Sam Sledge - Director, Investor Relations Dale Redman - Chief Executive Officer Jeff Smith - Chief Financial Officer.

James Wicklund - Credit Suisse John Daniel - Simmons & Co Tommy Moll - Stephens Praveen Narra - Raymond James George O'Leary - TPH Waqar Syed - Goldman Sachs Daniel Burke - Johnson Rice William Thompson - Barclays Kurt Hallead - RBC Vaibhav Vaishnav - Cowen Ken Sill - SunTrust.

Good morning and welcome to the Propetro Holdings Corporation Fourth Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Sam Sledge, Director of Investor Relations. Please go ahead..

Thanks and good morning everyone. We appreciate your participation in today’s call. As in the past, with me today are Chief Executive Officer, Dale Redman and Chief Financial Officer, Jeff Smith.

Yesterday afternoon, we released our earnings announcement for the full year and quarter ended December 31, 2017 which is available on our website at www.propetroservices.com. In addition, this morning we posted a presentation on our website that summarizes our results.

Please note that any comments we make on today’s call regarding projections where our expectations for future events or forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control.

These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release in the risk factors discussed in our filings with the SEC. In addition, during today’s call, we will reference certain non-GAAP financial measures.

Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will answer any questions you may have. So, with that, I will turn the call over to Dale..

Thanks, Sam and good morning everyone. We appreciate you joining us for today’s call. We are pleased to announce our first full year results as a public company.

This was easily the most transformational year in our company’s 12-year history and I would like to thank our employees, customers, supply chain partners and financial sponsors for all of their hard work and believe in Propetro.

The health and performance of our business depends on the strength of our team and we are proud to have the best in the business. I would like to take a couple of moments to recap some significant milestones achieved by our team in 2017.

We organically grew our frac capacity more than 60% during the year from 420,000 horsepower at the end of 2016 to 690,000 horsepower at the end of 2017. This is especially impressive when considering our fleet was 100% utilized and has remained that way since the fourth quarter of 2016.

Supporting our growth initiatives was the successful completion of our IPO in March 2017, which strengthened our balance sheet and infused additional capital into our business.

This past year we also purchased 86 Tier 2 engines that we estimate will yield approximately $30 million in savings and allow us to be opportunistic in addressing growth opportunities as we have already begun using this inventory to meet customer demands.

And finally, to support the increasing demand for our services, we strategically grew employee headcount more than 100% during the year while ensuring there was no sacrifice to safety or performance. Our team’s accomplishments resulted in outstanding financial results for 2017, including strong top line growth and cash generation.

This included revenues of $981.9 million, up 125% over 2016 as well as more than 1,600% increased in adjusted EBITDA to $137.4 million for 2017. Industry-wide activity in 2017 created a substantial demand for pressure pumping services leaving the market substantially undersupply.

We believe the market is still undersupplied and hungry for additional top performing people and equipment. This demand coupled with the long-term plans of our customers gives us clear visibility to continue to confidently invest capital into our business.

In addition, we expect pricing for our services to remain solid while we continue on methodical and taxable approach to increasing profitability by partnering and collaborating with our customers.

Looking more specifically at the fourth quarter of 2017, while customer demand remained strong our financial performance was impacted by certain activities that were transitory in nature and some of it which were not fully anticipated as we headed into the period.

First, we always face seasonality associated with the holidays and work closely with our customers to ensure we are meeting their expectations. We balance this with the need for our employees to have some well deserved time off to recharge and spend time with their families.

As such before the holidays we initiated conversations with customers and we are able to secure additional time off for our employees beyond what we originally plan. On behalf of the entire Propetro team, I want to thank our customers for their flexibility in this regard.

We also experienced a higher number of vertical frac jobs during the fourth quarter than expected as several customers needed to address some end of the year leasehold obligations. While vertical work is generally lower margin than horizontal work, we did our best to help our customers with these obligations.

I would note that for the first quarter of this year we have seen the mix of horizontal and vertical work stabilized at more favorable levels.

Finally, while not as financially significant as the additional holiday time off and elevated vertical work levels during the period, our fourth quarter operating results were also impacted by inclement weather.

As you can see from the financial guidance we provided in our release, we view our fourth quarter results as unique and have since seen efficiencies and profitability return to normal levels.

Turning attention to our targeted fleet expansion initiatives, we were proud to to recently announce the deployment of fleet 17 and 18 during January and February. Yesterday, we announced two additional new build fleets to be delivered and deployed by the end of second and third quarter respectively.

Both of these fleets will work for new customers on a long-term dedicated basis in the Delaware Basin. In addition, we announced that we will be using the remaining 14 Tier 2 engines and inventory to increase the average size of our legacy fleets to 45,000 horsepower per fleet during the first half of 2018.

