Greetings, and welcome to U.S. Well Services Fourth Quarter Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference call is being recorded.

It is now my pleasure to introduce your host for today’s call, Josh Shapiro. Thank you. You may begin..

Thank you, operator, and good morning, everyone. We appreciate you joining us for the U.S. Well Services conference call and webcast to review full year and fourth quarter 2019 results. With me today are Joel Broussard, Chief Executive Officer; and Kyle O’Neill, Chief Financial Officer. Following their prepared remarks, the call will be open for Q&A.

Yesterday evening U.S. Well Services released its full year and fourth quarter 2019 earnings. The earnings release can be found on the Company’s website at www.uswellservices.com. The company also intends to file 2019 Form 10-K with the SEC later this week.

Please note that the information reported on this call speaks only as of today, March 4, 2020, and therefore, time-sensitive information may no longer be accurate as of the time of any replay listening or transcript reading.

In addition, the comments made by management during this conference call may contain forward-looking statements within the meaning of the United States federal securities laws. These forward-looking statements reflect the current views of U.S. Well Services management.

However, various risks, uncertainties and contingencies could cause our actual results, performance or achievements to differ materially from those expressed in the statements made by management.

The listener is encouraged to review yesterday’s earnings release and the company’s filings with the SEC to understand those risks, uncertainties and contingencies. Also, during today’s call, we will reference certain non-GAAP financial measures.

Reconciliations of these non-GAAP financial measures to the most directly comparable GAAP measures are included in our earnings release. And now I’d like to turn the call over to U.S. Well Services’ CEO, Mr. Joel Broussard..

Thanks, Josh. Good morning, everyone, and thank you for joining us on today’s call to review U.S. Well Services’ full and fourth quarter results 2019. In 2019, our industry experienced challenging market conditions that continued to deteriorate through this year. I am proud of everything that U.S. Well Services accomplished, amid this difficult backdrop.

And we’d like to take a moment to review some of the highlights from the year. USWS deployed three new electric frac fleets in 2019 and also commissioned a fourth electric fleet that went into work during the first quarter of 2020.

We have completed over 4,000 stages with our electric fleets in 2019 and have completed over 12,000 stages since the Clean Fleet was first introduced in 2014. Our expertise in operating electric frac fleets continues to expand, and we believe we positioned USWS as the market leader in electric fracturing. U.S.

Well Services fleet currently includes five all-electric hydraulic fracturing fleets as well as our eight conventional diesel fleets. We averaged 9.9 active frac fleets during 2019 with a utilization rate of approximately 89%, which equates to a fully utilized fleet equivalent of 8.8 fleets for the year.

For the full year 2019, USWS generated revenue of $514.8 million, which reflects a 21% decrease relative to 2018 revenues. Adjusted EBITDA was $118 million, which is effectively flat versus 2018 adjusted EBITDA.

Adjusted EBITDA per fully utilized fleet was approximately $13.4 million or $11.7 million after deducting maintenance capital expenditures related to fluid ends. Over the course of the year, U.S. Well Services demonstrated its best-in-class operational capabilities, ability to leverage emerging technologies to drive greater efficiencies in the field.

We pumped for over 36,600 hours in 2019, which equates to nearly 4,200 hours per fully utilized fleet. Our efficiency was enabled by our operations and technology team’s ability to leverage data to inform supply chain decisions and equipment designs. An example of this was our early adoption of using all large-bore flow iron.

This decision and others are what allows USWS to consistently pump high hour days under harsh operating conditions. Our intellectual property portfolio was expanded considerably in 2019. We now have 30 patents with an additional 104 patents pending.

We believe our IP, combined with our experience operating and maintain electric frac fleets will continue to be a differentiating asset as electric fleet share of the overall pressure pumping market grows. Throughout the course of the year, market conditions deteriorated, culminating in a sharp deceleration activity during the fourth quarter. U.S.

Well Services was adversely impacted by customer-driven decisions to delay jobs and longer than anticipated holiday shutdowns. As a result, U.S. Well Services active fleets experienced lower utilization than in prior quarters. During the fourth quarter, USWS averaged 8-point active fleets, down from 9.3 fleets in the previous quarter.

Utilization was 84%, resulting in a 6.8 fully utilized fleets now from 8.4 fully utilized fleets in the third quarter of 2019. Revenue for the fourth quarter was $92.7 million, which represents a 29% sequential decline relative to the third quarter of 2019.

USWS generated an adjusted EBITDA of approximately $12.1 million for the fourth quarter as compared to $35.3 million for the third quarter of 2019. While market pricing and oversupply of horsepower remain critical challenges for our industry, U.S. Well Services has been successful in deploying our equipment for high quality customers.

