Good morning, and welcome to the ProPetro Holding Corp. Third Quarter 2021 Conference Call. All participants will be in a listen-only mode. [Operator Instructions] I would now like to turn the conference over to Josh Jones, Director of Finance. Please go ahead..

Thank you, and good morning. We appreciate your participation in today’s call. With me today is Chief Executive Officer, Sam Sledge; Chief Financial Officer, David Schorlemer; and President and Chief Operating Officer, Adam Munoz. Yesterday afternoon, we released our earnings announcement for the third quarter of 2021.

Please note that any comments we make on today’s call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several 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 and risk factors discussed in our filings with the SEC. Also, 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 hold a question-and-answer session. With that, I would like to turn the call over to Sam..

Thanks, Josh, and good morning, everyone. We’re pleased with our third quarter operating and financial performance, which reflects our capital discipline and operating strategy coupled with the continued focus on customers and teamwork.

Our activity levels continue to increase throughout the third quarter, resulting in a 15% increase in revenues and an 18% increase in adjusted EBITDA.

ProPetro continued to differentiate itself from its peers by generating solid margin and positive free cash flow, while continuing to introduce ESG-friendly solutions to our service lines, which we will discuss more later. Our team remains committed to executing on our discipline and focused strategy, and it shows.

With steady improvement in the global economy and improving oil prices, North American oil service activity has continued to improve. That said, we still believe, we are in the early stages of what appears to be a sustained up cycle in the oil field.

We are currently seeing stronger demand for anti supply of efficient pressure pumping fleets as continued plans for modest growth from the E&P community collide with pressure pumping equipment attrition.

We expect pressure pumping utilization to continue to rise as we head into 2020 to potentially to full capacity as incremental demand for efficient fleets from private and public E&Ps trends upward.

Additionally higher effective utilization in the frac market coupled with inflationary forces across our supply chains have led to gross and net pricing increases across all of our fleets. Our emissions friendly equipment, including our recently announced Tier IV DGB dual-fuel conversions are now garnering strong demand in differentiated pricing.

As a reminder, those conversions support existing capacity and do not add effective horsepower to our fleet. We’ve also been active in recovering what we will call pandemic price discounts with our objective to recover all discounts and completely transitioned back to normalized financial performance and improve profitability for our shareholders.

Our pricing discussions with customers have been and will continue to be collaborative to help both parties share the fruits of maximizing efficiency and compliment their corporate planning and budgeting processes. To date, our team has received pricing increases from all customers and our price deck continues to migrate up.

ProPetro’s proven track record for quickly and effectively responding to the needs of our customers albeit in a mutually beneficial manner, continues to differentiate ProPetro in our industry. During the third quarter, our execution at the wellhead continued with high pump time and productivity improvements relative to the second quarter.

Congratulations to our team for those accomplishments and continuing to make our equipment reliable and ready for our customers and for performing their work in a safe manner. As we move forward, disciplined deployment of our equipment, the profitable projects is essential to achieving success in this current and future operating environment.

This applies not only to ProPetro, but our sector as a whole. As we have discussed in the past, we will not activate additional crews without adequate pricing, long-term visibility to consistent work schedule and expectations of high efficiency targets so as to enable an opportunity to earn solid operating margins.

The dedicated fleet model is our preferred method of operating and recurring E&P consolidation in the basin continues to produce more opportunities under that model.

We remained steadfast in the belief that this upstream consolidation will benefit sophisticated and efficient pumping companies that can quickly assist oil and gas operators in the development of large acreage positions and do so in a very consistent and predictable manner.

Of note, private operators and smaller public companies have and continue to lead the increases in drilling rig counts certainly in the Permian Basin. We expect these activity increases to result in incremental demand for efficient and high-performing pressure pumping equipment as we previously noted.

With that, I’d like to turn the call over to David to discuss our third quarter financial performance and capital resources.

David?.

Thanks, Sam, and good morning, everyone. During the third quarter, we generated $250 million of revenue, a 15% increase from the $217 million of revenue generated in the second quarter due to higher activity and more effective pricing of our jobs. Effective utilization was 13.8 fleets, which increased 5.3% from 13.1 fleets during the second quarter.

We currently have 13 fleets working, three of which are Simul-Frac. Our guidance for fourth quarter average effective fleet utilization is 12.5 fleets to 13.5 fleets with visibility to some downtime due to seasonality included in that range.

