Nine Energy Service Inc (NINE) 2019 Q2 法說會逐字稿

Greetings, and welcome to the Nine Energy Service Second Quarter 2019 Earnings Call.

(Operator Instructions) And as a reminder, this conference is being recorded.

I would now like to turn the conference over to Heather Schmidt.

Thank you.

Please go ahead.

Thank you.

Good morning, everyone, and welcome to Nine Energy Service earnings conference call to discuss our results for the second quarter of 2019.

With me today are Ann Fox, President and Chief Executive Officer; and Clinton Roeder, Chief Financial Officer.

We appreciate your participation.

Some of our comments today may include forward-looking statements reflecting Nine's views about future events.

Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond our control.

These risks and uncertainties can cause actual results to differ materially from our current expectations.

We advise listeners to review our earnings release and the risk factors discussed in our filings with the SEC.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today also include non-GAAP financial measures.

Additional details and a reconciliation to the most directly comparable GAAP financial measures are also included in our second quarter press release and can be found in the Investor Relations section of our website.

I will now turn the call over to Ann Fox.

Thank you, Heather.

Good morning, everyone.

Thank you for joining us today to discuss our second results for 2019.

This quarter, both revenue and adjusted EBITDA fell within the range of management's original guidance and we increased cash flow from operations by approximately 95% quarter-over-quarter.

We anticipate cash generation will continue to increase throughout the remaining quarters in 2019 and into 2020.

In fact, as of close of business on Friday, August 9, our current cash position is up significantly from quarter close to approximately $59 million.

Additionally, we anticipate CapEx to be down materially in 2020, which should lead to significant free cash flow.

Company revenue for the quarter was $237.5 million, net income was $6.1 million and adjusted EBITDA was $38 million.

Basic earnings per share was $0.21.

Adjusted net income for the quarter was $8.8 million or $0.30 per adjusted basic earnings per share.

ROIC for the second quarter was 7%.

Despite volatile moves in WTI's relative quarter, the market remains steady throughout the majority of regions and service lines during the second quarter with the exception of the Northeast, which began to see activity weakness in the back half of Q2.

I will speak in greater detail about this during our Q3 outlook.

Our larger oil revert E&P customers have remained consistent with their activity plans.

We saw increased activity across all of our service lines this quarter with strong performances from cementing and completion tools, which continues to outperform the market.

Once again, our cementing division increased activity by approximately 1% quarter-over-quarter while simultaneously increasing profitability by increasing the average revenue per job by approximately 5%.

This increase was despite U.S. new wells drilled declining by approximately 4% quarter-over-quarter and not receiving any incremental unit during the quarter.

In the Permian, we increased our market share for the second consecutive quarter while maintaining an industry-leading on-time rate above 95%.

As a company, we increased our total stages completed by approximately 19% despite total U.S. completions increasing by only 6%.

In completion tools, we increased the number of stages completed by approximately 26% and revenue by approximately 4% quarter-over-quarter.

Our U.S. wireline performed well, winning market share and putting the core new wireline trucks we received at the end of Q1 to work in West Texas helping to generate activity growth of approximately 4% quarter-over-quarter despite headwinds associated with our Canadian business, which had low utilization in Q2 due to typical spring breakup seasonality.

In June, we did begin to see the effects of a Northeast slowdown on revenue and profitability.

In Q2, our coiled tubing division performed well.

This is due in large part to our technology, including downhole memory tools and data collection, along with the expertise and execution at the well site.

Our large diameter utilization was flat quarter-over-quarter and our days worked increased by approximately 2% quarter-over-quarter with more complex completions including lateral -- longer laterals and multiwell pad development, coil drillouts remain extremely difficult and can be one of the largest contributors of nonproductive time if not executed perfectly.

This complexity has enabled us to differentiate in the market.

As many of you know, one of Nine's highest priorities for 2019 has been the development of a dependable, lower-cost, low-temperature dissolvable plug to penetrate the Permian and Northeast market, which have lower bottom hole temperatures than other U.S. basins.

This development is a collaboration between our legacy Nine and Magnum teams to create both new IT design with a shorter design to bring the overall cost to manufacture down through less materials as well as new material science to ensure consistent and predictable dissolution for every type of well bore in a low-temp environment.

We have also successfully utilized data from our coiled tubing teams in the design of the tools.

We remain confident that our Q1 2020 time line for commercialization remains on track.

