Nextier Oilfield Solutions Inc (NEX) 2021 Q1 法說會逐字稿

Good morning and welcome to the NexTier Oilfield Solutions First Quarter 2021 Conference Call. As a reminder, today's call is being recorded. (Operator Instructions) For opening remarks and introductions, I like to turn the conference call over to Kevin McDonald, Chief Administrative Officer and General Counsel for NexTier. Sir, please go ahead.

Thank you, operator. Good morning, everyone, and welcome to the NexTier Oilfield Solutions earnings conference call to discuss our first quarter 2021 results. With me today are Robert Drummond, President and Chief Executive Officer; and Kenny Pucheu, Chief Financial Officer.

Before we get started, I would 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, which could cause our actual results to differ materially from those expressed and/or implied by these statements. We undertake no obligation to revise or update publicly any forward-looking statements, except as may be required under applicable securities laws. We refer you to NexTier's disclosures regarding risk factors and forward-looking statements in our annual report on form 10 K, subsequently filed quarterly reports on form 10 Q 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 measure are included in our earnings release for the first quarter of 2021 and with respect to 2019 related non-GAAP financial measures in our earnings release for the first quarter of 2020, each of which are posted in our website.

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

Thank you, Kevin, and thanks, everyone, for joining us this morning. We continue to make good progress with our strategic initiatives around converting our completion fleet to natural gas power in an effort to meet the growing demand in this important part of the market.

Our first quarter ended on a strong note exiting March with our best monthly performance since April of 2020 after recovering from the unexpected and extremely abnormal winter conditions in February and transitioning to new customer activity early in the quarter. We were pleased to on-board 5 new customers earlier in the quarter and enjoyed steadily efficiency improvements as we exited March. The ongoing results will continue to improve with the additional deployment of newly converted gas-powered equipment throughout the rest of 2021.

Our decision last year to increase the pace of conversions from diesel engines to lower-carbon footprint, natural-gas-powered, Tier 4 pumps is beginning to serve us well as we exit Q1, and as we expected, demand continues to grow as we progress towards half 2 of 2021. In addition, some of our historical customers are beginning to return to work as we roll further into 2021 and the COVID recovery.

The value proposition of our integrated completion solution is well understood by these customers and it's meeting ever-increasing interest from new customers as we demonstrate the advantages, including improved efficiency of aligned objectives and incentives around fracking, last-mile logistics, wireline pumped down perforating and the up-and-coming deployment of Power Solutions, our natural gas fueling solutions.

Our new customers are favorably evaluating the cost effectiveness of this more efficient integrated completion offering and the resulting optimization of well site staffing. I am very pleased with the momentum of this enhanced and differentiated offering, which we expect to be reflected in our results during the back half of Q2 and throughout the rest of the year.

Despite this whipsaw activity profile caused by the extended freeze in Q1, which shut down the majority of our fracking wireline Permian Basin centric operations for 10 days, I was very proud of the way our NexTier team rebounded in March with our best monthly performance since April of 2020. The ongoing deployment of new ESG Pro and ESG Platinum dual-fuel integrated fleets are getting off to a great start with high efficiency and steady improvement in the amount of diesel fuel being displaced with cleaner natural gas.

I was also particularly proud of our cementing business performance through the extended freeze in the Permian where operations managed to continue without interruption. The momentum of the recovery in our cementing and coil tubing business has been very positive, and it is expected to continue. Overall, our extensive footprint in the Permian Basin is a core NexTier strength and the initial focal point of our new Power Solutions business. This business is on schedule to become commercial in Q3, which will integrate CNG and field gas with our frac fleet to make it even easier for our customers to transition to natural gas power and a more cost-effective lower-carbon footprint. There's no wonder that market demand for this technology is growing, especially as diesel prices continue to increase.

We are encouraged by our customers' plans as well as a backdrop of improving commodity prices. We anticipate increased activity in the coming quarters and are managing increased customer interest in our core strategic initiatives that emphasize 2 key priorities: providing integrated service solutions through well site scope expansion and responsible, low-cost, low-carbon completion operations. These solutions and investments are focused on differentiating our completion services in the part of the market where customers are focused on total cost of operations and maximizing their returns. We plan to generate meaningful returns as the cycle continues to evolve. And I will now provide an update on how we are executing on our core strategies.

First, on well site service expansion and integration. NexTier's integrated solutions platforms means that our customers benefit from one safety system, one quality management system, one risk management system and one cohesive aligned team that is focused on efficiency. The outcome of this which reflects the value proposition of our integrated offering is simple. Our approach leads to fewer and better align suppliers and personnel on each job and improved financial and website performance for NexTier and our customers.