Cost of services, excluding depreciation and amortization for the third quarter was $189 million versus $163 million in the second quarter, with the increase driven by higher activity levels and inflationary impacts approximately $2 million in a reactivation costs of stacked equipment and a wage adjustment implemented during the quarter.

Whereas, as we mentioned on the prior call, the second quarter did not have any reactivation costs. Third quarter general and administrative expense was $21 million compared to $18 million in the second quarter. G&A exclusive of $2 million relating to non-recurring and non-cash items was $19 million consistent with the second quarter of 2021.

We expect fourth quarter G&A to remain in this range. Depreciation was $34 million in the third quarter, which is consistent with the prior quarter. Our net loss for the third quarter was $5 million or a $0.05 loss per diluted share compared to a second quarter net loss of $9 million and a net loss of $20 million in the first quarter of this year.

So, as you can see, our performance is improving from the prior quarters, but this underscores the need for improved profitability in our sector for us to achieve sustainable positive net income. Our profitability is driven by our success in achieving appropriate pricing and understanding our cost structure.

As we commented on our second quarter call, we experienced increased logistics costs and other inflationary pressures at mid-year and our team was able to effectively manage through those inflationary pressures.

But for the actions we took throughout the third quarter to improve pricing, including proper cost recovery and pumping rate increases, the cost of service increases during the quarter would have degraded our EBITDA margin.

Finally adjusted EBITDA of $42 million for the third quarter increased 18% sequentially compared to $36 million for the second quarter. The sequential increase was primarily attributable to increased activity and additional cost recovery on jobs. Adjusted EBITDA margins improved 37 basis points, and we experienced 19% sequential incremental margins.

Adjusting for reactivation costs mentioned earlier, margin improvement would have been 114 basis points sequentially. Our challenge going forward is to remain ahead of cost increases, while expanding and defending our margin.

Notably, we recently repositioned fleets to more profitable work with customers it place higher value on efficient operations at this point of the cycle. We will continue to optimize our portfolio of assets in a way that supports margin expansion.

Nevertheless, we will not put additional fleets to work unless we have visibility to appropriate economics across our currently operated fleets.

For the third quarter, we incurred $53 million of capital expenditures of that amount approximately $20 million was for conversions, $2.5 million was related to reactivation CapEx of stacked equipment, and $2.1 million was for other strategic supply chain investments for equipment that won’t be delivered until next year.

Actual cash used in investing activities as shown on the statement of cash flows for capital expenditures in the third quarter was $35 million with positive free cash flow of $13 million. This figure differs from our incurred CapEx due to differences in timing of receipts and disbursements.

Our outlook for full year CapEx spending is $155 million to $165 million including recently announced investments of approximately $30 million in accelerated conversions that is expected to be incurred during the second half of 2021, but for equipment expected to be delivered next year.

With regards to the recent accelerated CapEx spend for an additional 50 Tier IV DGB conversions that Sam mentioned earlier, these pumps will be allocated to dedicated fleets with current customers and higher relative pricing to ensure these pumps generate healthy profitability.

Consequently, our full year CapEx will likely be toward the upper end of the range should activity remain at current levels and the outlook for 2022 remains favorable. We continue to expect positive free cash flow for the full year 2021 when adjusting for our accelerated 2022 CapEx.

While we remain debt-free, we increased our cash position and liquidity by $12 million and $13 million respectively during the quarter with cash of $85 million and total liquidity of $154 million. Total availability on our asset based revolving credit facility increased to $69 million. Cash as of October 29, 2021 was $91 million.

As Sam mentioned in his opening comments, the strength of our balance sheet and commitment to capital discipline is critical to our success. And we are firmly committed to ensuring we maintain a solid financial position that provides maximum financial and operating flexibility. And with that, I’ll turn it back to Sam..

Thanks, David. As we’ve already mentioned on today’s call, there is momentum building as our sector anticipates modest activity gains over the coming months. As the industry returns to normalized service levels in the Permian, we look forward to taking on the many challenges expected next year.

In fact, ProPetro’s preparing for those future obstacles today. Specifically labor markets are becoming a greater issue in the oil field as service activity has continued to trend upward throughout 2021. These challenges place risk on the reliability of the oil field service sector next year, as oil prices signal producers to modestly expand.

Fortunately our team and our customers understand these issues very well. A portion of the recent price increases received from our customers was reinvested back into our labor force.

This action not only provides a morale boost to the employees that remain loyal to ProPetro team during the depths of the pandemic, but also makes our team more competitive in today’s labor markets.

Our ability to offer competitive pay rates, consistent work schedule with blue-chip customers, opportunities for professional development and the continued commitment to the Permian community, places our team in an advantageous position heading into 2022.

