Nextier Oilfield Solutions Inc (NEX) 2019 Q4 法說會逐字稿

Good morning, and welcome to the NexTier Oilfield Solutions' Fourth Quarter and Full Year 2019 Conference Call. As a reminder, today's call is being recorded. (Operator Instructions)

For opening remarks and introductions, I would like to turn the call over to Daniel Jenkins, Vice President of Investor Relations for NexTier. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and welcome to the NexTier Oilfield Solutions' earnings conference call to discuss our results for the fourth quarter and full year 2019. With me today are Robert Drummond, President and Chief Executive Officer; Kenny Pucheu, Chief Financial Officer. We appreciate your participation.

Before we get started, I'd like to direct your attention to the forward-looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the company's website. Our call this morning includes statements that speak to the company's expectations, outlook or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the company's control that could cause our actual results to differ materially from those expressed in or implied by these statements.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. We refer you to NexTier's disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, recent current reports on Form 8-K and other Securities and Exchange Commission filings. Additionally, our comments today also include non-GAAP financial measures. Additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our press release that is posted on our website.

With that, I'll turn the call over to Robert Drummond, Chief Executive Officer of NexTier.

Thank you, Daniel, and thank you, everyone, for joining us on the call this morning. Before we get started, I'd like to make a few comments regarding the current and rapidly evolving market backdrop. We're just 72 hours post the unexpected actions taken by OPEC and the resulting decline in crude oil prices. While it's too early to determine the impact of these events, we are closely assessing the situation, including potential activity responses by our E&P customers.

Notwithstanding the recent commodity price volatility, NexTier is able to remain nimble and is poised to effectively navigate these challenges. This includes a strong balance sheet and liquidity position that allows us to be both offensive and defensive, runway on our debt maturity until 2025, alignment with a base of resilient customers and a track record of adjusting our cost structure in response to market conditions.

I would also like to provide a few comments regarding the evolving coronavirus situation. We take seriously the personal impact this threat has had on so many around the world, and our thoughts go out to those directly impacted by the virus. At NexTier, we are taking all appropriate precautions to help protect the health and well-being of our employees.

With that said, before we discuss our latest results for the fourth quarter and full year, I'd like to start by reiterating NexTier's value proposition. We strive each day to help our customers win by accelerating production and lowering their cost per BOE. When executed successfully, this drives leading performance for customers, provides an engaging work environment for our employees, benefits the communities in which we operate and generates differentiating returns.

I'm excited about our performance and positioning relative to our peers. We have a management system built to deliver leading service quality, an insatiable drive for continuous improvement and a strong international growth opportunity with NESR. Also, as a result of the formation of NexTier and our recent well services divestiture, we have a strong balance sheet, the ability to capture significant cost synergies and free cash flow generation that will enable us to execute on capital allocation priorities.

In addition, one of the things that I'm most excited about is our platform for innovation that is focused on the application of technology to both reduce cost and improve efficiency for our company and our customers. Our innovation platform will enhance our ability to achieve industry-leading efficiencies, reliability and safety, while further enabling us to implement a very practical approach to sustainable operations. We'll expand more on NexTier's competitive advantages later in our call. But now I'd like to provide an update on the fourth quarter.

We ended the year with a strong quarterly performance, extending our track record of delivering on our commitments. While the fourth quarter was expected to be challenging, the magnitude of the activity decline was among the most intense the industry has experienced recently. We faced reduced activity from typical year-end seasonality, compounded by heightened levels of budget exhaustion as our customers remain fiscally disciplined.

The activity slowdown impacted the volume of work across the industry and increased activity gaps in frac calendars, resulting in a highly competitive pricing environment. Despite this challenging backdrop, we were successful during the fourth quarter in delivering strong performance by staying close to our customers and managing what's in our control.

I'd like to touch on a few highlights from our fourth quarter performance. We generated $648 million of pro forma revenue and $78 million of pro forma adjusted EBITDA, which were within or at the high end of our most recent guidance range. We generated annualized pro forma adjusted gross profit per fleet of $15.6 million, maintaining our position as a leader in relative performance. When including the full quarterly results of both legacy Keane and C&J, we generated combined adjusted free cash flow of $55 million in the fourth quarter when excluding management adjustments, mostly from merger and integration costs.