As noted, we significantly grew our logistics business in the first quarter and into the second. Although the nature of the business carries lower margins than our core completion services, it is accretive to both EBITDA and cash flow, and importantly, with the capacity gain in our latest merger, carries a very low capital cost to deliver. We continue to demonstrate our ability to land commodities at a lower cost while still generating returns enabled by our AI-driven control tower inside NextHub.

Additionally, the efficiency of our AI-driven logistics operations supports our focus on responsible operations by reducing diesel consumption and the number of vehicles on the road. We are building on this capability even as the market struggles to address the scarcity of truck drivers available to support our sector. We have successfully added capacity to address this dynamic, and we are expanding capacity to support our customers with reliable last-mile logistics. Our logistics platform enables lower proppant costs, lower last-mile costs, lower emissions and the opportunity for drivers to make more money.

Our wells site integration strategy is also a key enabler to achieve an exceptional safety performance. And in fact, our wireline business was proud to receive the 2020 Gold Star Safety Award from the AESC, the Association of Energy Service Companies, recognizing our team for its commitment to ensuring leading safety results in the field. Safety is always a primary focus for NexTier and reflects our license to operate for customers.

In addition to this exceptional safety performance, integrating frac and wireline remains a critical component of our strategy, as we consistently realize 25% or more improvement in frac efficiencies when integrated as a completion fleet. With this safety and operational performance, we were making gains in the number of integrated completion fleets we have in the marketplace and seek further expansion into the future. The emergence in Q3 of our Power Solutions business providing comprehensive fueling options for our natural-gas-powered fleet further enhances our unique integrated value proposition.

Second, we continue to drive forward on our low-cost, low-carbon strategy. We would point to several key achievements on this front. First, we continue to deploy Tier 4 dual-fuel equipment into the market. We see continued demand for lower-emissions frac technology, and as planned, we are allocating strategic capital to dual-fuel conversions for delivery throughout 2021. And I want to emphasize that this investment converts existing diesel-powered pumps to natural gas as a primary fuel source and does not add additional horsepower to the market. The demand is largely driven by the savings on fueling operations with clean-burning natural gas displacing diesel, and this value proposition is further enhanced as the cost of diesel continues to rise.

Second, we continue to evolve our workflows around this new equipment to maximize diesel substitution by utilizing our NextHub's digital capabilities and proprietary MDT-branded frac controls for tuning the pump system to operate in the most efficient manner. We've gone to market with a tiered offering focused on natural gas substitution capabilities, which we've named ESG Pro and ESG Platinum, providing our customers' price point options for reducing their well site carbon footprint.

Third, our Power Solutions business is on track to deliver compressed natural gas in early Q3. We're deploying CNG equipment and processes that improve upon the safety and reliability of existing solutions and includes new proprietary technology that provides the safest and easiest way for customers to use their own field gas. Power Solutions will help drive and enable greater natural gas substations, power frac fleet, optionality on field or CNG gas fueling and optimize emissions reduction and reporting. These benefits, combined with fewer and fully integrated well site personnel, enable us to closely align with our customers' objectives.

And finally, we successfully tested the NOV Ideal eFrac system with a key customer and are currently performing additional field test utilizing multiple power sources. We are field testing alternative electric power solutions to the first-generation electric solution of the large single power source turbines currently being used in the market. One of these alternatives that we are currently field-testing is a 100% natural-gas-powered generator that we believe is more reliable, modular, more capital efficient and, we believe, has a lower-emissions profile. We continue to lead the way in successfully piloting these next-generation technologies and reducing the technical risks associated with a potential transition to alternative power sources for fracturing. We look forward to providing further updates on our next-gen strategy in the near term.

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

Thanks, Robert. First quarter revenue total $228 million compared to $215 million in the fourth quarter. This marks a sequential increase of 6% as new fleet deployments and growth in our integrated logistics business as well as in our WCI business was largely offset by the impacts of severe winter weather in February.

Total first quarter adjusted EBITDA was $1 million compared to $8 million in the fourth quarter, mainly driven by the inclement weather event across our Southern region as well as some choppiness in the schedule as we transitioned to several new customers in the quarter. The impact of the storm was more than double our preliminary estimate, with over 2/3 of our operations offline during that 10-day period. The storm impacted the heart of operations across our Southern region, which includes the Permian, the Eagle Ford and the Haynesville.

The activity decline resulting from the storm was further compounded by the additional costs associated with head count and equipment we had in the system from ramping up our operations in response to greater demand building through Q1 and into Q2. We estimate that the total storm impact on adjusted EBITDA was approximately $10 million.

In our Completion Services segment, first quarter revenue totaled $209 million compared to $200 million in the fourth quarter. Completion Service segment adjusted gross profit totaled $15 million compared to $24 million in the fourth quarter.