I think our teams for meeting the challenges faced over the past year, and I look forward to working with them to meet the challenges in the years to come. In addition to the labor issues. We also anticipate supply chain disruptions to persist next year.

As mentioned on our previous call, we recently made strategic investments to hedge against anticipated supply chain issues and ensure reliability for our customers. Our strong debt-free balance sheet, coupled with a focus on capital discipline allows us to be opportunistic at this point in the cycle.

We will continue to look for opportunities to maintain and enhance our earnings power in 2022. Is our view that supply chain disruptions may be in that positive for the pressure pumping space next year.

As activity modestly builds long lead times, and the inability to secure equipment in a timely fashion may provide a barrier to speculative capacity, expansions and over investments that have been made in past cycles. It is also very important to understand that our sector operates assets with finite lives.

We believe pressure pumping fleet attrition and effective utilization rates are widely miscalculated as the industry approaches next year. Over the past two years, acreage positions across the U.S. have consolidated into the hands of the most efficient operators.

And those operators largely demand more equipment on location and more pumping hours per day in order to achieve their respective investment goals.

While this shift and operating paradigm creates better opportunities for the most efficient pressure pumpers in our space, the new standards in development have led to accelerated pressure pumping attrition across North America.

For this reason and paired with continue to underinvestment across the sector it likely won’t take significant activity gains for the pressure pumping space to be fully utilized next year. That said, ProPetro will continue to commit to a disciplined approach as our industry moves further away from pandemic activity and pricing levels.

Maintaining the reliability of North America’s pressure pumping fleets and supporting the energy industry’s collective ESG goals in a disciplined manner will require improved economics for ProPetro in our entire sector. Therefore further net pricing increases.

We will continue to work with our customers to ensure reliability and sustainability of their respective operations. Lastly, under my leadership ProPetro remains committed to our legacy of service, excellence and execution that has enabled our success for over 16 years.

This continued excellence and execution will be fundamental to enabling our teams to remain competitive in a dynamic marketplace. As we’ve mentioned, our business will undoubtedly have to continue to evolve, to compete, and we believe our team is up to that challenge. We will continue to show differentiation both financially and operationally.

Our teammates and customers have grown to expect a strong safety culture at ProPetro, and we will enthusiastically lead in preserving it. I’m very proud of our team, shared ownership and safety and look forward to maintaining our reputation as a best-in-class service provider for our customers.

Moreover, we also maintain our commitment to improving the Permian basin through our fervent community involvement. We continually strive to positively impact the area we serve while on and off the job. With that, I’d like to turn the call over to the operator for Q&A.

Kate?.

[Operator Instructions] The first question is from Ian MacPherson of Piper Sandler. Please go ahead..

Hey, good morning, Sam and team..

Good morning Ian..

Good morning..

You delivered good results in what we know is not an easy quarter to do so. So congratulations to the team there.

Sam, given what you’ve stated about the tightness of the market, your customers recognize that by now we’re seeing more evidence of a budget creep for next year based on service cost inflation, where is the customer dialogue outside of pioneer for you with respect to customer appetite to want to lock-in capacity and to firm up commitments for a longer term arrangements next year and what is ProPetro’s appetite to play the term versus the spot way by this point of the cycle, when you should be getting more net pricing over the next couple of quarters?.

Yes, Ian, that’s a fantastic question. I think to try and pick part of your question, part of our belief in the market tightness and how things may play out next year is lies in that customer interest to position their service offering as effectively as possible for next year and the lock-in as much of that efficient capacity as possible.

And I’ll highlight that term efficient capacity. We’ve seen through our customer portfolio, a pretty active effort to grab on to the more high performing crews we’ve even experienced recently, repositioning of a few of our own fleets to try and service that efficient demand.

If we compare this to budget cycles in the years past, I’d have to say that conversations with customers are probably more active than I’ve maybe ever seen them in the past five or six years, going into a New Year in a new budget to ensure that these larger programs have what they need to execute.

So really just talking directly to the customers, this is – this just one dynamic that we think bodes well for the ProPetro and the pressure pumping industry next year. But that’s been very evident..

Good. That’s helpful. Thanks.

I didn’t hear it David, if you did, if you provided it, but did you comment on EBITDA progression or just in general terms that the progression of margins from Q3 into Q4 as you have, guided a little bit of normal seasonal dip in activity, but you talked about you, it sounds like the directions of margins over the medium run, it’s still higher, but is that true also in Q4 or will the margins in Q4 be pulled down by the seasonality?.