We are also seeing growth in other services including the recent deployment of two new build cementing units and one new build coil tubing unit. Including – included in our announcement yesterday was our plan to deploy two more cementing units later this year.

And we will capitalize on additional growth opportunities for our other service offerings as appropriate. I will now turn it over to Jeff to discuss our financial results in more detail.

Jeff?.

Thanks Bill and good morning everyone. As Bill discussed we achieved a significant number of accomplishments during 2017 that drove impressive financial results across the board.

The combination of expanding our best in class fleet, steady improvement in pricing and efficiencies and 100% pressure pumping fleet utilization over the period resulted in revenue of $981.9 million for the full year 2017 which was 125% higher than $436.9 million in 2016.

By working closely with our supply chain partners and efficiently managing our internal cost structure, we achieved operating income [Technical Difficulty] over the prior year. Even more impressive was more than 1600% increase in adjusted EBITDA to $137.4 million from $7.89 in 2016.

Based on our outlook for continued growth and demand for our services we look forward to expanding our financial success in 2018. Looking specifically at our sequential quarterly results for fourth quarter as compared to the third quarter of 2017, revenue grew to $313.7 million, which was 11% higher than the $282.7 million in the third quarter.

Contributing to the increase was a larger fleet size in increased demand for our services which led to improved pricing. During the fourth quarter of 2017, 97.4% of total revenue was associated with pressure pumping services as compared to 96.2% in the third quarter of 2017.

Cost of services, excluding depreciation and amortization for the fourth quarter 2017, was $262 million as compared to $225.4 million for the third quarter of 2017. The increase was primarily due to the larger fleet size coupled with an associated increase in headcount.

As a percentage of pressure pumping segment revenues, pressure pumping cost of services increased to 84% from 80% for the third quarter. General and administrative expense was $10.3 million as compared to $11.1 million for the third quarter of 2017.

Net income for the fourth quarter of 2017 totaled $10.1 million or $0.12 per diluted share versus $22 million or $0.25 per diluted share for the third quarter of 2017. Finally, adjusted EBITDA for the fourth quarter of 2017 was $42.8 million as compared to $47.8 million for the third quarter of 2017.

As Dale previously discussed, fourth quarter profitability was impacted by more holiday time off than originally expected, a higher than anticipated amount of vertical frac work and inclement weather. Turning to the balance sheet and capital spending, we ended 2017 with cash on hand of $23.9 million and total debt of $72.9 million.

During 2017, we incurred $305.3 million of capital expenditures, which included seven new build frac fleets, 68 additional Tier 2 diesel engines, a small amount of growth in ancillary services, and maintenance capital expenditures.

Excluding the $28.5 million that was incurred for fleet 17 at the end of 2017, 2017 full year capital expenditures were $276.8 million, which is within our previously guided range at $270 million to $290 million. We are noting this adjustment due to the fact that fleet 17 was not deployed in revenue producing until January of 2018.

Looking at liquidity, we recently announced the amendment of our asset base loan credit facility, including an increase in capacity to $200 million, a 33% increase over the previous borrowing capacity of 159. As of December 31, 2017, total liquidity was $103 million, including $24 million in cash, $79 million available on the Propetro’s ABL.

As I have stated in the past, we remain committed to maintaining financial discipline, strong balance sheet and ample liquidity. We continue to target and net debt to trailing 12 month EBITDA ratio of less than 1.0x. We plan to remain below that level for the foreseeable future.

Finally, due to the timing of reporting year end 2017 results near the end of the first quarter, we are providing preliminary financial estimates for the first quarter of 2018. We currently anticipate revenues of $372 million to $382 million and adjusted EBITDA of between $64 million and $70 million.

This represents a significant improvement in adjusted EBITDA margin as compared to the fourth quarter of 2017. This supports our view of the strong start to 2018 as we expect our first quarter margin will meet or exceed the high point we saw in the third quarter of 2017. With that, I will turn it back to Dale for his closing comments..

Thanks, Jeff. 2017 was an outstanding year for Propetro and I am pleased to report 2018 is off to a great start as we have avoided or mitigated many of the issues our industry has faced in the past few months. Extremely harsh winter weather in the northern U.S.

affected parts of the sand logistics supply chain, primarily rail, but during that time, we were able to lean on our diverse and flexible sand supply chain to keep us moving at the well site and avoid downtime that has been widely reported in our sector.

In the first week of 2018, the Permian also saw extreme cold spell that affected many parts of our industry. However, through close collaboration with our customers we were able to adequately prepare in advance, which allowed us to quickly resume operations at optimal levels as soon as possible.