During the first quarter, we deployed an average of 18 completions fleets. And when factoring in activity gaps, we operated the equivalent of 15 fully utilized fleets. On a fully utilized basis, annualized adjusted gross profit per fleet, which includes frac and bundled wireline, totaled $4 million compared to $6 million per fleet in the fourth quarter where slightly higher utilization was more than offset by the severe winter weather impact.

In our Well Construction and Intervention Services segment, revenue totaled $19 million, up approximately 27% compared to $15 million in the fourth quarter. Adjusted gross profit totaled $2 million compared to $1 million in the fourth quarter. The improvement in results in both of our cement and coil tubing business lines is a result of market share growth and focused basins as well as returning customer activity.

Adjusted EBITDA for the first quarter excludes management adjustments of approximately $4 million, which were primarily noncash related. Net noncash adjustments of approximately $5 million were primarily comprised of market-driven facility closure and severance costs, stock compensation expense and a loss on a financial investment, partially offset by a reduction in estimated accruals from favorable progress on a pre-merger related tax audit. Approximately $1 million of management adjustments were cash related.

First quarter selling, general and administrative expense totaled $16 million compared to $23.7 million in the fourth quarter. Excluding management adjustments, adjusted SG&A expense totaled $21 million, effectively flat to prior quarter and reflecting the decrease of 56% versus Q1 of 2020.

Turning to the balance sheet. We exited the first quarter with $272 million of cash, relatively flat as compared to the prior quarter. Cash, as of the first quarter, included the receipt of $34 million associated with the second part of the Well Support Services sale consideration, which was partially offset by our ongoing capital investment and our low-cost, low-carbon strategy.

Total debt at the end of the first quarter was $355 million net of debt discounts and deferred financing costs and excluding finance lease obligations compared to $336 million in the fourth quarter. Net debt at the end of the first quarter was approximately $63 million. We exited the first quarter with total available liquidity of approximately $353 million comprised of cash of $272 million and availability of approximately $81 million under our asset-based credit facility.

Cash flow used in operations was $23 million during the first quarter, driven by increased use of working capital, mainly due to the revenue ramp in March and timing of collections generating higher receivables. Excluding the receipt of $34 million associated with the second part of the Well Support Services sale, cash flow use and investing activities totaled $14 million. Our investment activities are mostly driven by additional investments in our Tier 4 dual-fuel, carbon-reducing technologies, maintenance CapEx and investments in our Power Solutions business, partially offset by proceeds from excess equipment and property sales. This resulted in free cash flow use of $37 million for the first quarter.

Turning to our outlook. As we turn to the second quarter, positive factors are at play. First, significant onetime impacts associated with the winter storm are behind us. While more than 2/3 of our operations were offline for nearly 10 days during February, we successfully returned to pre-storm levels in late February.

Second, our customers were up and running. We've benefited from continued activity growth in the final weeks of the quarter and now into the second quarter, as customers returned to work with robust activity and confidence as commodity pricing continues to show some strength. And finally, we see improving calendar utilization in Q2. While calendar gaps remain, we have seen improvement in our ability to utilize our asset base more efficiently. Taken together, we currently expect to have 20 deployed and 18 fully utilized fleets for the second quarter. This activity growth, combined with the factors just mentioned, are expected to drive second quarter sequential revenue growth of at least 25%. Combined with better fixed costs absorption with the higher number of working fleets and some improved calendar utilization, we expect to deliver second quarter adjusted EBITDA of between $18 million and $22 million.

We continue to expect total capital expenditures for the first half of 2021 of approximately $60 million, comprised of maintenance CapEx across our product and service lines, including $3 million per fleet per year for frac, as well as strategic investments in additional dual-fuel conversions and the continued deployment of our new Power Solutions business. We have not wavered in our long-time commitment to asset readiness and expect to continue to invest nearly $1 million per month on our fleet readiness program that continues to draw minimal fleet reactivation costs and confidence on redeployment quality and speed.

Looking ahead, we are encouraged that what we're seeing in the market as we head into the second half of the year, including an improved commodity price environment and further tightening in the market for natural-gas-powered fleets, which account for a growing percentage of our asset base. This is exactly what we planned for when we laid out our strategy during the early part of the market response to the impacts from the COVID-19-related shutdown. Our platform provides significant earnings power, including meaningful embedded earnings growth associated with continued utilization improvement.

In addition, we continue to see pricing recovery for our services as a potential amplifier to our growth. As noted, we've seen the opportunity for some net pricing increases recovering a portion of the pricing conceded at the depths of the downturn but continue to see further pricing upside potential through the rest of the year and into 2022, especially for the natural-gas-powered equipment, which comprises the majority of our deployed fleet.