Well, we didn’t talk about perspective margin progression. I think that, we’re expecting normal seasonality or at least some seasonality that will be offset by some of the net pricing increases that we discussed, that we achieved during the quarter and really at the end of the third quarter.

So those things will impact there are still some inflationary pressures that I think we and others have discussed and are prevalent out there. So, I think that’s hopefully some guidance. That’s helpful..

Yes.

So, if I understand correctly, it sounds like EBITDA should be closer to flat within a, fairly close range as opposed to traumatically higher or lower?.

I think that’s fair to say. And we did see some margin improvement as I mentioned, and if you look at our numbers, revenue per fleet is up approximately 10% EBITDA per fleet up nearly that amount. So, we had some good progressions this quarter. But I think really we’ll start to see more of that in 2022..

Right. Thank you..

The next question is from John Daniel of Daniel Energy Partners. Please go ahead..

Hey guys, just a question on the CapEx 86 Tier IV engines once these all get delivered? Where do you think that number is you’re in 2022?.

Well, we have not nailed down our 2022 entire CapEx budget. I think what we wanted to do is make certain that we could secure our supply chains for equipment to support 2022 activity out of the gate. I think we’re still going to be looking at our entire fleet and what needs to be done to support activity level.

So, we’ll have more guidance on 2022 on the next call..

Yes, John, this is Sam, I’ll add to that is that we need, we need our economics to continue to migrate up to be able to continue to add equipment like that. We’re very comfortable with the investments we’ve made today. But we need continued positive movement on the profitability front.

We also think it’s just going to be difficult in general to get components like that next year, part of the reason why you saw some make that move..

Right? No, no. I mean, well, I guess it’s kind of the chicken and the egg, right. You’ve got the right balance sheet, the right profitability now, but lead times are extending. So is it ahead of it or do you wait for that, negotiation with the customer and then you get behind on the lead times.

That’s just sort of the basis of the question, something to think about..

Yes, I think the orders that we place, put us in a good position, certainly for the near term and longer term..

Okay.

As you look at your customer base obviously you don’t want to names when I asked this question, but like what percent of them don’t really care about the emissions benefits?.

Very small..

Okay. All right. Fair enough. And then the last one from….

That’s not to say that there aren’t any, but it’s a minority..

But is it something where you see, making up it from now, two years from now where if you’re sort of steady state 13-ish fleets, when do 100% of them become emission friendly, and they just conceptually like, is it, it’s obviously a multi-year process, right. It takes time and money, but do you ever get there and does the….

John, this is David. I think that, CapEx is, and spending is important to the customer still. And I think we’ve had some customers talk about their emissions from completions being really a smaller, much smaller component of their total emissions program.

Some companies have mentioned that they’re really focusing on production as it relates to emissions more so than completions activity. So, there are customers that are asking for this type of equipment, but there is also still some sensitivity to total costs of their completion programs.

So, I think the migration will continue, but there’s still customers that are putting efficiency. And as Sam mentioned earlier, frac efficiency at really the top right now a few other customers are making some moves to, electric and other specific lower emissions solutions. But that’s going to take time..

Yes. This is Adam, John, I would just add too. We’ve had here recently, just a customer or a couple of customers actually make some long-term agreements with even our Tier II equipment, just to ensure the supply of horsepower to help them with their completions next year. Just due to sheer, market tightness of supply chain tightness..

Okay. I’ll sneak in one super quick one for you, Adam, since you just spoke up, just give us your take on the core market out in the Permian and that’s it for me..

Yes. I mean, that’s a tough market, John, I mean, like it, unlike our pressure pump in or the Frac and Simul [ph] divisions not every well requires pool like every well requires the Simul-Frac jobs, but it’s just a, it’s a tough market. It’s very competitive.

We have been able to creep some pricing back there it’s just highly really more focused in the Delaware where the higher pressures to complete and drill out wells are, so at the – remains highly competitive..

Got it. Okay. Well, nice quarter and thanks for putting me in..

Thanks, John..

The next question is from Stephen Gengaro of Stifel. Please go ahead..

Thanks. Good morning gentlemen..

Good morning..

Two things to me, one is it is a follow-up of your current active fleets, right? So call it 13 or 14, including the CapEx that you just announced for the new DGBs.

How many will be low emission? Is it five or six?.

It’ll be a little bit more than four fleets worth of dual-fuel equipment by mid-year next year..

Got it, okay..

Of which we already have a portion of that in the system today..