This year, we believe the leading story in our sector will be about well site performance and execution through customer and supply chain partnerships. We expect these teams will begin to differentiate pressure pumpers in the Permian as the recovery transitions to more of a manufacturing mode.

We believe we are uniquely positioned to provide industry leading execution in this environment.

We will achieve further differentiation by continuing to closely listen and address the needs of our customers, ensuring we have the right equipment in the right places at the right time to help our customers solve issues in an environment of growing technical complexity.

Working with supply chain vendors and support services to avoid industry bottlenecks and inefficiencies and attracting top quality personnel and retaining our best in class workforce.

Capitalizing on our strong industry relationships and a pure Permian focus, we look forward to further improving well site efficiencies and increasing profitability at a pace that aligns with the long-term plans of our customers.

As part of these efforts, we will continue to evaluate opportunities to prudently grow our platform organically, to support the needs of our customers while remaining focused on driving shareholder value. So with that we will open it up for questions, operator..

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from James Wicklund of Credit Suisse. Please go ahead..

Good morning guys and congratulations on at least first quarter guidance if you couldn’t hit the fourth quarter, I mean that’s you did it in the right manner?.

Thank you, Jim..

The biggest question – I am sorry and here we are going to do one, I would – rather you have raised I Q1 and missed Q4 than the other way around that was my only point.

I have faith in you guys to show some capital discipline, okay and even in the phase of wanting to grow and serve your clients, but if everybody feels that way and one E&P company double orders been it all falls apart what you are thinking on that and how do you respond to investors concern about the industry overall overbuilding and this is we have listened to everybody oh yes, it’s okay for us, but it’s the other guys, but we never can’t figure who the other guys are, so can you talk about overbuilding the industry?.

Well Jim, I will take a stab at it. I think we have got a much more disciplined universe as we have maybe in the past. The challenge is there has probably never been a time in history when there is so much opportunity and I am kind of speaking specifically here in the Permian what we see.

But I think when we visit what our customers interact with them, I think there is absolutely focus on capital discipline on that end which trickles down to capital discipline to the service industry. I can’t quite all your concerns, but we are so focused on helping our customers in this basin move into manufacturing mode so to speak.

So I think the discipline is there. I have been doing this for almost 40 years and I have never seen a more focused disciplined group of customers than what we are dealing with..

Okay, I appreciate. We always like to ask the point-blank question of the CEOs, the industry as you got to think about it too and so that was I appreciate it.

My follow-up question came about really is the last comments you made, you are talking about increasing well site efficiency and serving customers and driving shareholder value, that almost sounds like foreshadowing of M&A into different businesses?.

No. Jim I would not read that into that. We are going to say that we have got a very savvy team. There is a lot of M&A activity there probably be some consolidation, but our focus as I said at the well site, we don’t need a distraction of integrating anything at this point.

We have demonstrated that we can build this organically at a pace that we can handle those efficiencies in that customer focus and we are just not going to be the one that gets off the track and gets away from what we have told the Street than our investors and our people..

Perfect. Gentlemen, thank you very much and congratulations on your first ending the year as a public company and best of luck..

Thank you, Jim..

Our next question comes from John Daniel of Simmons & Co. Please go ahead..

Thanks. Good morning, guys..

Good morning, John..

Two questions for me.

One I guess, first congratulations on the two new customers in the Delaware, I was hoping you could elaborate a little bit about maybe on a name who they are, but just the opportunity set you see with them and does the customer expansion with new customers does that suggest that some of the – that the other customer base is sort of staying flat from here..

John, I will let Jeff to answer that albeit there maybe new dedicated fleet customers that we have had history with both of those customers that we are adding that capacity too at this time, but you are needing more granularity there.

We are happy with our customer base and we will continue to expand as their needs arise, I think all of our customers are in a pretty good spot, a lot of clarity on their 2018 plans.

There could be some adjustments as we go through the year of their ask if we continue to see strong commodity prices, but you can – I think I think you guys have already modeled in pretty much at the horsepower that we have and will look at that expansion on a customer by customer basis.

I think it speaks to the discipline that we are seeing on our customer base out here. Our plans are pretty clear and we don’t see any watch based on the calendar for quite some time going into 2019..

Okay, I will pass you a little bit offline on that one.

I guess the second question is more for Jeff I feel and I know you probably don’t want to give any specific Q2 financial guidance, but can you at least talk about your expectations for margins in the month of March relative to the Q1 average and just the trajectory you see over the next few quarters? That would be appreciated..

Well, I think within Q1, the average guidance that we have given if you look at January through March, the trajectory is on a steady uptrend throughout that quarter. The exit rates in March will be better than what January was.