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

Thanks, Kenny. We have provided routine updates on our strategic initiatives as we've continued to build our new company since NexTier's creation back in Q4 2019.

I would now like to provide our investors with 3 key updates. First, we're scheduling a virtual investor event for September 24 where we will provide a deep dive into the company and our technology. Please look for a save-the-date invitation soon. Second, on April 26, we published our Spring 2021 Investor Presentation that sets out more details on low-cost, low-carbon strategy that provides a compelling valuation on NexTier's earning potential. And third, we recently published the NexTier's 2020 Corporate Responsibility Report, providing a deeper look into the importance of responsible operations as a driver for our low-cost, low-carbon strategy. These reports are available on the Investor Relations page on our website.

In closing, I would like to reiterate that we continue to reduce our operating costs via our increasing digital capabilities and are beginning the process of recovering pricing conceded during the worst part of the COVID-driven activity downturn. Pricing, particularly in the natural-gas-powered portion of the market, will continue to leak upwards as agreements are reset and supply and demand continues to tighten. We expect our lower operating cost and enhanced integrated completion platform will deliver very healthy profit fall-through as price recovers and our margins continue improving over the next 2 years. Despite the weather-related challenges that we experienced in Q1, we continue to see the activity ramp we anticipated into Q2, and our Q2 EBITDA exit annual run rate above $80 million is in line with our expectations at this early stage of the market recovery.

In addition, we see Q3 EBITDA run rate improving considerably off of this established Q2 base. Based on current visibility, we believe that we will achieve at least $80 million of EBITDA in 2021 and exit the year with double-digit EBITDA margins. This reiterates our previous comments that 2021 is going to be a transition year for U.S. oilfield services, and we believe that we are very well positioned and we'll have strong momentum as we move into next year.

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

(Operator Instructions) And our first question today comes from Chase Mulvehill from Bank of America.

So first thing I wanted to talk about was just kind of come back to the pricing conversation. You said you're seeing net pricing, and we've heard that from some of your competitors as well. Maybe if you could just take a moment and talk to how much pricing actually fell during the downturn, how much you've been able to get back. And then, is this -- are the net pricing increases you've seen just on kind of the Tier 4 DGB fleets? Or are you able to kind of push pricing on some of the conventional fleets, too?

Thanks for the question, Chase. Much of the current, as you point out, pricing was set during the worst part of the COVID shutdowns. And we have been with our customers for the long haul from the beginning, and we believe in long-term partnerships. And I would say, in general, current bids that we're making in the market today are higher than they were during the COVID period -- the worst part of the COVID period. The agreements that we set along the way, they have reopeners, and we worked with our customers along the way to recoup inflationary changes and do the most part of that negotiation during the reopeners.

You ask how much it dropped. I would say it dropped a lot during the worst part of the middle of last year, and we've only began to recuperate very small amounts. And that's going, we think, give us the ability to change more because -- there's 2 or 3 factors. First, on the supply and demand side, I mean, it's steadily converging because, one, demand is increasing and so is frac intensity. And it's consuming equipment at a fast pace, I think. And it's been very extremely minimal CapEx investment in any kind of growth to the market.

And I think that those factors, in addition to the fact that we are dealing with now more and more a bifurcated market, bifurcated around fuel source where natural-gas-powered fleets that are representing somewhere in the neighborhood of 20% to 25% -- 23% of the total deployed fleet because the market, in general, is growing, that percentage is shrinking and it's relatively sold out. That dynamic for pricing improvement in that arena is much better.

In the conventional portion of the market, I'd say that the dynamics there are impacted a lot by small independents that are yet to be sold out with conventional equipment. And that part of the market is much slower to move so far. But bottom line is our customers went through the process to heal their balance sheet in 2021, and we say 2021 is a transitional year. That's kind of what we're saying. They're in the process of allowing their balance sheet to heal, and we expect, as we roll into 2022, that's when we'll see most of our opportunities to make a price move. And that's given us -- that, in conjunction with the fact that we know what customers we got coming back of our traditional customer base, gave us the confidence to be as forthcoming on our guide as we did. Hope that answered...

Okay. Yes, absolutely. Absolutely. Appreciate the color. If we could talk a little bit about simul-frac, and I don't know how much simul-frac operations you're doing today. It's obviously a small part of the market. You need 4-plus wells per pad to really kind of take advantage of simul-frac. And so I don't know if you could maybe just take a minute and talk about some of the trends that you're seeing out there with simul-frac and the ability for NexTier to be able to handle it on the logistics side and help your customers advance kind of simul-frac penetration.