With that as an overview of the fourth quarter, I'd like to review our performance for the full year. In June, we were excited to announce the merger between C&J Energy Services and Keane Group, forming an industry-leading U.S. land completions company. In our short time since announcement and subsequent closing, we've been successful in reaching important milestones and achievements.

First, we closed the merger with C&J and implemented a well-planned and executed integration process, while maintaining a relentless focus on delivering for customers and ensuring continued safety and service quality, including one of the lowest total recordable incident rates in our company's history.

Second, we remain on track to realize $125 million of annualized run rate cost synergies by the end of the second quarter of 2020. In addition, we've identified approximately $80 million of incremental cash synergies, which Kenny will provide more detail on later in the call.

Third, we completed a comprehensive equipment rationalization program, updating our go-forward marketed capacity by permanently removing a sizable base of equipment, details of which we provided on our last earnings call.

And fourth, we announced our entry into a new world-class basin by deploying equipment from the U.S. to the Middle East/North Africa region via a partnership with NESR, demonstrating our ability to remain nimble and responsive to market opportunities.

In summary, I'm very proud of our 2019 achievements. On Monday, we announced the divestiture of our Well Support Services segment to Basic Energy Services for approximately $94 million of total consideration. This strategic transaction further positions NexTier as one of the largest completion services company, predominantly focused on the U.S. land market. In addition, this transaction strengthens our balance sheet, reduces our cost structure and capital spending, improves our overall risk profile and increases our financial flexibility.

So now let's move to what we're currently seeing in the marketplace. As we put our 2020 plan together, the market backdrop looked very similar to what we experienced entering 2019, a range-bound macro environment with overcapacity of completions equipment and a reduction in overall capital spending by the E&Ps. Just this week, we've witnessed a material drop in commodity prices, driven by the impact of global supply and demand dynamics, which is causing us to reevaluate our 2020 plan.

From an activity perspective, the first quarter started as expected with levels continuing to increase through early March, as our customers got back to work early in the year. However, we expect activity levels going forward to be at risk as a result of the current market volatility. The full impact of which we are still assessing as facts continue to evolve.

From a pricing perspective, overcapacity and customer spending constraints have resulted in adjustments. And we continue to partner with our customers on driving efficiencies and deploying innovation to reduce operating cost, all of which are helping to offset these market headwinds.

This challenging environment provides a playing field for differentiation, and we're proud to emerge as a leader on this front. While we would prefer to have a more supportive market backdrop, we are excited about the unique levers we have to drive further delineation versus the market for NexTier.

Within the competitive landscape, companies with a clear operational playbook, track record of execution and strong balance sheet providing financial firepower will outperform. We keep it simple and focused to further separate ourselves across 3 main tenets: optimizing our cost structure, delivering industry-leading efficiency and safety, and maximizing the customer value proposition via innovation.

So first on optimizing our cost structure. We maintain an unrelenting focus on cost optimization, and we continue to target opportunities to achieve a low-cost position across direct materials, maintenance and footprint, while maintaining exceptional service quality. We have a track record of making proactive decisions necessary to align our operations and cost with market conditions and now have a larger platform on which to execute that strategy.

The second tenet is delivering industry-leading safety and efficiency. We have a relentless focus on operating model that's built around optimizing efficiencies, which continues to serve as the foundation of our partnership approach. It requires 3 ingredients, including working for the right customers, delivering a high level of execution and injecting innovation.

Our efficiency improvements have been partially driven by the bundling of wireline with our frac fleet within our Completion Services segment. As a result of our integrated management structure, we have successfully incorporated our bundling strategy across a significant portion of our deployed fleet. I am excited about the progress we've made and the fact that more and more of our customers are reaping the benefits of our bundled completion platform.

The third tenet is maximizing the customer's value proposition via innovation. We believe that strategically deploying new tools and technologies will enable us to deliver step-change efficiency improvement and lower overall cost structure. We continue to focus on technology deployment across 3 main areas: surface, subsurface and digital.

Our innovation strategy is simple, deliver advancements that provide improved operational performance and enable real-time, data-driven decision making. These advancements will permanently drive cost out of the system and improve reliability to provide tangible value for NexTier and our customers.