I think that given what we are aware of is on the charge for the second quarter of the year we would expect to see a continued improvement in that margin..

Okay, great. Thank you very much..

Thanks, John..

Our next question comes from Tommy Moll of Stephens. Please go ahead..

Good morning and thanks for taking my question..

Good morning, Tommy..

It was good to see pricing continue to tick up in Q4 and given we are still undersupplied in the basin, I just wonder if you can give us any sense of the magnitude or maybe just the cadence of any additional legs up in price as we move through 2018?.

Tommy, I think I would answer that as if you follow I am going to speak specifically to our thesis and we gave a very clear guidance on what we thought margins would be throughout ‘17 and we are very clear going into ‘18.

At the end of the day, quick whatever EBITDA margin you want to fit, but our goal was to get to a 2-year payback metric on this equipment. That’s what we laid out to our customers, that’s what we have tried to convey to our investment base.

That’s a great place to be and in your ability as a company to gain even a little more margin there is going to be up to you individually as a company and you are not going to hear us getting into a situation where we are just price raise we have told everybody in Q3 we were looking internally at how we could be more efficient, how we could increase margin, and I think the development of the Permian as it continues to be more pad, simple work, of which all of our customers are participating in, we are going to gain margin that way.

We are not seeing a softening of pricing with those that we work with and our customers have been great to help us achieve what we have told the Street and there is a lot of ways to play the margin game, we are playing it long-term, because there are decades worth of development in this Permian Basin and I think that’s how I would answer that question..

Okay, thank you.

And sort of just as a follow-up if we look at the growth plan you have laid out to get to 20 fleets deployed this year, how much growth CapEx should we assume falls in 2018 to accommodate that plan and to the extent you are able to provide any insight into how you think about the cash that you could harvest by the end of the year in terms of just navigating the balance between looking toward potential new fleets or de-levering/shareholder returns, I realized it’s a bit premature, but if you can give us any insight into how you are balancing among those options it would help? Thanks..

Okay. With regards to 2018 CapEx considering that the bulk of the cost of fleet 17 actually was crude in December of 2017 total growth CapEx with what we have announced is probably in the neighborhood of about $100 million.

Beyond that, I can tell you that with the cash flow that we are generating, the plan is first of all to use operating cash flow to pay for that growth CapEx and to then also pay down debt throughout 2018, the projections we have right now would lead you to believe with what we have announced that we will actually be debt-free once again by sometime in the first quarter of 2019.

So, those are the two highest priorities. And as we go through the year, we will reevaluate what we are going to do beyond that point. All options are open and nothing is off the table for our consideration, but we will continue to evaluate the – maintain our optionality as we go throughout the year in making that decision..

Great. Thank you. That’s all for me..

Thank you, sir..

Our next question comes from Praveen Narra of Raymond James. Please go ahead..

Hi, good morning guys.

As we think about adding the well site efficiencies and thinking about the efficiency side of it, can you give us a sense of where is it work as a percentage of stages as well as for 4Q and 1Q and if you could give us an idea of what you think could be in the cards for 2018 as a whole?.

Yes, I can tell you that the progression has been steady from the second half of ‘17 forwarding in the third quarter, 60% of the stages we pump were zipper, in the fourth quarter, it was 65% and of course we are not complete for the Q1 yet, but looking at numbers quarter-to-date that number is escalated to 69%..

And I guess going forward from here is it fair to expect that to remain if that’s a fairly high percentage, is it fair to expect that to stay in that 70% range or do you think it can actually trend higher?.

It could actually trend higher..

Okay, okay.

When we think about the 17 fleet in the Delaware I know it’s still early innings, but I guess could you compare the efficiency of that fleet – maybe ‘17 and ‘18 versus the ones that you had work in the Midland?.

We like what we see, Praveen. I won’t get much granular than that, but it’s all positive that stages are longer. It’s very, very encouraging what we are seeing over there and look forward to adding more capacity in that basin and it’s really good..

Okay, perfect. If I could squeeze one in, I know we have talked about the plans of getting the Delaware to equal to the Midland Basin.

Can you talk about if you have and what that might be a goal for the size of the coiled tubing and cementing fleets?.

Yes, I think we are going to be opportunistic and be very disciplined in adding capacity on the cementing.

Cementing is a place we definitely look to grow a little expeditiously compared to coil, but we will be as methodical there as we have been on our frac side and try to get to a position where we are in the top three providers in terms of market share in cementing.

Coil is a place we will methodically move and have that in our toolkit, but we won’t be able to move at that same pace as we are in the cementing if that gives you some dollar..

That’s helpful. Thank you very much guys..

Thank you..

Thank you..