Well, look, I'm glad you asked that question because simul-frac is becoming a more and more important part of our customers' forward thinking. We've been involved with it pretty dramatically from the beginning. And in some basins, it's becoming a bigger and bigger piece of our work, while in some basins, it's yet to be a factor really. So I would say in the beginning, it was typically lower rates in treating pressures per well. And with that, our ability to have less wear and tear on our equipment was good, and it was a process that was interesting and more and more attractive to the customer because they're delivering more footage per frac on a routine basis.

But lately, the intensity of simul-frac is increasing and is consuming more and more horsepower. Obviously, we're adapting our pricing models and remuneration process to that. But the point that I want to make there is that when people say, "How many fleets are operating in the market?" without clarity around how do you count a simul-frac fleet, it becomes less and less clear. And I would say is that this is one of the factors that we think is consuming a lot of the supply in the market where a simul-frac fleet, you've got to count it at, what, 1.25 to perhaps even up to 2 fleet. And inside that arena, execution matters dramatically. You do have less transition time, but you've got 2 wireline operations embedded in it. It's good for us.

And the whole benefit of our model around integration is amplified when you have that kind of intense operation going on. So my prediction is you're going to see this continue to increase, I think, a little bit. And as you point out, it's only applicable in certain pad configurations, typically pads that are designed to accommodate it. And that process, I think, some of our customers are working towards, so we embrace it. We're good at it. I think we were on the early stages of it. It incorporates a pretty good bit of our work today, and it is intense work. And we tend to excel in that kind of arena. Good question.

Our next question comes from Chris Voie from Wells Fargo.

Thought I'd maybe ask about your tiered offering for kind of ESG-type fleets. Curious what kind of appetite you're seeing from customers. Is there a lot of difference between appetite for ESG Pro versus the ESG platinum? How is it evolving in terms of what people want and how much they care about higher natural gas -- sorry, diesel displacement versus lower?

Chris, good question. Look, it's evolving. I think there are a number of factors involved there. Obviously, the benefits of burning gas, the arbitrage between diesel and natural gas prices as a driver, but it's also around our customers reducing our carbon footprint. And there's a lot of information in the market today about claims about what is the best emission profile equipment. And I think the entire sector is on a learning curve a little bit, and we got a strong opinion. We spend a lot of time studying it, and I've noticed that our customers are getting more and more educated and more and more smart about that process.

So I would just say is that we have a good mix between ESG Pro and ESG Platinum. The key thing to think about, though, is that there's a premium associated with both of those packages over what you would pay -- a customer would pay for diesel conventional fleet. So that's the reason we had multiple entry points for our customers, how we blend the equipment and how we run it to deliver different levels of diesel displacement so that they could enter where they wanted to.

But I think I would predict that over time, as the market becomes more material about understanding the cost benefits of carbon footprint reduction, that we'll see more and more of a migration toward Platinum and the requirement for Tier 4 dual-fuel equipment being one of the best and most cost-effective answers. So that's the way I would describe that dynamic and I -- and we're very encouraged about where it's going, and you're going to see us continue to deploy dual-fuel fleets throughout 2021. We got -- we've been calling out the investment we're making, and we've been fortunate enough to be able to offset a lot of that investment with the sale of our servicing business that we completed right at the beginning of COVID.

Okay. That's helpful, and -- sure. And maybe for the second one, just about growth in active fleets, curious if you can describe how much growth you expect from here. Obviously, throughput is going to be going up, strong revenue growth in the second quarter, just more work per fleet, but what about fleet additions as you go through the back half of the year and maybe some commentary about which basins you expect to grow the most?

Yes. So it is basin question somewhat too, but I want to reiterate it. We see it -- '21 unfolding kind of like we expected, and it's going to be a transition year. And what we said in our prepared remarks was that we've been fortunate to on-board new customers during the beginning of this year that are, in many ways, replacing some of the traditional customers who ramped down activity aggressively in 2020 but all along, planning a stage recovery during 2021.

So when you ask that question, from our perspective, we got visibility on continued additions into Q2 and to Q3, and it'll be in a neighborhood of a couple per quarter kind of thing but mostly with our new Tier 4 ESG Platinum type offerings. And that's the reason we're guiding so strong for Q2 and Q3 going forward.

At the same time, the dynamics around the market, in general, have continued to improve. And our sales and marketing efforts are continuously improving as we've added new talent into that arena. So we can get our message out to the entire customer base, but that's what we see 2021. And for us, that evolution is -- we turn -- that gives us the ability to turn cash flow positive into 2022. And ultimately, as we get fully deployed with our ESG strategy and Power Solutions and everything that we got going to be a leader in free cash flow generation when we get into 2023.

Okay. And is most of that growth can be in the Permian?