We are currently operating 11 active fleets, of which four are the new generation electric frac fleets. The recent outbreak of the coronavirus has created concerns about global economic growth and crude oil demand, resulting in a rapid decline in oil prices.

Although the ultimate impact to our business is unclear at this time, any recession or sustained period of slowing economic growth would be detrimental. We are visually monitoring the situation and maintaining an active dialogue with our customers so that USWS can react rapidly as needed.

I would point out that there are over 90% of USWS fleet is working on either a contracted or dedicated basis. We believe our limited exposures spot market is an asset in a volatile market, such as this one. Over the long-term, we believe U.S.

Well Services, combination of top-tier efficiency and leading-edge technology, offers customers a unique value proposition. Our electric frac technology provides the optimal combination of fuel cost savings for customers, emissions reductions and reduced ownership costs.

In the current market environment, demand for these next-generation fleets significantly outpaces demand for conventional diesel-powered equipment, and we believe that there will be an additional opportunities to deploy fleets and generate attractive returns on capital.

Our management team is continuously evaluating near-term risk, including fluctuations in commodity prices along with long-term opportunities to create value for our shareholders. With that, I will turn it over to Kyle O’Neill, our Chief Financial Officer..

Thanks, Joe, and good morning, everyone. As Joel mentioned, revenue for the full year 2019 was approximately $514.8 million, down 21% from 2018’s revenue of $648.8 million. This year-over-year decrease was primarily driven by the continued trend for our customers to self-source materials such as sand, chemicals and proppant storage and transportation.

In this context, in 2018, we sold sand to customers in over 50% of our active fleet months as compared to roughly 10% in 2019. While this trend has led to a large reduction in revenues, our adjusted EBITDA margins have actually improved as our business mix continues to shift towards higher-margin service and equipment revenue.

Year-over-year, service and equipment revenue actually increased by 12%. Our cost of services was approximately $384 million in 2019 compared to $533 million in 2018. The decrease in cost of services was primarily driven by lower cost materials, being sand and chemicals and transportation.

Although USWS completed approximately 24% more stages per active fleet in 2019 versus 2018, our repair and maintenance costs increased by only 1% year-over-year. This is largely attributable to the higher proportion of electric fleets in our portfolio in 2019 versus 2018.

We’ve often stated that the cost of ownership is lower for electric frac fleet relative to conventional diesel or dual fuel frac equipment. This point is often overlooked but is evident in our financial performance.

We believe that lower cost to maintain electric fleets is a critical competitive advantage, particularly in a challenging market, such as the one in which we operate today. SG&A costs were approximately $31.9 million in 2019, down 8% from 2018 levels of $34.5 million.

Excluding stock-based compensation and transaction-related costs, SG&A increased year-over-year from $15.9 million in 2018 to $25.3 million in 2019. This increase was primarily driven by public company costs, such as reporting expenses and increased corporate headcount. We generated approximately $118 million of adjusted EBITDA in 2019.

That compares to $117.4 million in 2018. This equates to an adjusted EBITDA margin approximately 23% versus 18% in 2018. U.S. Well generated approximately $13.4 million of adjusted EBITDA per fully utilized fleet. Turning now to capital expenditures. In 2019, total CapEx was approximately $279.6 million on an accrual basis.

$196.6 million of those capital expenditures were for growth initiatives, all of which was directed towards new electric fleets. $34.7 million of our CapEx was for fleet enhancements, such as the purchase of large-bore iron packages and other supporting equipment. Finally, U.S.

Wells spent approximately $48.3 million in maintenance CapEx in 2019, of which $14.8 million was for fluid ends. This equates to an annual total maintenance CapEx per fully utilized fleet of approximately $5.5 million, of which $1.7 million was for fluid ends. As of December 31, 2019, U.S.

Wells had approximately $52.4 million of total liquidity comprised of $41.4 million of cash and restricted cash on hand and $11 million of availability under our ABL facility. I’d like to take a moment to review key highlights from the fourth quarter of 2019. As Joel mentioned, U.S.

well services entered the fourth quarter prepared to be nearly fully utilized. Several of our customers elected to push back work from the mid-fourth quarter to the late fourth quarter or early first quarter of 2020, leaving us with fully crude fleets that remain inactive for a large portion of the quarter.

Revenue in the fourth quarter declined 29% sequentially to $92.7 million. The decrease in revenue was driven by fewer fleets working and lower utilization resulting from a larger-than-normal share of stack frac work. Our cost of service decreased 16% sequentially to $76.1 million, driven largely by the reduction in activity levels.

Although the cost of services declined overall, our labor cost per active fleet increased 8% as we carried more personnel than required to support active operations. Adjusted EBITDA for the fourth quarter was approximately $12.1 million, down from 35.3% in the third quarter.