Our next question comes from George O'Leary of TPH & Co. Please go ahead..

Good morning, guys..

Good morning, George..

Maybe piggybacking on that prior question or the question just asked, for that other services segment as you guys add a little bit of cementing, a little bit of coiled tubing, is there any expectation or any timeline you guys have in mind for when that other services segment if you will turns EBITDA breakeven or positive?.

Well, first of all cementing actually falls within pressure pumping segment. So really the only additions that we have announced that would fall within other services would be that one additional coil tubing unit.

So, it probably that I mean other than the profitability that will come from that new unit and we are putting that unit on the ground with paybacks that are comparable to what we are seeing in the other segments of frac and cementing that, that will probably be the only enhancement you see to that other services sector..

Got it. That’s helpful.

And then two new customers in the Delaware Basin putting them on multi-year dedicated agreements, when would be the point where you guys would think about adding some infrastructure in the Delaware Basin? Maybe how many fleets would you need before you felt the need to do that, I am under the assumption that with two fleets active you will continue kind of running the operations out of the Midland side, but just curious for any color there?.

Yes, it’s not going to be a situation where we have got to spend a lot of capital from a facility standpoint.

We have got a lease facility in the Northern part of the Delaware that will suffice at this time and then we will kind of look as that infrastructure is built out and where the majority of our work is going to be, but we have got some customers that have offered facilities to help in that and that’s part of that collaboration that we have talked about.

So, we don’t see anything on the horizon that will keep us from being just as efficient in the Delaware as we are here in the Midland Basin..

Maybe I will just sneak one more in if I could. You guys have done a good job of adding incremental pressure pumping fleets at relatively low cost, you are preordering engines, you guys do things like leisure, your trailers, if I remember correctly.

If you were to order new fleets today or to contemplate ordering new fleets today, what would the lead times be and then what would the cost of that horsepower be either just for an overall fleet or per unit of horsepower?.

Well, the most recent information that we have been provided would lead us to believe that lead time for these new fleets actually are Tier 4, so that would probably in the neighborhood of seven months to eight months.

And the cost of that would probably escalate to somewhere for 45,000 horsepower fleet, it would be $34 million to $35 million, so I think that calculates at about $766 per horsepower..

Thank you guys very much..

Sure..

Our next question is from Waqar Syed of Goldman Sachs. Please go ahead..

Thank you. Good morning..

Good morning Waqar..

My question is on the number of frack stages in the fourth quarter, how did that change versus the third quarter?.

We actually prompt a higher absolute number of stages. Stages were up total 4.7%. However, what caused the drop in in profitability had to do with the number of stages per fleet.

But when you look at the stages per fleet pumped in the fourth quarter from third quarter that was a decline of 11% which is what added to the inefficiency that we talked about which is what contributed to the decline in profitability..

Okay..

It’s just a function of days available to PUMP shifts that’s all the things to be right into that narrative. I mean that – it’s really a combination of the job mix and the down days. The down days portion is – some of that was planned, some of that was unplanned..

That makes sense and how have those factors changed so far in the first quarter?.

You will see a recovery in stages pumped per fleet and a return obviously with the profitability that we have given guidance on you will see a return to more normalized levels that were comparable to what we saw in the third quarter..

Okay.

And then what was the percentage of hydraulic fracturing revenues within the pressure pumping business line?.

Frac is 95.9% of the pressure pumping revenue..

Okay, that makes sense.

And now you are close to 45,000 hydraulic horsepower per crew, do you see that changing again over the next 12 months to 18 months, do you think that’s a comfortable level now 45,000?.

That’s a comfortable level Waqar..

Okay. Thank you very much. That’s all I have..

Thank you..

Our next question comes from Daniel Burke of Johnson Rice. Please go ahead..

Yes. Good morning guys..

Good morning Daniel..

Just a couple – on the 35,000 supplemental horsepower, I mean is the right way to think about that that you are bulking up a broad cross section of your legacy fleet and thus it’s somewhat, it’s almost be thought of, it’s almost a maintenance expenditure, are you closing up the capacity of a couple of fleets that previously did vertical work?.

Well, if Daniel if you go back to where we started 2017, we basically had 10 fleets on the ground and 420,000 horsepower, okay. So the legacy fleets were really operating with only 42,000 horsepower when we have been out there quoting really from the beginning that that you need 45,000 horsepower per fleet.

And so all of that those 14 pumps do is supplement those original legacy fleets to get them close to or at that 45,000 horsepower requirement that we have been quoting. Now, you are absolutely correct and that we anticipate that there is – it may look like you are putting that horsepower on the ground and there is no revenue that’s related to that.