So back to your point, that's a good question. You asked me about the basins. Yes, a dramatic amount of it is. Our footprint in the Appalachian Basins has been a core of our company for a long time. It's a crowded space, more so even than the Permian, I think, supply and demand. And we're working through that. We've seen some competitors pull out of the region, and we have a long history with a good -- a lot of good customers up there, and it's determined a lot by what gas price outlook is. And opinions vary a little bit, but I think we're very proud of that position we have there. But in the visible term, most of that growth is in Texas. Put it that way.

Our next question comes from Ian MacPherson from Simmons.

Robert, when you talk about your turnover in the customer book and picking up 5 new customers in Q1, does that make it easier for NexTier to prosecute your efforts in expanding your work scope on the wellsite and selling more integration and all of it? And I wondered if you could speak to how also the change in the customer book is influencing the rollover in your pricing, if we've basically seen all the effects of repricing, your fleet kind of purged through and the average portfolio pricing should be melting up along with the spot market from here forward.

Good question. And look, I would say our value proposition is very much driven by the integration aspect. You often hear us call out the efficiency delta between our completion group and frac and wireline together versus operating independently. And this is statistically, ever since the beginning of Keane, and it's -- by working together, it's adding 25% on average or above frac efficiency by working the 2 together.

So when you talk about pricing and value proposition, to me, you have to look at it from an integrated perspective to get the full total cost of operation from the operators. So as we bring new customers into our portfolio, they're looking at our historical customer base and the results there to make their decisions about making a move with us. And when we -- and we're trying to drive the company. We realized that the profitability levels or lack thereof currently are unsustainable and that we have to fix it.

Pricing is, no question, a very important point as we call it back from the concessions that we made during one of the worst downturns ever. But during that process, we also lowered our cost to operate substantially. And the tools for doing that with digital has changed. So we were locking in a lower cost. We don't have to claw back as much price as we yielded to exceed the same levels of profitability.

And then when you add on the other profitability levers that we talk about, and that is integrating our next-gen gas-powered solutions, like Tier 4 dual-fuel or perhaps even eFrac when we move further down the road with the integration of last-mile logistics and our coming fueling power solutions, this is when we can start to take advantage of scale more.

And then also, we put 2 companies together to be able to address a lot bigger portfolio opportunities than we have currently. If you remember back before COVID struck, we were like 31 fleets and growing at that particular time. So as we add fleets back into the mix, our scale improves, and our ability to generate more profitability per fleet will be driven a lot by that as well. So I hope that, that addressed most of the questions.

Yes. absolutely. Yes. Robert, I wanted to ask a quick follow-up for you or for Kenny on cash flow for this year. You said that you're really thinking about free cash flow coming into focus for NexTier. Near term, it looks like your CapEx is going to be heavier in Q2 than it was in Q1. So probably another negative free cash flow quarter. How should we think about the CapEx after the special power solutions CapEx for the first half? Any early read on second half CapEx and like a ballpark for free cash flow ranges for the full year?

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Yes.

Sorry about that, Ian. Look, I was just going through the components of our H1 and our full year cash flow. And like I was saying, in H2, our investment cadence will increase somewhat. We have our returning customer activity that has high demand on gas-powered fleet. So we're going to continue to invest in Tier 4 DGB. So if you do the math, in 2021, we will have free cash flow use, but 2021 will be an investment year for us. We've been very diligent during the downturn in protecting our cash balance. At the end of Q1, we actually have more cash than what we started with pre-COVID, right? So we've always said that we're going to use our balance sheet to play offense and defense.

And with the increase in demand for natural-gas-powered equipment, we're going to be investing that in 20 21 as well as our Power Solutions business. But as Robert mentioned, as we go into 2022, pricing dynamics change a bit. We continue with our leading position on our Tier 4 dual fuel. We believe that we can generate meaningful cash flow -- free cash flow in 2022 and especially in 2023.

Okay. Got it. So the shorthand, CapEx could actually be higher in the second half, the first half, but then as the Power Solutions standing that up complete, then we should look probably more towards maintenance CapEx levels into '22 with rising EBITDA.

That's a good way to put it in.

And our next question comes from Stephen Gengaro from Stifel.

Two things from me. When you think about, and I know I'm not asking for guidance for next year or anything, but when you think about the gross profit per fleet numbers getting back into the mid-teens, $15 million, $16 million range, what will it take to get there? I mean -- look, I'm just trying to get back to, I think it was Chase's question earlier about pricing and utilization, but what would be sort of a road map to get back to that level of profitability?

Yes. Look, as we mentioned, we have a line of sight on EBITDA margins to progress through the year and exiting by the end of the year at 10%. On your specific question, if you look at our gross profit per fleet progression, it's going to double in Q2 versus Q1. Obviously, we had some inclement weather impact in Q1 that we called out, but it's going to double. And it'll be higher than it was in Q4 of 2020.

