing from the customers, Jeff, is that as they struggled with service quality with a lot of smaller players, they're trying to go with kind of more established players that are really focused on service quality and try to guarantee them some work or at least commit to some work over the longer term so that we can invest in the assets and expect a reasonable payback for it.

So it's essentially leveraging your scale and reliability to provide the customer something that they can count on?

Absolutely. And we've been taking a lot of inbounds, I would say, over the last six months. And our impression is that operators right now are really very – are really doing a hard review of their suppliers because I think they've been struggling with, as I said, service quality, safety, et cetera. And so I think they're just trying to shrink it down to the most proficient providers of service.

Stuart, you touched on the acquisition that you funded with cash. Now that you're at net debt zero, can you talk about your philosophy on using debt as an acquisition and how that would play into trying to return – if you took on debt, how it would play into trying to return to your leverage goals?

Yes, I'll start, and Melissa will chime in as well. So we obviously have been pretty vocal about wanting to keep very modest debt levels. That said, we have been – we've looked at a number of opportunities. We're going to be patient. We know it needs to be accretive. That said, I do think the ability to kick in some cash has been an advantage to us. When you look at opportunities. Obviously, it increases accretion. And also just give us, we think, an advantage and – or it could give us an advantage when we bid on things. So I would say I don't think we're afraid to use it for the right deal. But again, I don't think we want to kind of be a highly levered company, not by any means.

I would agree with that. I think the only other factor probably that weighs into our discussion is, I think we do remain equity friendly, would like the share price to be at a much higher level. But given our liquidity and our flow, I think for really small deals, cash might solve this into the world for all the reasons Stuart laid out. As we get to bigger, there's an added advantage. I think our goal would be to try to support the share price better and start to get to improve valuations whereby then when we go to do a larger scale transaction, we could put in some equity, improve float and liquidity and things start to really gather traction for us again at the moment.

Thank you for taking my questions.

Yes. Thanks, Jeff.

Welcome.

[Operator Instructions] Our next question is coming from William Kim from Presidio Asset Management. William, please go ahead.

Hey, Stuart. Good job getting that net debt to zero.

Thanks, William.

I guess I have a few questions. And I guess right on the recent acquisition, you mentioned, I guess, the two-year payback, is that a free cash flow payback or EBITDA payback?

EBITDA payback. We do view CapEx as being pretty mild, and I would say it's also under lease. So it's not two turns, it's actually noticeably better. It's going to be depending – we have a bit of a range depending upon exactly how the utilization deployment works, but it could be as low as – fewer than 20 months is what I'm looking at in the current model.

Great. Okay. And then those are pretty good attractive returns. How did that deal come about? Was it like a distressed situation? How did you end up sourcing that deal?

It was a distress situation. And it was a situation where, again, our ability to move quickly and use cash was a huge advantage.

Got it. Great. And then, I guess, overall, for the business overall, do you feel like your existing asset base has reached peak returns? And if not, what does that look like? And I guess related to that, what would it take to get the Wireline business economics back to – closer to 2019 levels?

So I'll start with the first question on do we think we've reached the peak? I think – I strongly say we do not think we've reached the peak, just as we do have additional assets that we can deploy both on the rig side and on the Wireline – High Specification Rig side and the Wireline side. The one thing I would highlight is we were very disciplined, I think, over the first half of this year to not drop price to put additional equipment out, right? So we took a philosophy that if we could not put equipment on a comparable rates, we would rather not put that equipment out, right? So we do have additional capacity at our disposal as the market strengthens. So that's kind of the first thing. The second thing I would say on the Wireline side. And I think when you kind of go up underneath or inside of Wireline, Wireline has three kind of sub segments to it. So there's pump down services, we're talked about that, that tends to be high margin. There's a lot of demand we've been turning down to work on that. Production-related services intervention work as well. It's call-out work, it's a little lumpier, but it tends to also be pretty high margin in the plug and perf market, as we've talked about, particularly in the Permian, has still been pretty challenged. We think it's reached bottom. We're starting to see some kind of firmness again in pricing. But I think to get it back to really pre-COVID levels, you would need to see the plug and perf market change dramatically for the better. Obviously, what we're very focused on is pump down in production right now. Again, we don't want to just sort of chase low margin work.

On the plug and perf business, is that – do you feel like there's a secular change going on there? Or is this just a different – still part of the cycle – regular cycle?

I think it's a little bit part of the cycle. As we talked about last quarter, we have seen in the natural gas basins plug and perf are probably some of the easiest assets to move around from basin to basin. And so we did say see in the Permian in particular, we saw trucks from South Texas, Haynesville, et cetera, move into the Permian and then get pretty aggressive with pricing. So I think it's just kind of a function of where we are in the cycle. There's been a little bit of that in the North, but not as much.

Understood. And then the last one for me is related to the balance sheet. I guess, what's kind of the minimum cash you would like to see on the balance sheet? What's an ideal level of cash? And I guess, are there any further asset sales that we can expect from your previous acquisitions?

Yes. So I'll take that. And I would say, look, there's not a magic number that we strive to retain. I think what we view is cash can be quite helpful to us at this point in the cycle and in the sector that we're in. So I think we think about it less in terms of needing to get to a certain minimum cash balance as much as running the right balance of where is our share price today, do we feel like that's a good investment and where we're continuing to deploy incremental cash at versus as we continue to see these additional tuck-in opportunities. So I think of it more as sort of a balance of if we have the ability to pay down – I think as we add debt, we want to pay it back down, right? I think we also view ourselves as being very undervalued in the market, as Stuart mentioned earlier. So I think we also think that's a good use of our cash. So I don't think the team feels that we need to build a stockpile of cash. I think we just view it as we're cash flowing, we need to use that cash very wisely, either through returning it to shareholders, if our share price is depressed or looking for additional opportunities. So I'm not sure that, that – if that's helpful. But I think at the other end of the spectrum, maybe the only thing I would add is I think the team starts to feel – we probably were uncomfortably levered after the Basic asset acquisition. And so if you kind of go to the other end of the spectrum, would we be happy to take on some leverage, I think, yes. And I think as the financial health of the company and the cycle starts to continue to unfold, that becomes more and more comfortable. I just think we're probably not going to look to take leverage on – after two turns, we're going to start to get pretty uncomfortable, but we would absolutely use it as a tool to continue to grow as well.

Great. And then any further asset sales that we can expect from the existing balance sheet?

Yes. I mean we have a few, but it's definitely marginal at this point. And in fact, we didn't discuss this. But in some cases, we feel like it's good for us to hold on to the assets that we have remaining because we may find some advantage and potential transactions down the road.

We have a couple of physical properties that are still holdovers from the acquisitions. But again, it's pretty minimal, William.

All right. Great. Thank you.

Thank you.

And this concludes our question-and-answer session. I would like to turn the conference back over to Stuart Bodden for any closing remarks.

Again, thank you, everybody, for joining the call today. Thank you for your interest in Ranger, and we look forward to speaking with you in the future. Thank you.