We have a consistent history of successfully capturing efficiencies as evidenced by improvements in pump hours and stages completed per day. We are proud of these achievements. However, we believe the next leg of efficiency improvement will come from the implementation of innovation, including digitally enabled technologies. With this in mind, I'd like to share recent successes in driving innovation across the organization.

Focusing on digital, I'm proud to announce the launch of NEX Hub, which enables our transition to an organization that integrates smart, real-time capabilities into our decision-making process. The construction of our new and expanded digital operations center, combined with the rollout of data insight platform will provide real-time operational support and visibility. In addition, these projects will drive real-time operations analysis to make faster decisions and enhance efficiencies, streamline our processes, further improve maintenance practices and reduce our cost.

Our NEX hub facility will centralize people and resources to provide a great customer engagement tool that highlights our investment in real-time logistics management and the open collaboration of data with our partners. Our initial rollout has been successful, and we now have a portion of our active fleet streaming data with 24/7 operational support. And by the end of 2020, all of our deployed fleets are expected to be connected to NEX hub to optimize operations, maintenance and logistics.

Another digital initiative that will feed directly in the NEX hub is our recently developed equipment health monitoring, or EHM program, that is focused on extending major component life to improve operational reliability, reduce nonproductive time and decrease both maintenance OpEx and CapEx. Our EHM program uses artificial intelligence to predict and reduce premature failure of major component parts. This initiative has provided notable cost savings as we near completion of the pilot program on a portion of our frac fleet. By the end of the second quarter of 2020, we expect to have all the active fleets being monitored by our EHM program.

Sticking with the digital theme, we also have been investing to standardize our asset base through the installation of our proprietary equipment control systems, branded under the Mobile Data Technologies name, also known as MDT. MDT is wholly owned by NexTier through a 2013 acquisition by C&J. MDT control systems enable us to better monitor equipment, streamline maintenance programs and reduce unplanned downtime.

Additionally, one of the most exciting and value-added features is that we have access to the programming code and are easily able to make changes to the system, which allows us to better control the advancement of our digital strategy and avoid being reliant on third-party providers. As we progress in our digital journey, we will continue to develop MDT technologies and further integrate them into our operational platform.

And finally, we have a very practical approach when it comes to managing ESG opportunities, and our innovation initiatives are driving significant advancements in our ESG profile. With this in mind, I'd like to share some recent initiatives that we have implemented that demonstrates our commitment to responsible operations. After successful field trials, we are excited to have recently deployed 2 rebuilt and upgraded fleets with Tier IV dual-fuel DGB engine technology to an existing dedicated customer. NexTier had been a leading test partner with several large OEMs and was one of the first to field test and deploy Tier IV dual-fuel solutions.

We are investing in our Hibernate engine idle reduction technology, which enables us to target a 6% reduction in fuel consumption once fully implemented on all deployed fleet by year-end 2020. And finally, the usage of fuel additives in our diesel supply has resulted in reduced fuel consumption and as much as 50% reduction in air emissions. All of these recently implemented initiatives further demonstrate our practical approach to environmental stewardship.

So now before handing it over to Kenny, I wanted to comment on Kenny's recent appointment as NexTier's Chief Financial Officer. Kenny brings more than 2 decades of industry experience, with much of that time at Schlumberger. Kenny joined the Keane team in 2016 before its 2017 initial public offering, and has played a critical role in Keane and NexTier's success to date. Kenny's operational prowess combined with his financial competency makes him a great partner to lead the financial efforts across our organization. I look forward to him taking on his expanded role and working alongside the leadership team as we drive results for our stakeholders.

With that, I'll now turn the call over to Kenny.

Thank you, Robert. Total pro forma fourth quarter revenue totaled $648 million compared to $897 million in the third quarter, which was within our revised quarter guidance range. The sequential decrease was driven by fewer deployed frac fleets and lower activity levels across our service lines due to year-end seasonality and customer budget exhaustion.

Total pro forma fourth quarter adjusted EBITDA was $78 million, which was at the high end of our revised guidance range. This compared to $138 million of pro forma adjusted EBITDA in the third quarter. We continue to proactively rightsize our operations relative to market conditions and expected customer demand, which resulted in lower overall cost structure and higher fourth quarter profitability than initially guided.

In our Completion Services segment, pro forma fourth quarter revenue totaled $510 million compared to $735 million in the third quarter. The revenue decline was driven by lower deployed fleets and decreased activity levels due to seasonality and budget exhaustion. Completion Services segment pro forma gross profit totaled $106 million compared to $169 million in the third quarter.