And then if you look further into Q3, we see that we'll be able to deliver double-digit gross profit per fleet. And from there and beyond, that will be double digit. So we're going to keep our SG&A flat. So any incremental revenue pricing utilization is going to fall through pretty well from an EBITDA standpoint.

So just to kind of reiterate what Robert talked about earlier, all the different levers that we have, we're adding utilization, which will help with our leverage. We're -- we have our integration around wireline. We have our integration around Power Solutions and our integrated logistics. And then in addition to that, we have a large and growing Tier 4 DGB fleet that, we believe, is going to give us better pricing dynamics as we go through the year and into 2022 and beyond.

So I think all those things combined -- I'm not really ready to commit on timing of that kind of full cycle or mid-cycle GP or EBITDA per fleet, but we are seeing improvement based on the factors that I just described and we believe that even more acceleration on EBITDA trajectory as we go into 2022 and 2023.

No. Great. That's very good color. One other follow-up. I know you have this fleet readiness program in place. And when I think about having 20 fleets deployed in the second quarter and looking at kind of your total asset base right now, at what level of fleets deployed do you start to see a material escalation in activation costs? Is it 25? Is it higher than that? I'm just trying to think about where you'd need to put more capital to work to reactivate assets.

So we talk about spending $1 million a month on keeping it ready, and you look at the total fleets that we have at our disposal. And you take into account the consumption of horsepower around simul-frac. We can deploy double-digit more fleets at the same kind of cost structure we've been deploying them since the bottom of the downturn. When you get past, say, 30 fleets, then we may have a little bit more. But anything that had substantial costs to redeploy, we cut up.

We called out 600,000 horsepower since the merger. And we did that -- we probably -- we would not have done that much if we didn't think U.S. land was going to be different going forward than it was in the past. And then we're talking -- and our fleet count estimates go into the mid-200s as we get into next year. And we think that what we have now, we can deploy very cost effectively. And that's the reason we believe we've got a lot of pent-up earning potential.

Did that address your question?

Yes.

And our next question comes from Waqar Syed from ATB Capital Markets.

First of all, could you maybe talk about your international fleets, how many are currently active, what's embedded in your outlook for Q2 and then for the remainder of the year?

Yes. Thank you for asking that. Our partnership with NESR has served us well. It has been a case where bringing our U.S. capabilities and efficiencies into the unconventional arena over there where they have significant volume has made a big difference. We have currently 2 fleets operating, and it's been that way for a number of quarters. And as we look into the rest of this year, we see the potential to begin perhaps to deploy another one around business development opportunities as other countries inside MENA Region look to try to do the same thing. But it's also -- the opportunity for us in the short term from material impact has to be linked to places where they have the volume for us to address on an efficient scale, i.e. they got a lot of inventory of wells. And that's a developing arena in the Middle East.

But I would say that we're doing -- operationally, we're very happy. We're very happy with NESR as a partner and business development largely driven by NESR's capabilities, and I would not really be the big partner of anybody else when it comes to that. They're very good. And we get a chance to look at a lot of things that way. So I would just say for the rest of this year, we kind of see it flat.

Okay. Just one kind of broader kind of philosophical type of question is, if you can help us understand how this cycle may be different from the last cycle. Historically, what has happened in the industry -- pumping industry is that off the bottom, as activity picks up, slowly profit margins grow. And only when EBITDA margins gets into the $10 million to $15 million per crew does the industry start to add capacity. The customer base, they're almost always, in an upcycle, starts spending up to 120% of their free cash flow.

When I look at this cycle, your customer base right now has almost all said that they're going to be at maintenance capital for some period of time. But the industry -- pumping industry itself has started to make investments much earlier in the profitability curve that even when the margins are still in that low to mid-single-digit range. And so I'm struggling to understand why is this optimism about investing so much into capacity or upgrading while customers are still not paid, it's still a competitive market, still a fragmented market, and moreover, fees continue to become more and more efficient. So you are artificially, to some extent, adding supply into the market. So help me understand why this kind of industry is starting to invest so much earlier in the cycle.

Look, that's a good question. And I would answer it like this. I think everybody in our sector kind of understands that the activity profile, in general, is range-bound a bit more than it was in the past related to your maintenance investment portfolio and operators staying closer to their cash flow and investment profile. The reason we're taking the strategy that we're taking and investing in converting existing horsepower capacity to natural gas power is because we moved from one part of a bifurcated market to another. And the upper end of that bifurcated market is essentially sold out. It is somewhat still pricing lead linked to the total market, but there has not been additional capacity added on a scale of any sort. And there's been a [neat] fleet or 2 placed and a fleet or 2, I think this is my view, of Tier 4 kind of equipment added by other competitors in the marketplace.