Adjusted EBITDA margins were approximately 13% compared to 27% in the third quarter of 2019. On a fully utilized basis, U.S. Well Services generated $7.2 million of adjusted EBITDA per fleet, or $6.4 million after deducting fluid end CapEx. SG&A was approximately $7.4 million in the fourth quarter of 2019 compared to 8.2% in Q3 of 2019.

And excluding share-based compensation and transaction costs, SG&A was $6.1 million in the fourth quarter compared to 6.8% in the third quarter. At this time, I’d like to turn the call back over to Joel Broussard for some final remarks..

Thanks, Kyle. We believe U.S. Well Services is well positioned entering in 2020, and we believe our operational capabilities, cutting-edge technology and alignment with our customer goals of reducing completion costs while improving environmental stewardship will continue to serve as a key differentiator for us going forward.

With the uncertainty that is permeating the market at the moment, USWS management is actively monitoring our operations in order to be able to react swiftly to any adverse impacts on our business while remaining keenly focused on creating long-term value. With that, I would like to turn the call over to the operator for questions and answers..

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Stephen Gengaro with Stifel. Please proceed with your question..

Thank you and good morning. I guess, I’ll start with two things. The first is you talked about having 11 fleets deployed, and I think you talked about 10 under contract or dedicated arrangements.

As we think about 1Q and in 2020, what is the embedded profitability look like relative to what we’ve seen in 2019?.

Well, Stephen, we don’t give formal guidance, but I think we’re clear in our press release that we’re seeing continued pricing pressure in Q1. That being said, we’re taking a hard look at every cost in our cost structure to look to offset any pricing declines we have.

I think we’re also – any time that we’re deploying crews, and then we’ve talked about this in the past, we will staff up a month, two months ahead of time to ensure adequate training, and we’re putting in the right people on-site for those new crews. That caused us to carry excess headcount in 2019.

So that’s another area where we’ll see improvement in 2020..

Okay.

And so when you – if you were to think about the effective utilization of the 11 fleets, is there any way you could ballpark that when we’re thinking about the first quarter?.

It’s a tough one because of just – customer frac calendars can move around a few days of delay and to catch up with a rig can have an impact on that. But I think that we’ll – we’re optimistic that we’ll see utilization in excess of what we had in Q4..

Okay. Thanks. And then just as a follow-up. When we look at and when you’re talking to your customers on the e-fleet side versus the conventional side, it sounded like over the last couple of months, it’s probably been a little stickier, and you probably been able to – the preference for e-fleet seems to be pretty high.

I mean, are you continuing to see that.

I mean, are you seeing the profitability gap there widening versus where it was six months ago? As maybe prices holding better for e-fleet? Is that a reasonable way to think about it?.

Yes. The profitability between diesel and electric, the gap is widening..

Okay..

Yes. And we’re seeing that both through our pricing and actually lower cost of operating – lower operating costs..

Okay, thank you..

Thank you..

Our next question comes from Dylan Glosser with Simmons & Company. Please proceed with your question..

Hey, good morning, guys..

Hey, good morning.

How are you?.

Good morning..

Just wanted to briefly touch on your electric fleet.

Do you guys expect to deploy the idle electric fleet in either Q1 or Q2? And additionally, can you talk on your expectations for future electric frac deployment for expansion?.

Yes. The idle electric fleet is one of the first ones we built with the triplex pumps. We have a interest, however, we’re going to wait to see if we can get a full calendar for it before we go through the costs of putting a crew on for three or four months..

Understood. And I think you guys mentioned in previous calls that you had already invested in some of the assets to build a new electric fleet.

Have you guys invested any further in that? If so, or if not, how much is remaining on that? Could you remind us of that number?.

We have about $30 million left on one fleet that we decided on to build it out if we have a long-term contract..

Right. Okay. And….

We can have active dialogue, and I think we want to be ready to strike. We have – like we said in the past, we have all the long lead items, and we’d be ready to go once we include the final touches on it for long-term commitment..

Okay, great.

I guess, last thing I’d ask on that, is there a major difference in customer desire for the older electric fleet that you guys currently have versus maybe finishing out that new build?.

Yes. Everybody wants a new build fleet, for sure. They want the latest version..

Yes. I mean, that fleet was designed back in 2012, 2013, went to work in 2014. And it’s a triplex and they’re all triplex pumps. And so it’s very well suited for larger pads. We have less moves per month or per year….

And lower rate, lower pressure..

Lower rate, lower pressure. And we see it today..

Thank you for that color. And I guess, last question for me. In the release, in your prior commentary, you guys mentioned pricing pressure.

Is that pricing pressure more of – is it making pricing flat from Q4 to Q1? Or has pricing come down from Q4 to Q1? And further, what is your expectation? And what are you seeing out there today from maybe what the trajectory is from Q1 to Q2?.