Okay.

And so the other question, just because you talked a little bit about this, when you’re thinking about, pricing, and kind of the appropriate returns you need to get, basically to order more upgrade equipment or assets, or are we talking in the EBITDA per fleet range of sort of high teens, and I’m just curious sort of on top of that, are you – what types of pricing are you seeing? Are you seeing close to low double-digits as you go into next year as some of your competitors have referenced or is that you’re kind of any range you could provide?.

It’s – this is Sam. It’s, it’s probably more unique to or unique on a customer by customer basis because our offering can change from customer to customer. If you’re providing materials, if you’re not in any other services that you may or may not be providing.

That said, we are far from appropriate economics for companies like ProPetro and our nearest peers to even sustain operations of the size that we are today. As I mentioned in my scripted remarks, this equipment does have finite lives, most of which is dependent on hours in which you operate that equipment.

So, we've experienced across our sector some pretty significant under-investment post pandemic coupled with very poor economics across our entire sector.

So the amount of under-investment that there has been in pressure pumping equipment, I think could become an issue to serve the E&P space's needs going into next year that's why we feel so strongly about the market being much closer to full utilization than not. That said, to kind of leave that thought back to pricing, we've got a long way to go.

We feel good momentum right now and we think there is going to be more opportunities throughout next year to recover our economics to make a question like that a little bit more tangible where we can give you a better answer. We're just so focused on recovering economics and profitability near term, but it's hard for us to – right now..

Fair enough, that's great color. Thank you..

The next question is from Arun Jayaram of JPMorgan. Please go ahead..

Yes, good morning. I wanted to maybe start with Simul-Frac, you mentioned three of the ProPetro fleets are working with customers some presumably Diamondback and Pioneer on Simul-Frac.

I know your customers, Sam are citing pretty significant completion efficiency gains – Diamondback on their call mentioned how they're doing 50% more – it completed lateral feet per day versus a standard zipper frac.

So, I was wondering if you could talk a little bit about the pricing model around Simul-Frac so that you can share some of the benefits you're seeing with your customer base?.

Sure. Arun, yes Simul-Frac is definitely growing importance in the pressure pumping space and just for context we deployed our first – well, our first and second Simul Frac fleets I think in January and February earlier this year.

So we're kind of almost a year into this new operating technique of which yes we've seen some pretty amazing efficiency gains that you referenced with some of those customers. That said, we've learned a lot in the last eight or 10 months of operating in this Simul Frac technique while adding a third Simul Frac.

So, every day we move forward we learn more about it. One thing that we have learned is that our economics need to improve there as well, right. We deploy more equipment to these Simul Frac locations.

Therefore, we need a return that is right sized to that amount of equipment and that's something that we're working hard on right now with those customers because it seems that those operational efficiencies that our customers want to maintain those operational efficiencies.

So, we're hoping that there is some good mutual benefit in this type of operation. We just don't feel like we're there quite yet..

Okay great.

And then just my follow up would be, just on the niche but apparently growing market for e-fleets, can you give us an update on where you're at in terms of DuraStim and is this the right solution to customers or how you're thinking about ProPetro's participation in that market?.

Yes Arun. This is Adam.

We're currently preparing to continue to test the reliability of DuraStim probably in the first half of 2022, kind of been hindered by a little bit of supply, as you might know, the uniqueness of the supply chain of that particular product is even tighter than what is normally out there, so we ran into a little bump in the road as far as the supply of certain expendables or consumables for DuraStim but the news is to redeploy probably first half of the year and continue to test that and we'll keep you in the nose and as we know more about that is around DuraStim.

To add to that, we're constantly – we're continuing to look at other e-fleet solutions out there to continue to be involved in that game and in that market and to be able to provide possibly a solution or e-fleet solution to customers that are looking to put that type of equipment to work..

And how do you see that market developing over time, relative to demand for Tier IV units?.

I think the majority of our customers Steve Tier IVs is probably a kind of a stepping stone to the electric market. I think there's still a lot of development going and a lot of things changing on the electric equipment side and the electrification of our customers' acreage.

So, I think as that continues to evolve the Tier IV DGB is going to be highly used to provide a cleaner, more efficient type of horsepower location and as they continue to evolve their acreage for electrification I think the electric market will start to heat up as well..

Arun it's, Sam. We obviously – you knowing our customer base, fairly well that we have a couple of customers that are highly interested in this type of technology and we're having conversations around electric equipment almost on a daily basis and we'll continue to do that.