During the fourth quarter, we deployed an average of 30 pro forma frac fleets and when factoring in activity gaps, we operated the equivalent of 25 fully utilized fleets. On a fully utilized basis, pro forma annualized adjusted gross profit per fleet, which includes frac and bundled wireline, totaled $15.6 million compared to $18.6 million per fleet in the third quarter. Despite the difficult market conditions in the fourth quarter, our financial performance continues to position us as a leader of relative peer performance and remains a key differentiator for NexTier.

In our Well Construction and Intervention Services segment pro forma revenue totaled $58 million compared to $67 million in the third quarter. This was driven by lower average deployed unit count and decreased activity levels due to seasonality and budget exhaustion. Pro forma adjusted EBITDA totaled $7.2 million compared to $9.1 million in the third quarter, resulting in pro forma segment adjusted EBITDA margin of 12%.

In our Well Support Services segment, pro forma revenue totaled $81 million compared to $95 million in the third quarter. The decrease was driven by the divestiture of the majority of our fluids management assets in the third quarter, budget exhaustion and year-end seasonality. Pro forma segment adjusted EBITDA totaled $9.2 million compared to $12.4 million in the third quarter, resulting in pro forma segment adjusted EBITDA margin of 11%.

Pro forma adjusted EBITDA for the fourth quarter includes management adjustments of approximately $87.5 million, consisting of $55 million of merger and integration costs, driven by severance and accelerated noncash stock compensation expense; $12.3 million of noncash impairment, mostly associated with the retirement of the Keane trade name; $5.6 million of noncash stock compensation expense; and $14.5 million of other costs that are driven by tax and litigation reserves and facility closures.

Of the $87.5 million in management adjustments during the fourth quarter, approximately $36 million were noncash. Pro forma fourth quarter selling, general and administrative expense totaled $70 million compared to $102 million in the third quarter. Excluding management adjustments, pro forma adjusted SG&A expense totaled $54 million compared to $66 million in the third quarter.

Turning to the balance sheet. We exited the fourth quarter with $255 million of cash. This compared to just over $270 million of pro forma cash at the end of the third quarter, which was net of the $65 million special dividend paid to the legacy C&J shareholders upon closing of the merger. Total debt at the end of the fourth quarter was $338 million net of debt discounts and deferred finance costs and excluding finance lease obligations, which was effectively unchanged versus the third quarter.

Net debt at the end of the fourth quarter was approximately $83 million, resulting in a leverage ratio of 0.2x on a trailing pro forma 12-month basis. We exited the fourth quarter with total available liquidity of approximately $559 million, which included cash of $255 million and availability of approximately $304 million under our asset-based credit facility.

When including the full quarterly results of both legacy Keane and C&J, cash flow from operations was $48 million during the fourth quarter. Cash flow used in investing activities totaled $54 million, driven by maintenance CapEx and further investments in technology. This resulted in free cash flow use of $6 million during the fourth quarter. Excluding $61 million of merger and integration cash costs, adjusted free cash flow totaled $55 million in the fourth quarter.

We consummated a deal to divest our Well Support Services segment to Basic Energy Services for $93.7 million of total consideration, which was signed and closed on Monday, March 9. We received $59.4 million of cash at closing and just over $34 million of basic senior secured notes with a make-whole protection feature at par from Ascribe Capital, a private investment firm with over $3 billion of assets under management.

As it relates to the senior secured notes portion of the consideration, I would like to highlight a few features of the deal. The notes are accompanied by a make-whole guarantee at par, which guarantees the payment of $34.4 million to NexTier if the notes are held for 1 year post closing. In the event of a basic restructuring or credit rating downgrade in conjunction with the change in control, the make-whole protection feature can be triggered, which guarantees a notes redemption at par. As note holders, we are entitled the 10.75% annual coupon paid semiannually during the whole period.

Total deal consideration of just under $94 million reflects approximately 5 years of free cash flow before taking into account an incremental $6 million of corporate SG&A savings for NexTier.

In December of 2019, we announced a capital return program that is supported by our strong balance sheet and projected free cash flow generation. Due to trading restrictions associated with our well services divestiture, we have yet to purchase any shares on our previously announced capital return program. Given recent volatility and uncertainty in the macro environment, we are reevaluating our capital allocation priorities.