But in general, I think our part of the market's been very disciplined about adding additional horsepower while simultaneously consuming more of what we already have through things like simul-frac and increased frac intensity. So we're -- supply and demand is converging, I think, pretty rapidly. And I think you can't look at the market the way we probably used to as one unilithic -- monolithic supply base when you have this bifurcation aspect. So that's the way -- it's a little bit complicated perhaps, but what I would just say is that the investment from NexTier is inside that upper part of the market that has a growing demand structure.

Yes. Fair enough. Fair enough. My hope was that maybe industry would wait to upgrade and let the customers pay for it rather than proactively doing that. And the worry is that it may become -- the dual-fuel market may become as commoditized as the diesel market was at some point.

Well, one thing I would say is that we feel like our balance sheet gives us some differentiation on being able to do so at any kind of scale. And a competitive advantage being had there in that a company our size, I believe, has as many dual fuel -- we got as many gas-powered fleets deployed as anybody in the market. And it's going to take a number of years, I think, for anybody else to get at scale to be able to do that. So that's us taking care of what we can control, I believe, and both from the attrition standpoint on the conventional side and the movement into a different tier on the evolutionary side. But I understand your point. I hope I made a dent in that because that's the reason I think that it's not one unified move -- the move -- the ability to move price inside that bifurcated market differently.

(Operator Instructions) And our next question comes from John Daniel from Daniel Energy Partners.

The first one, guys, is on the on-boarding of the 5 new clients. Can you just walk us through maybe what drove their decision? Is it the integrated solution, the Tier 4 engines, performance issues of peers? Just any color that you can provide would be helpful.

John, I think that we are all competing in the market every day. And there's -- oftentimes, there's a tender process. Price is a big factor and so is efficiency. And more importantly, probably how you present yourself in the market price-wise is very much linked to what kind of efficiencies you could project into your own models. Our integrated offering is a factor. The percentage of our fleet that we're supplying our own sand and logistics is as high as it's ever been and on the increase. And I think that's a factor, especially during parts of COVID where the infrastructure was challenged.

And we were differentiated like better positions, I think, largely driven by our abilities inside of NextHub to eliminate the [merge] and give drivers, for an example, ability to make more money operating with us as opposed to somebody else where they have more wait time and less total travel -- total hauls per day, for example.

So it's, as you would expect, the whole shooting match. And obviously, for us to hold on to those customers, we have to deliver what we said we were going to do, and that's what we think the readiness program also had differentiated our ability to hit the ground running pretty good with our customers. Not error free, but much better, I think, than the average.

All right. Fair enough. I got a housekeeping question, sort of a follow-on to Chase's, but with the rise in simul-frac activity, if you've got a crew out doing a simul-frac, do you count that as one crew? Or do you count that as 2 for disclosure purposes?

John, that's a good point, and we're trying to decide what to do. It's been evolutionary. Before, I would've -- in the beginning, I would have said 1.25 was the number it ought to be. Historically, we would count them as one. And I would say more likely it's more like a 1.5 kind on average. So I would just say we all look at that to determine, but certainly, I think the counts like you and I talk about being around 200, I think most of them is one.

That's what I do. Okay. Fair enough. All right. Now I'm going to ask you a question that you might think is the dumbest question of the day. Because I know you just gave guidance, it's going up, and that's good. The pricing is going up. But are the volume of inquiries for new work as robust as they were 2 to 3 months ago? Can you just characterize the inbound calls from customers for work?

No, I'd put it this way. As I reiterate a little bit what I already said, but our perspective around the customers that we are very familiar with, we already kind of knew what their plans were going to be and when they were going to be layered into the future deployments in '21. But the bid level -- and we get to look at it, I think, nearly everything. And I would say that it's on a slight uptick or steady uptick, but I would also say is that sometimes that is the customer fishing, I think, about what price looks like, what's going on in price and haven't yet exactly decided when they might deploy a fleet. So I think that's a dynamic that's difficult to nail down. But we're excited, frankly, about the volume of opportunity. And obviously, we run a pipeline and we try to handicap that, and that pipeline is very healthy.

Operator, I think that's the last question we can take, but before we close, I just wanted to say one thing was that, to the analyst, I appreciate -- there's been a lot of turnover in the group. You guys got a large volume of activity to cover. We appreciate your interest in our company. And I really want to thank all the NexTier employees for their dedication to our customers and our company and the collective safety that we demonstrated throughout all the turmoil that's been happening, everything from the Texas freeze to COVID before that. So thanks for participating in today's call.

Ladies and gentlemen, with that, we'll conclude today's conference call. We do thank you for attending. You may now disconnect your lines.