The reality is there may not be revenue that relates to it, but there certainly can be a payback on it based upon maintenance that will – it will allow us the flexibility with some redundancy on those crews to actually maintain and avoid some maintenance costs that we may have been and may have occurred in 2017 on a go forward basis.

So we fully anticipate to get a payback on that, it’s just a little bit harder to quantify than if you were putting an additional fleet on the ground..

Got it. Okay, that’s helpful.

And then just one other one may be we will obviously grow – see growth in regional sand this year, your fleet count has grown, significantly you are focused on execution kind of rolled those factors together, any changes in how you guys are contemplating, addressing sort of managing your last mile logistics?.

I think Danny this – and I think I have said this on several of these calls. This regional sand, we have been very fortunate with our logistics team, not to be in a situation that we have heard others talk about. We think this is only going to make us better.

Anytime you get your sand closer to what you are doing it work that’s got to even enhance your last mile logistics situation. And we don’t think that’s going to do anything but get better as some of the regional minds come on here in Q2..

Got it, okay. Well, great, thank for you that..

Thank you..

Our next question comes from William Thompson of Barclays. Please go ahead..

Good morning, maybe for Jeff, you reiterated expectations for maintenance CapEx of 6% of revenue, can you help us calibrate given the fact that you guys capitalized fluid and how we should think about on an apples-to-apples basis with your peers in terms of just maintenance CapEx excluding [indiscernible]?.

Yes. I think the guidance we have consistently given has been that maintenance CapEx can be forecasted at 6% of revenue that statement holds. We have also further said that that historically fluid ends have been about two-thirds or 66% of that number.

I can tell you with our transition from carbon to stainless fluid ends, that percentage has come down slightly. In 2017 that number was more like 61% of that total maintenance CapEx number. And the anecdotal evidence we have thus far into 2018 was as we may see that improve even further..

Okay, that’s helpful.

And then maybe for Dale, in terms of two more dedicated agreements for the two new builds, I think a couple of quarters ago we are talking about maybe the structure of those dedicated agreements being – having a floor in terms of profitability and kind of more real-time pricing, has anything evolved in terms of how those contract structures look or is there early chat of maybe take or pay contracts, just maybe help us on the evolution of that?.

Yes. We will continue to have the same thesis with those relationships as we have throughout the company’s history. I would say there is a little more interest and not to get too granular, there is several of our customers that are wanting to contract up a little firmer.

As we add capacity for them which speaks to how people are doing such a great job on location. Lot of these customers don’t want to lose them. And if those contracts look like something they would want or they need for their shareholders or their Boards, we are not against that at all.

But I think the majority of our work will continue as it has and it’s a true partnership situation with these blue-chip customers..

And then maybe one more last one for me, the 45,000 horsepower average fleet size, I mean that’s pretty consistent with most of your peers, one of your largest competitors has talked about 36,000 horsepower, is that a mix difference in terms of where you are – I mean obviously you are 100% exposed to the Permian, is that just a larger fleet size required in the Delaware and Midland versus some other basins or maybe just help us rationalize that comment?.

I think that’s specifically to how and obviously like they are spread in a lot of different basins, but being solely focused here in the Permian, 45,000 horsepower is the right horsepower size across this basin. And I think that’s probably how I should say about that..

Thank you, Dale..

You bet. Thanks Will..

Our next question comes from Kurt Hallead of RBC. Please go ahead..

Hi, good morning gentlemen..

Good morning Kurt..

Congratulations on a very good end to the journey through the year and it looks like you are off to a great start. I had a follow-up dynamic, right, we have heard throughout the quarter about a number different of supply chain and logistical issues.

Obviously, your guide points for the first quarter would suggest that, that’s not really much of a drag to get it on your outlook.

I am wondering if you maybe give us a little bit more color about how you guys operate and what the differentiating factors are, that are enabling you to either overcome or sidestep some of these issues?.

Great question. And again, you can answer that in many ways, I will try to keep it short, the sole focus that we have here on our frac side specific to this basin, we are just able to manage this business better. That’s one reason.

Secondly, I would say the relationships we have with our supply chain partners through the cyclicality of this business and acting the same way through those cycles, we have a lot of goodwill built up with that group and that probably speaks to why we have seen less volatility as maybe some of our peer group.

And I don’t want to minimize the fact that this customer base really helps us. It’s scheduling the dedicated fleet model that we have a lot of different variables speaks to why we did not see some of the issues that will come out of Q1 and probably leak into Q2. We are very fortunate to be positioned where we are..

Okay, that’s great.