We believe our strong balance sheet and liquidity position, enhanced by the proceeds from our well services divestiture, provides us the financial flexibility to execute on multiple priorities. As we gain more insight on the impact to our business from the recent market volatility, we will refine and execute our capital allocation program. We look forward to providing updates on the execution of our program throughout the year.

Now turning to our outlook for the first quarter. We experienced increased activity levels through early March versus the fourth quarter across all of our business lines. In our Completions segment, we expect to achieve an average of 28 fully utilized fleets in the first quarter versus 25 in the fourth quarter. We expect increased activity levels to be offset by lower overall pricing and the divestiture of our Well Support Services segment on March 9.

We have always taken pride in our management system that has provided strong visibility into our business. As a result, we have routinely provided robust guidance and delivered on those commitments. However, with the rapidly evolving market conditions, we have decided not to provide detailed guidance for the first quarter until we have been able to fully assess the impact of recent macro dynamics to our business.

Turning now to CapEx. NexTier has invested in its asset base over the years and has a well maintained fleet. While maintenance CapEx were the focus on innovation and extending the useful life on our frac assets, we see CapEx per fleet reducing to $3.5 million to $4 million per utilized fleet. With the divestiture of the well services segment, reducing the overall CapEx, maintenance CapEx requirements of the other service lines at current activity levels is approximately $25 million.

Strategic capital expenditures for 2020 will be $60 million, primarily focused on converting existing conventional frac pumps to dual-fuel capability in order to burn CNG or natural gas from the field. As Robert mentioned, we have taken delivery of multiple DGB upgrades in the first quarter, so the strategic CapEx spend is committed and will be front-end loaded in the first half of 2020.

In addition, we will spend $20 million on deal-related expenditures to unlock synergies, including harmonizing frac controls, business systems and consolidating facilities. However, based on recent developments in the macro, we do have the ability to flex the majority of the CapEx budget with shifts in demand for our services as both the maintenance and deal-related spend is linked to activity and can be reduced accordingly.

Finally, we are excited about our cash flow generation prospects with continued cost control measures and expected synergy capture in 2020. In addition to our previously announced $125 million of cost synergies associated with the merger, I am pleased to report that we have identified approximately $80 million of cash synergies that we expect to realize before year-end. We have identified $60 million from targeted, incremental working capital improvement that we expect to realize by implementing best practices from both legacy companies.

Additionally, we have identified $20 million of proceeds from various property and equipment sales that we expect to close this year. Even though we anticipate an additional $40 million of deal-related costs in 2020, we are forecasting meaningful free cash flow generation. These additional cash synergies in combination with the cash proceeds from our Well Support Services divestiture, further strengthen our balance sheet and position us nicely to execute on our capital allocation priorities.

With that, I'll hand it back to Robert for closing comments.

Thanks, Kenny. And before we open up the lines for Q&A, I want to highlight a few key points.

First, we have a strong balance sheet that will help us navigate these challenging market conditions. The proceeds from the well services divestiture announced on Monday strengthen our already formidable liquidity position. Second, the integration has progressed ahead of schedule and we're laser-focused on achieving the synergy targets that we've previously conveyed.

Third, the recent market conditions have been challenging, but we are focused on controlling our own destiny by generating free cash flow. We continue to focus on rightsizing our business in line with market conditions and expected customer demand. Fourth, we remain committed to harvesting innovation and investing in technologies that will fundamentally change the way we conduct our business and permanently drive cost out of the system.

With that, we'd now like to open up the lines for Q&A. Operator?

(Operator Instructions) Today's first question comes from Tommy Moll at Stevens.

Robert, I wanted to ask about the dedicated customers you've got. If you go back to the end of 2018, you guys proactively addressed some of the pressures in the marketplace, where you basically traded some price for visibility into your 2019 activity, which resulted in a pretty good outcome for you guys, all things considered. It sounds like you did something similar at the end of '19. So I wondered if you could just comment on how that RFP season went and anything we should know there. And then to the extent you can and understand this is volatile and early, but just any idea you have about how this current environment may play out in terms of the dedicated agreements where the ink's barely dry and now the world has changed in terms of the macro outlook?