We do think that economics for that type of equipment and potential contracting terms are migrating in the right direction. So, we want to remain opportunistic there and be able to provide solutions to our customers if terms are attractive to both parties..

Great, thanks a lot..

The next question is from Scott Gruber of Citigroup. Please go ahead..

Yes, good morning..

Good morning Scott..

So, it sounds like you guys have already secured some net pricing that will benefit 4Q, which is good to hear, but are you expecting a greater rate of improvement in pricing in early 2022? I ask because some of your peers as they reset their MSAs after the E&Ps, have reset their budgets, they are expecting or talking about greater pricing improvement, greater improvement in profitability in 1Q and some of them bleeding into 2Q, just from a timing standpoint.

I'm just wondering whether ProPetro will see that same trend, is the disproportionate share of the profitability improvement you're expecting in 2022, is that going to occur early in the year or will it be more drawn out over the course of the year?.

Scott, this is Sam, great question. When we alluded to things in our scripted remarks, like a collaborative approach to pricing with our customers, one of the things that I think is behind that comment is us moving our pricing and our economics in a positive way, while not disrupting budgets and CapEx plans of many of our customers.

Thankfully, a lot of these pricing conversations as they are happening today and have happened over the past few months, time up well with our customers' ability to plan for next year.

We, in an earlier question on this call one of the analysts alluded to creeping CapEx in the E&P space and I think you'll see that continue to happen as companies like ProPetro and our peers are trying to position our economics in a healthier play.

So, I say all that to say that we are doing our best to condition current and potential customers around additional pricing movements that might need to happen going into next year possibly even as early as January of next year.

We're in relatively different places with almost all of our customers, so the effect and timing could be different across our portfolio, but this momentum has to continue as asset lives for pressure pumping equipment continue to draw it down because of these increased efficiencies, so we will look to continue to push going into next year.

I think one thing that we have going our way, which I've experienced personally myself in conversations with many of our customers is that we have a lot of smart, sophisticated customers that understand economics and business very well and we're doing our best to educate them on our goals and not just for us, but what we think is healthy for our sector.

Most of those conversations have been very fruitful and we'll look to continue those going into next year..

Scott, this is Adam I would just add one more thing, as well as you heard in the scripted remarks from both Sam and David.

The repositioning of a few of our fleets have also helped us going into the fourth quarter and beginning the year with a couple of new – expand our portfolio with a couple of new customers that are priced at better mid cycle pricing going forward, so we'll also see the impact of those fleets moving toward better pricing..

Got it. Appreciate the color. And then maybe if I could ask about some color around demand trends across the major customer cohorts; obviously private been a lot of the demand growth this year, but they've also continued to add incremental rigs, which would suggest incremental frac demand continues to grow next year.

We have good color for the public E&Ps, but I'm curious what you're seeing from the majors today, in terms of incremental demand and could you provide some additional color on the privates and public E&Ps all in terms of just incremental demand from here, in the Permian?.

Sure. I think the way that you've described it is fairly accurate. I think we've seen most of the E&P's in the Permian migrate from things like dug [ph] backlogs and large undrilled – uncompleted well inventories to more of a just-in-time – more of a just-in-time operation. That said, we've had rigs slowly added throughout the last couple of months.

Our view is that you will continue drilling rig adds into next year, probably through mid next year that will support activity adds in the ballpark of 20 to 30 frac fleets across North America. Next year, and we don't think it really takes that much or more than that to really tighten or tighten the completions market.

So, I think you'll see the privates continue to lead the way, maybe the small publics and independents but the market as you can see through crude prices is continuing to call for more oil and the United States and North America cannot add more oil to the system without more rigs and more frac crews and we're confident that we're going to see that gradually build..

Yes Scott, this is David. Just to add to that, some anecdotes as the privates continue to pick up in the rig counts and also consolidate some of the smaller privates, some of the smaller public companies those are – that's the complexion of the two of our new customers that will be picking up.

Companies that are migrating from more of a spot or periodic frac schedule to a more efficient dedicated calendar.

And so, we're participating in that part of the cycle, and in that part of the marketplace and I think that in Sam's opening comments talking about efficient frac capacity that's where things are going to be migrating in 2022 more so and we're positioned to support that..

Got it. Appreciate the color. Thank you..

[Operator Instructions] The next question is from Taylor Zurcher of Tudor Pickering and Holt. Please go ahead..

Hey, Sam and team. Thanks for taking my questions.