Now, maybe a second dynamic and obviously maybe a little bit premature to ask it, but nonetheless given the recent experience you guys had coming through the downturn the ability to get through that downturn may come out here as a public company? And back to maybe Jim Wicklund’s first question, I mean at the end of the day, right, you got to drive what drives your company, you can’t worry about what’s going to happen from an industry standpoint as it relates to incremental capacity, but what are some of the lessons maybe that you learn through the downturn and as you are going through this upturn, what are some of the risk mitigation things that you can kind of focus on and again, not don’t want to get the car before the horse and think about a downturn prematurely, but just want to get a sense from you, where would you learn through the downturn and how you are thinking about mitigating risk as you go through the cycle?.

Great question and I will try not to bore you with my answer the service business is about mitigating risk as you just talked about. And I think our company and the leadership here we have mitigated the customer risk about who we are working with in their acreage positions and how they view us as a partner.

We have mitigated the people risk, the best we can we have the best-in-class workforce. Our people have been able to retain and motivate as we have talked about the best employee base either who have been associated with.

On the supply chain side, we have mitigated the majority of that with choosing the right partners and really the commodity all of us are at risk with the commodity pricing and again, we are situated in the lowest breakeven, well economic basin from a commodity price standpoint, you could possibly be in this business.

The rest of this is about execution and differentiating yourself and I think we will continue to do that. We will be laser focused in doing that. And I would add one other theme to your probably – part of your question is this industry going to overbuild horsepower and it has before.

What I would say this work today is hard, it’s intense, it’s 24 hours, it’s logistically challenging, it’s challenging on all fronts and I think you can just start off and it takes a lot of capital to play this game and a lot of strong foundational to what I am most proud about this company is to be able to scale, to grow and not lose focus on what’s important and that’s your people and your customers.

So, I am not saying others can’t come to the party and dance and do that, I am saying this game is much different than any game I have seen in my history and you better be in it for the long-haul and you better be building it for the long-term and be ready to stay in it for a long time..

Great. That’s great color.

Maybe one follow-up housekeeping for Jeff as we look at – as you provide your first quarter guide points, there is two things I was hoping to get some color on, first was the depreciation and the other one was how should we think about your tax rate?.

Tax rate, I think we have got it projected for the Q1 at 21% and that the depreciation that we would anticipate for Q1 is somewhere in the neighborhood of $18.5 million to $19 million..

That’s awesome. Alright. Thanks, guys. Appreciate it..

Sure. Thank you..

[Operator Instructions] Our next question comes from Vaibhav Vaishnav of Cowen. Please go ahead..

Hey, good morning and thank you for taking my question.

Could you tell us what was your maintenance CapEx in 2017 and if I think, let’s say, $6 million to $7 million per fleet of maintenance Capex in 2018, am I in the ballpark?.

Well, the guidance we have always given is the maintenance CapEx is about 6% of total revenue and that’s held consistent in 2017. If you look at 2018 and where we are at and applying that same 6% to 2018, I think maintenance CapEx number on a per fleet basis, that number is probably more in the $4.5 million to $5 million range..

That’s very helpful.

As you guys have put this fleet number 18, 19, 20, could you help us think about how much higher pricing or profitability is for the latest fleet that you put in versus let’s say fleet 17 or fleet 18?.

Yes, but it’s going to be consistent across the fleet from a pricing perspective..

Got it. I think John Daniel has asked this question, I will try it a different way. I think if I am not mistaken the implied guidance of gross profit per fleet for fourth quarter is around $17 million, it seems like March is higher than the average.

Is the exit rate for March closer to $20 million a fleet? Would that be fair way to look at it?.

Yes, it’s not $20 million a fleet it is higher than what we would have started the quarter with. March will be higher than what January is, but it won’t be approaching $20 million a fleet.

That kind of gets back to a point that Dale talked about earlier is when you look at the payback metrics on these fleets when you get to we are probably hanging in the 16ish range today which gives you about a 2-year payback or slightly less on Tier 2 fleet with the escalated cost of the Tier 4 fleet and I have given you that number $34 million to $35 million.

I think there is room for us. There is uptick there that’s possibility, but obviously at $35 million and you are at $17.5 million annualized EBITDA per fleet that would give you a 2-year payback.

So, it’s not that, that’s a cap necessarily, but that’s certainly an area we definitely need to progress to as Tier 4 fleets become the norm, but we would not give guidance for $20 million a fleet..

That’s helpful.

And just to clarify when you look at payback, I am assuming you are looking at payback after maintenance CapEx, is that fair?.

Yes, typically we do. I mean and we have quoted in the past was what it took for us the threshold for us to actually pull the trigger in a new fleet was probably a 2-year payback on an EBITDA basis and some were around 3-year payback on maintenance CapEx – after maintenance CapEx on a cash flow basis.