Thanks for that question, Tommy. As you point out, we were looking at 2020 planning, it looked a lot like the transition from 2018 to 2019 before the most recent OPEC disruption. So we were a bit on the same playbook. In '19 over '18, we yielded price and then we called it back through efficiency and cost management as we have improved our pumping hours per fleet. And then 2020, the playbook is going to be very much the same.

As far as the success of 2020 over 2019, I would say we had the usual puts and takes. You can see our fleet count in Q1 moved up versus Q4. And our dedicated agreements are not exactly the same, but they -- as far as who they're for, but -- about the same ratio. So we feel good about that transition. In fact, the bottom for us probably was November, and our fleet count was climbing in December and in January and in February. And then in March, we reached this point where we have this bit of a disruption. We already see some impacts occurring on the fleets that we're participating on the fringes of the spot market side, where customers had some discretionary capabilities to slow down operations. So that's the reason we kind of we're -- we didn't really guide real specifically for Q1.

But I would also say is that our long-term relationships with our customers or -- they take it serious as we do. And I think that we expect those arrangements to hold fast. But I think all of our customers are in the process right now on deciding what they're going to do. And that will be determined probably in the coming days and if not, for sure within the coming weeks. So we're being cautionary and staying focused on operations and making sure that we continue to get better. But that's kind of the story for us.

Okay. Well, I'm sure there will be plenty more questions on the near-term outlook. But for my follow-up, I wanted to pivot to the NESR partnership that you guys announced. What can you share with us in terms of how you're partnering with them to go to market? It's some of your core service lines, but just anything you can share about the mechanics of how that partnership works. And then on the financial side, can you give us anything on the magnitude and timing of when it's expected to hit your P&L?

So good question, Tommy. Thank you. Look, I might boast just for a minute and say I think this is one of those deals where it's actually a 3-way win. It's a win for Aramco because at end of the day, they're seeing their efficiencies improved dramatically as NESR and NEX got together to deliver efficiencies. NESR's a win because that's going to bring new import U.S. performance on frac and wireline into their own conventional foray, and that's been a positive. The stage counts are up dramatically versus historical.

And then for us, it's obvious win because we got a low-risk entry into a part of the world rich in hydrocarbon and for a customer base that we got a lot of respect for over time. And I'd say the dynamics of that, it's really built around -- I think it's a unique partnership that's built around mutual respect between NEX (sic) [NESR] and NexTier that will be difficult to replicate.

So it's important for us. We're doing what we do well, and we got our frac and wireline put together. And so far, operations have been very good. I take my hat off to the NexTier employees who've have made that trek over there. And we got -- safety and efficiency-wise have been performing right up to our standards, and I attribute that to NESR's leadership, related to the facilities and the partnership that we've built.

So on the upside, I think it's very much linked to NESR's relationships all across the Middle East/North Africa region and the further development of U.S.-style fracking operations in that region. So I like where we're positioned, and I think -- you'll see that in our P&L., I mean, already in Q4, the impact of those operations. So if you ask me about what it's going to look like going forward, I'm saying that we're in good shape with the operations we got going and we feel pretty good about kind of a growth potential linked directly with NESR .

And our next question today from Stephen Gengaro at Stifel.

That was a very good overview on the prepared comments. I just had a couple of follow-ups. And I think what I'd start with is, as you think about fleet deployments and how many frac fleets you have active in the U.S. market, can you give us a sense for kind of the profitability parameters around kind of the go versus no-go decision? And how you think, both for you but then as an industry, how do you think the industry reacts? I mean, obviously we've seen attrition already. But do you think this accelerates that? I mean how should we be thinking about both from your perspective and your view of the macro frac market, assuming, of course, we kind of get a slowdown, as it seems like, we are sort of on the brink of here?

Thank you. I like that question. And I would say, how we make decisions is that we're running the business to generate free cash flow. So looking at price that can generate profitability that pays for the maintenance CapEx of the individual frac fleets, which Kenny guided a little bit that we expect to take down in 2020 versus 2019 as well as each individual fleet share of the SG&A structure of the company and then drive our decisions around that. And every effort that we have is to lower that operating cost constantly, so that we can continuously use that leverage in the marketplace either for margin or for market share. So that's a battle that's ongoing constantly.