My first one is just on the – some of the frac market outlook commentary that you've made for 2022 so you're talking about the frac market potentially getting really tight at full utilization at some point in 2022 and I wonder just specific to your own fleet, you talked about 1.4 million horsepower, you've got 13 fleets working today and it sounds like three of those are Simul-Frac, so certainly more horsepower on location for those Simul Frac fleets.

But, if we think about your fleet today – my question is just if the pricing and demand was there, how many incremental fleets could you reactivate, how much equipment is currently sitting idle within your fleet today?.

Yes. Taylor, great question. I think that's the right question to be asking every pressure pumper in the space honestly and to just provide some context at the peak in 2019 we operated 26 and 27 fleets.

I can tell you that we’re – with the assets in the 1.4 million horsepower, we have today the way we’re operating, we’re never going back to that number. Hard to quote what the exact number is, but it is definitely less than that.

And I think what’s behind that, which we’ve already alluded to multiple times here on the call is the attrition that is the follow-on effect of these efficiency gains and we’re not the only ones that have become more efficient in the pressure pumping space.

Many of our peers and competitors have increased efficiencies as well and that’s more hours on the equipment and therefore shorter equipment lives.

So it’s hard to see on paper, but the anecdotes that we’re seeing here on the ground, in the Permian, are starting to make us feel more and more convicted about the potential supply constraints of horsepower in the Permian Basin, in the pressure pumping space..

Okay, understood.

And follow-up on efficiency, the efficiency gains that you guys have realized have been really strong over the course of 2021 and clearly Simul-Frac is a big piece of that, but maybe if we just exclude Simul-Frac for a moment, I suspect to the operation outside of Simul-Frac is getting even more efficient and my question is, what’s driving that? Whether it’s well completion design or the equipment itself, it seems like the Tier IV DGB and some of these lower emissions equipment technologies – I mean clearly there are benefits from a fuel cost savings perspective and an emissions reduction perspective for operators out there, but I wonder if there is a real noticeable efficiency benefit from having those equipment – that sort of equipment on location or if it’s really just emissions and fuel cost savings types of operators today..

Yes, there is a few factors at play there Taylor, one thing that I can’t go without mentioning is the high-performance of our team and our people. We think, we have the best operating team in our sector. We think it shows through our performance quarter-on-quarter. That said, I think what’s leading efficiencies in our sector is equipment.

When you saw activity draw down to almost all time lows after the pandemic, many companies like ProPetro all of our peers, our entire space, we deployed more average equipment to each location to try and protect our activity and our margins and our efficiencies. Our customers have come to expect that now.

So our ability to continue to push efficiencies higher is frankly probably most attributable to more equipment being in the system and our teammates having all the tools they need at their disposal to execute on those efficiencies. It’s going to be nearly impossible to take that efficiency away.

Our goal is to have our customers help us pay for that efficiency through things like price increases while we will continue to look internally at our cost structure, our maintenance programs to try and drive our cost structure down.

But I can’t say that there is anything more – that’s more of a play in this efficiency game than just extra equipment..

Yes, and Taylor, this is David, just another anecdote there. Early this year, there was a report issued by Rystad that attributed Simul-Frac market share in 2022 of about 27%.

We were not executing any Simul-Frac activities, the fact is our zipper crews were performing at such a high level with our conventional equipment that it broke the algorithm and gave us credit for Simul-Frac productivity.

So, I think when you look at ProPetro and the assets that we have and the team that we have that Sam and Adam referenced that really is what generates your productivity and certainly we will see some different things from different equipment as it comes out, but it’s really the ProPetro hallmark that our customers see and customers that are migrating to efficient frac activity see as well..

Very interesting. I appreciate the answers, thanks..

The next question is from Waqar Syed of ATB Capital Markets. Please go ahead..

All right, thank you for taking my question. Sam, just going to go back to Stephen’s question earlier in the call, but I’m going to ask it in a different way. The EBITDA margins back in 2019 were around 24.6% and this quarter were around 15.6%.

So, as you continue to see inflation – input cost inflation, but you get some price increases, do you have any visibility to getting to EBITDA margins in the 20% plus kind of range in 2022?.

Yes Waqar, I think we’re already seeing green shoots of that in smaller cases. So, with some of our customers where we have more activity that may move a little more slowly, but in small doses Waqar, I think we’re already seeing some of that..

Good to know. And second question is like you referenced to kind of a reinvestment cycle that pumping companies are likely to face here, now in the past most contracts between pumpers and E&Ps were kind of handshake type contracts.