And so those are the standards that we are still sticking too..

Got it.

And one last question for me, it seems like you have been very successful in getting more customized to subscribe to the dedicated fleets, how are the conversations going forward either with the same customer base or any additional customer base?.

Yes. I think just to give you clarity, we have roughly once the 20th fleet gets on, we will have roughly our customer base that we are currently serving will have 20 of the roughly 45 to 50 fleets they have running. We will have that market share within our customer base.

So we have got a lot of room to grow their, but we got a lot of friends out there with other customers that are adding acreage that could fall into that dedicated model. So we will be looking at that customer base too. But opportunity to grow is all around us, just to name discipline about it and how we add that growth..

That’s extremely helpful. Thank you so much for taking my questions..

Thanks Vaibhav..

Our next question comes from Ken Sill of SunTrust. Please go ahead..

Yes. Thanks for squeezing me in here.

First question is just kind of you guys talked about doing 70% zipper fracking, given that Delaware has got deeper depth longer laterals, how many zipper fracs can you guys do in a day when things are really homing?.

From a stage perspective?.

Yes, from a stage perspective?.

It varies, everybody has a different recipe and a different pound per foot metric, but it’s still transitioning, I guess is the best way to answer that. And you have heard what we – how we kind of define 100% utilization, some of that will need to be adapted to these longer pump times. I wouldn’t – would anybody else want to answer..

Yes. I guess what we have quoted in the past is full utilization was probably five stages a day, 25 workdays in a given month, so 125 stages per fleet per month is kind of what we have used as that definition.

We will tell you that given our limited experience and exposure in the Delaware thus far and the size of those stages and the pump times in those stages, it’s quite possible that in the depending on what the recipe is that definition could change to something lower than that. It could change to three stages per day.

And three stages per day is we have seen or I think it provides a good level of profitability for a fleet. So as Dale said, it’s kind of a moving target as time goes by..

I was kind of curious, because I have seen some operations obviously different basin at DJ where they are doing a stage every 1.5 to 2 hours, sometimes faster?.

That’s not apples-to-apples. That’s totally different animal and so you are going to be real careful when you start comparing us to our peer group. We are the only pure play Permian player in this space. So you need to get a little more granular as you look at the peer group, not compare apples-to-oranges..

No, I was speaking three hours to four hours of a stage will be that as good as you could do in the Delaware, how big the stages are. So that brings me to another question.

So I think one other thing the investment community doesn’t really understand is that, it’s not all about prices, not utilization, is that something that is being incorporated now in your dedicated contracts, where look if you guys can get me 100% utilization may be the prices on a sliding scale or is it still you are bidding on a job on a first stage basis for the equipment charge plus whatever for logistics, chemicals and [indiscernible]?.

Yes. I think the best way to answer your question is we are across the table on a day to day basis with this customer base and other conversations. Obviously, we are very transparent on our payback metrics.

All of our customers know what’s its stake for us to deliver that, so we don’t have any reason to believe that our – in our negotiations that we are not going to meet those metrics. And I think that’s the best way to answer your question..

That makes sense and there is a lot of different ways to get there, but you are focused on let’s get a return on our investment…?.

Yes. And balance that with what guidance our customers given their investors and the street. And we have kind of proven that that can work. And so I think that’s kind of where we are at and that’s our philosophy..

And just one final question or I don’t remember your answer is not really your business, but if you look at everybody is trying to go to dedicated fleets working for customers are consistent, but there is still a tremendous number of private operators and smaller operators in the Permian that can’t keep a frac crew running all the time, is there going to be a bifurcation where if you are doing spot work for one or two off wells that pricing is just going to have to make up the difference or is that just going to be work that somehow gets later done on a fill in basis?.

Well, we try to do everything we can to help all those customers that don’t have the ability to have a dedicated fleet and specifically those that have helped us build our company. And there are a lot of those here in this basin.

They are the disadvantage because obviously they just don’t have that dedicated situations, so their pricing is going to be more expensive. And I am sure they have budgeted that in there, but we are going to do what we can to help them with others having 20 fleets, someone is always having a little issue. And we will move off and have what we can.

But there is a lot of horsepower that has a different model than us, that is playing in the spot market and helping those folks develop that acreage, but it will be a challenge for a lot of those guys..

Thank you..

You bet..

This concludes our question-and-answer session. I would like to turn the conference back over to Dale Redman, CEO for any closing remarks..

In closing I want to thank our people, our customers, our supply chain partners and the Permian Basin community for all your support. 2017 was the year of recovery, 2018 will be the year of differentiation. This year is off to a great start and the future for Propetro has never looked brighter. Thank you. Have a great day..

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