And I think we have a bunch of levers that other people don't have right now because of the, luckily, timeliness of our merger with -- between Keane and C&J, that we got a little more cost variable -- variable cost to address, and the synergy aspects of doing that gives us a bit of advantage. As far as the macro impact overall, I would just say that supply and demand is well documented to be oversupplied on the horsepower side. And it's probably -- we were probably headed down a path, it was going to take a couple of years to get fully sorted out. Certainly, the market has had some attrition in horsepower and ongoing consumption of horsepower as it relates to efficiency improvement. But at the end of the day, it was going to take a significant amount of time.

I would argue, if we do have a major correction of activity here related to this oil price flux, that it's going to put a lot of pressure on the system and the companies to have debt or have debt walls coming and are going to have a different reaction, perhaps, how they price in the market longer-term than they may be were hoping for. So bottom line, I think maybe the scenario, if you try and look at the bright side of the situation we have with OPEC, is that it very likely could accelerate the overall fix of supply and demand. I hope that addressed your question.

Yes. No, that did. And then just as a follow-up, in prior periods like this, have you guys found that you're differentiation is sort of magnified as a positive? Or do you think it becomes less important where your customers are just ultra-focused on price? So how do you think -- what have you seen from that perspective historically?

Of course, that would vary by customer. But I would say, many of the customers who have a very long-term view and have many thousands of wells to drill and complete, ultimately produce their assets, take different value views about how they work with partners and how much they look at the full value equation as it relates to efficiencies and how much you're getting for what you spend. So I think that varies widely across the market. But as far as how the market is going to react, I think, is there another playbook that looks just like this one? I don't know. This has been a mighty dramatic quick change. And how that plays out is -- I don't want to use the word unprecedented necessarily, but it's not -- it's kind of close to that.

Our next question today comes from Sean Meakim at JPMorgan.

Robert, so the release last night indicated there's an incremental $80 million of cash savings that you found. I think you mentioned it on the call earlier, but I don't think we got a lot of incremental detail so far. Can you maybe just give us some granularity on those savings? And when you roll up the costs associated with integrating the 2 companies with these savings, I'm just curious kind of how do we come out for 2020? It sounds like the net impact is positive for cash? And is that part of what gives you the confidence on that free cash flow profile for this year?

Sean, it's Greg. Good morning. I'll make a few points on the synergies. First, the $125 million of P&L synergies remains intact with kind of the following sequencing for '19 and '20. We had $3 million of synergies in the fourth quarter of '19, expect $20 million in the first half of '20 as we ramp and then $63 million in the second half of '20 as we achieve the $125 million run rate by the end of 2Q. So we expect to deliver that $125 million run rate P&L synergies regardless of the market conditions.

The $80 million of incremental cash synergies, the ones that Kenny mentioned are newly identified, consist of $60 million from working capital, driven by efficiencies not volume; and $20 million for the disposition of excess assets related to property and equipment, as we consolidate facilities we have excess properties, et cetera. These are expected to deliver ratably on the cash side throughout 2020. And these synergies do not include the elimination of $20 million of CapEx or any other benefits from the well services transaction.

On the deal cost, I think we have a story here that's compelling versus the deals I've worked on in the past. The total cash deal cost, we spent $72 million in '19 and we expect another $60 million in '20 of cash. In '20, it will be $40 million through the P&L, as Kenny mentioned, and then $20 million in CapEx. That makes up to $60 million. So that gets you to a total deal cost, cash cost of $132 million.

On the synergy side, we're going to get $125 million from the P&L; $83 million, which will be realized in 2020; $80 million in cash, all of which will be in 2020; and about $20 million in CapEx savings, which is part of what's leading to the reduced maintenance CapEx that Kenny talked about. So that's about $225 million of cash synergies versus the $132 of total cash deal cost, so you're looking at less than 1-year payback. So if you look at the total equation through the kind of year, 18-month cycle, it's a very compelling payback on the investment.

That's -- I think that's very detailed and very helpful. So that kind of leads me back to the capital allocation question. So it's understood that there's a desire to see how the dust settles a bit here given the events of the last few days, but your shares are down 70% in the last few months, 90% since the IPO, obviously you're not alone in the sector, but you're trading at 20% of fleet replacement. I'm just curious, if you generate the cash that you expect to in 2020, even in a more challenging volume environment, are there better places to put that free cash flow than back into the stock as we go through the year?