Is there a push by you or the industry to change the nature of contracts with the E&Ps as you guys invest money into new fleets or new upgrades, things like that, so that there is more reliability of returns in those investments?.

Yes, I think the answer to that is yes. We have some small examples of what we think that looks like. Obviously, our relationship with Pioneer is very contractual. It’s been very mutually beneficial from our perspective and I think from Pioneer’s perspective as well.

But it’s going to take some time Waqar to operate to, I guess, what I’d call a healthier commercial model that might be a little more contractual, I think, through some of this education we’re trying to do with our customers around what the effects of these efficiencies are.

How long this equipment lives in these current operating conditions, is helpful in those conversations to push the commercial model to a more sustainable place which is probably more contractual.

Some of the more near-term opportunities to be more contractual with our customers revolves around some of this next generation equipment, the dual-fuel equipment, the electric equipment, the E&Ps that are trying to push the envelope on reducing emissions are willing and at the table to talk about contracts to pull more of that equipment into the system..

And Waqar. This is David.

I think the way to look at it is in the past, there was some speculative building of frac capacity across the marketplace, today, there is really no appetite for that in any of the companies that we see and so, if a company is looking to go to a next generation, whether it be electric or other type of solution we’re going to require some very tight contractual terms there.

And outside of that, it’s probably going to be as it has been, but the entire industry is going to be migrating to more of an industrial model, we believe and that’s something that I think Sam and Adam had talked about, and we as a team talk about and ultimately it would be nice to have more contractual exposure across our portfolio..

That will be a great development. Thank you very much. Thanks for your answer..

Thanks Waqar..

The next question is from Derek Podhaizer of Barclays. Please go ahead..

Good morning. Can you expand on the reactivation of stacked equipment you talked about? Was this for a Simul-Frac operations or any other type of fleets? Just want to reconcile this to your fleet count not stepping up in fourth quarter and you expect this to be ongoing as we go through this year and into next year..

Yes Derek, this is David. The reactivation was related to some of our previously stacked equipment. We are – we’ve done that in preparation for what we’re seeing in 2022 and we want to make sure that, that equipment is ready to go.

So, I think that as we stated in our comments, we’re not going to deploy additional fleets without having proper economics across our portfolio of projects, but we’ll let you know as best we can, when we see additional fleets that we’re going to be deploying..

Yes Derek, for me, this is Sam. It’s just a product of us matching our readiness with our conviction of what’s going to happen in the market next year..

Yes. Got it.

And would this be incremental fleets next year or is this more just replacing some of the older equipment of your current, but just trying to think about what your incremental fleet count could look like next year exclusive of the converted to Tier IV DGB stuff, just more of the legacy Tier II, are these new fleets rolling out or are these helping to replace and just get your fleets more efficient which is updated equipment?.

I mean, I think a little bit of both. I think, we are talking about and seeing enough opportunities and conversations with customers to either take market share, because of our performance and pricing that we’re seeing or to add at acceptable profitability levels..

Okay, that’s helpful. Just want to switch over to e-frac. So, wanted to just talk about the turbines for your DuraStim fleets.

You saw one of your competitors unlock some of the value in their turbine sell to a third party and leaseback, just wanted to get your thoughts on that given how much the power market has evolved, we’ve seen a number of new players enter this market over the past six months and is this something that you will go down this road to unlock some value to help support the recap cycle that you’re going through?.

Sure, great question. We bought two 30-megawatt turbines, almost two years ago in preparation for our DuraStim project. We’ve since watched the power market in general, as well as the e-frac specific power market evolve pretty significantly. We’ve also used those assets in the development and continued testing of our DuraStim.

That said, we’re looking at multiple options whether it’s lease sale or to deploy with electric fleets for those turbines that we currently own. So, we’re very open-minded to all the different ways we might be able to unlock or capture the value of those assets.

We’re not sure exactly how that materializes right now, but those assets do have long lives and high value and we want to ensure that they are being used in the best interest of creating value for our shareholders and we’re working on that constantly..

And Derek, as I think most of you know, there is a lot of dynamics going on with respect to power demand throughout the world and so these are – these I think are very relevant assets to resolve some of those issues..

Got it. Okay, great. Appreciate the color..

[Operator Instructions] So, there are no questions at this time. This concludes our question-and-answer session. I would like to turn the conference back over to Sam Sledge for closing remarks..

Thanks for joining us on the call today everyone. We enjoyed the discussion. We’re also proud to play a part in an innovative energy industry where oil and gas remain critical to everyday life across the globe. We hope you join us for our next quarterly earnings call. Have a great day..

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