We think pricing is going to be flat through the year, at least ours are, because it’s got so low. And the pricing from fourth quarter to first quarter, we think, is right in line, maybe a slight improvement..

As far as Q1 to Q2 goes, though, with the moves in commodity prices recently, I think it’s difficult to say right now. We’re still watching and evaluating these assembles..

Awesome. Thanks, guys for your time and appreciate it. I’ll turn back..

Thank you..

Our next question comes from Daniel Burke with Johnson Rice. Please proceed with your question..

Hey, good morning, guys..

Hey, good morning, Daniel..

Let’s see, any way to – of the 10 fleets working, contracts are dedicated, would it be possible to get the split into the two buckets? And then also, could you just remind us how the fleets that are considered contracted work and how pricing works on those fleets?.

Sure. I mean, I think we’ve got….

Three dedicated..

Three dedicated and the rest are under what we call contracts. The difference between the two is the – under a contract, there’s no ability to cancel or there is some type of penalty if a customer were to cancel for convenience. The dedications are really a pricing agreement where it’s for, let’s say, a year.

However, they could cancel us, it may contain some type of language that says we have our – they have a fleet running, we get the work, but there’s no financial penalty..

Okay, got it. Thanks for that, guys. And let’s see. Maybe one more on the financial front.

Any insights on how to think about, assuming no further growth CapEx in – or no new fleets added in 2020 on the electric side, Kyle, can you help me think about how to think about both CapEx and maybe working capital since you’re starting from a pretty low revenue base at year-end in 2020?.

Yes. I mean, I think that right now, we’ve – anytime we transition from one set of customers to another set, which we did pick up a couple of new customers in Q4 and Q1, we’ll see working capital kind of stretch out a little bit as we kind of get into that payment cycle. So I think we’ll see a little bit of release there and should improve.

On the CapEx side, with no new growth CapEx, and we can – in 2019, our total maintenance CapEx was about $5.5 million per fleet that included a $1.7 million of fluid ends, and I think that will be in line. We’re working very diligently to bring that number down throughout the year.

We’re seeing some price reductions in components, but more importantly, we’re focused on technology developments, things like our FRAC MD, which can help us reduce the vibrations on our pumps, and that directly translates into reduced repair and maintenance and maintenance CapEx there.

So I think the same range for maintenance CapEx that we had last year, kind of $5 million to $6 million. $5.5 million is kind of where we ended up for 2019, but we’ve got a very sharp eye to reduce that number throughout the year..

Okay, great. And then maybe a last one, Joel. Just impressive improvement in efficiencies in 2019 in terms of stages per fleet, and the industry made pretty good strides as well.

As you look at 2020, I recognize that what you can achieve is partly attributable to the opportunity set the customer presents to you, but with maybe a greater mix of electric fleets in 2020, do you think you can make further gains in terms of stages per active fleet in 2020?.

That’s a great question. There’s only so many hours in a day. And I think we were over – from 2018 and 2019, we increased 30% on efficiencies. So we’re bucking up to that 24 hours in a day between well swaps and wireline slight, but not as aggressive as it’s been from 2018 and 2019, maybe a 5% to 8% increase in efficiencies..

Okay. Maybe I should have phrased that in terms of pump hours per day. I appreciate that you guys do give those. Maybe that’s a better metric in stages. But, okay, it makes sense. Okay, all right, guys. I’ll leave it there. Thank you for the time..

Thank you so much, Daniel..

Our next question is from Stephen Gengaro with Stifel. Please proceed with your question..

Just as a follow-up, I wanted to just follow-up on the working capital question. I think, Kyle, you mentioned some improvement when we look at sort of full year 2020 versus 2019.

Was the comment on the full year, was it more a 1Q comment? Or should I sort of think about the full year working capital needs?.

I think, it’s both. I think you’ll see an improvement in – starting in Q1 and for the full year..

Okay, thanks. And then as you look at the overall market right now and you sort of think about some of the things we’ve seen on the fleet attrition side, and you just think about just from an overall pressure pumping supply-demand perspective, what’s your sort of current view on what the world looks like over the next three or five quarters..

The overall high was 430 fleets working, and it dropped to 350. I think with consolidation, we’re seeing on E&P companies, the new high, it’s going to be in the low 300s. And with downturn it could possibly be 220 fleets working. That’s our take..

Okay. Great, thank you..

Thank you..

There are no further questions at this time. At this point, I’d like to turn the floor back over to Mr. Broussard for closing comments..

Thank you all for joining. Appreciate everything..

Ladies and gentlemen, thank you for your participation. This does conclude today’s teleconference. You may disconnect your lines, and have a wonderful day..