Good question, Sean. Obviously, one that's right on the forefront of our mind. We have been restricted through this deal with Basic up until now, since we announced that $100 million. And they've been a bit anxious to take advantage of it. But with the amount of uncertainty that's in the market as we sit here today, that it just seems more prudent not to take the -- it was so tempting to buy the stock right now, but better, we think, to sit on the cash during this period until we can see how things shake out just for the sake of not having to regret later. Do I think there's a better return than our stock at $2? I do not.

And our next question today comes from Connor Lynagh at Morgan Stanley.

I was wondering if we could talk through your cost structure. I certainly understand you guys don't have a lot of visibility right now, but can you help us think through how much of your costs within the segments are at the field level or at the crew level versus how to think through how the fixed cost might trend if activity is being reduced? I appreciate the merger synergies might make it a little challenging, but any help you can get there would be appreciated.

Kenny, go ahead.

Yes. This is Kenny. Good question. So when you look at the cost of goods sold dynamics, I would just say that the direct costs as it related to the field are going to be a very high percentage. The support costs that are there in the field, we've kept very lean over the years and through this integration. So that percentage is low. So the variability and the cost as it relates to activity is very high. So as we've done in the past, we've been able to adjust our cost structure quickly to any market change, and we expect to do that here.

In addition to that, you've seen our reduction in SG&A. That was both from a synergy perspective and also from a market-driven perspective with the decline in the market that we saw in Q4. So we look at it at all angles. We're looking at cost of goods sold direct, we're looking at the support structure and we're also looking at SG&A to make sure that we can be the most competitive that we can and generate free cash flow.

One other thing I might just add is that we had started over a year ago while -- as Keane, in investing in our digital program related to equipment health monitoring and using data to help us lower operating costs in general, and I think this is going to -- we factor that into our 2020 cost structure going forward, and we want to be able to -- out of that strategic CapEx pool, continue to keep that funded because the return is very good. Great question.

Got it. That's helpful. And it strikes me that in prior downturns or even just quarters where utilization is low, the industry in general kind of gets hurt by the fact that you deploy a lot of assets and people on-site and maybe your customers aren't in such of a hurry, so you're just sort of eating cost and not earning revenue Maybe your model addresses that somewhat, but how do you think through the ability to mitigate that risk with your customers if they do decide to slow down?

I'm sorry, we had a little cut out on the phone there. Could you repeat that middle part of the question?

Yes. The question was basically just if you have an ability to manage the potential for customers to be in sort of less of a hurry, if you will. It seems like the industry has suffered previously from deploying assets and people on-site and not really earning revenue. Are there changes you can make to your pricing structure or your compensation structure that can help you mitigate the idle time, so to speak?

Got it. Thank you. Look, for us, for anybody, profitability is very much linked to efficiency and the management of the white space in the schedule. Obviously, working close with customers to get in the front end of that planning process is very key. But we do have a history of being able to fluctuate our variable cost, a large part of that associated with personnel cost with the business. And I think that goes to planning a bit and having the right amount of spare capacity, if you will. And what I mean by that is there's plenty of capacity in the market as far as assets, but having hot-stacked or hot available assets, mainly the equipment is ready to go and it's manned. The bigger your scale, the more leverage you can have there to use that where it's needed.

So it's really about how accurate you can be predicting what it's going to look like and managing costs towards that. I think as we get smarter with the digital information and the data, we can make decisions more in real time is also an aspect to it. And keeping the supply chain right in tuned with the activity, those are all kind of factors that are incremental, one decision to the next. I hope that helped.

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Robert Drummond for closing remarks.

Thank you very much. And before we end the call today, I'd like to publicly thank the employees of NexTier for all their hard work and dedication. Our employees continue to focus on delivering excellent service quality to our customers throughout the integration process, while maintaining one of the best safety records in our company's history.

In addition, I'd like to recognize all the former Well Support Services employees and thank them for their contributions to both legacy C&J and to NexTier. This transaction with Basic provides an opportunity for our former employees to continue building upon their success of delivering strong service, quality and safety within an organization fully dedicated to the well servicing business.

Finally, we look forward to updating you on the progress and performance on our first quarter call in early May. Thanks to everyone for joining the call. Have a good day.

Thank you, sir. This concludes today's conference call. You may disconnect your lines, and have a wonderful day.