After multitude of successful in-house R&D tests to date, we have begun to run products downhole with customers.

We are partnering with a leading E&P company who are willing to share information on performance such as water analysis, deployment fees, treating pressures and cleanout results.

With the low-temp dissolvable, we are simultaneously working on 2 other technologies, which we also anticipate having ready for commercialization in 2020.

Both of these products will leverage a similar, shorter design similar to that of the low temp requiring less materials, ultimately, lowering the manufacturing cost for Nine and for our customers.

The first is a high-temp dissolvable plug, which will utilize our existing high-temp materials, which are proven and have consistently performed flawlessly.

This new shorter design will allow us to lower the cost for operators and basins like the Bakken, Haynesville, Eagle Ford and other international markets so that they can move from a hybrid to full wellbore of dissolvable plugs while maintaining consistent and reliable dissolutions.

We remain very confident in continued performance of the materials that we've been running successfully for over 4 years in high temperature environments.

To be clear, for the high-temp plug, the variable that changes is the plug design, not the already proven materials.

Second, we'll get shorter and cheaper all composite plugs.

While we believe dissolvables are the future, there is still a large addressable market for composite plugs that we can continue to access and gain market share.

We will be utilizing similar materials from our current Scorpion design and anticipate continued high-level performance from this product.

This new line of plugs with a similar design but different application will be known as the SCORPION STINGER product line.

With all 3 technologies, Nine will be able to service the entire addressable plug market in the U.S., Canada and abroad.

The Permian will be the largest growth market in North America with both the low temp and composite plugs.

But we also anticipate the international market could potentially be a significant channel of growth as well for both the composite and high temp plugs.

By mid-Q4, field trials for the low temp dissolvable plug should be completed, having run trials in all major low-temp basins, including the Permian and Northeast from multiple customers with unique wellbores.

We anticipate field trials for the high temp plugs to be completed in early Q1 and field trials for the composite plugs to be completed in mid- to late-Q1 2020.

We expect all 3 plugs will be commercialized and ready for Q2 2020 with the low temp being the first in Q1.

At this time, we are not providing any growth rates or 2020 outlooks for these tools.

But based on what we know today, we are expecting very healthy growth for these new technologies even if 2020 market conditions and E&P CapEx spend remain consistent with current levels.

As a reminder for tools, EBITDA has almost 100% free cash flow conversion, and we will simultaneously be able to drive revenue growth, margins and cash flow while reducing our overall CapEx spend.

To conclude, this new product line will fundamentally reduce the cost to complete for our customers, provide a consistent and reliable technology and lower our company's overall cost to manufacture, resulting in cheaper, better and faster tools, which is the only way to win in North American shale.

With that, I would like to turn the call over to Clinton to walk through segment and other detailed financial information for the quarter.

Thank you, Ann.

In our Completion Solutions segment, second quarter revenue totaled $215.9 million, compared to first quarter revenue of $209.1 million, an increase of approximately 3%.

Second quarter adjusted gross profit was $49.8 million compared to first quarter adjusted gross profit of $47.7 million, an increase of approximately 5%.

During the second quarter, we completed 1,156 cementing jobs, an increase of approximately 1% over the first quarter.

The average blended revenue per job increased by approximately 5%.

Cementing revenue for the quarter was $56.7 million, an increase of approximately 7% quarter-over-quarter.

During the quarter, we did not receive any incremental cementing units but did pay for 2 units, which is reflected in the CapEx number for Q2.

During the second quarter, we completed 11,494 wireline stages, an increase of approximately 4% versus the first quarter despite wireline stages in Canada being down approximately 40% due to typical seasonality around spring breakup.

The average blended revenue per stage decreased by approximately 2%.

Wireline pricing in the U.S. decreased slightly, but the blended revenue per stage declined mostly due to less stages out of Canada, which has a higher average stage pricing.

Wireline revenue for the quarter was $64.2 million, an increase of approximately 1%.

We received 2 incremental growth capital wireline units towards the back half of Q2, bringing our unit count to 61 at the end of the quarter.

In completion tools, we completed 32,888 stages, an increase of approximately 26% versus the first quarter.

Completion tool revenue was $56.1 million, an increase of approximately 4%.

During the second quarter, our coiled tubing days worked increased by approximately 2%.

The average blended day rate for Q2 decreased by approximately 1%.

Coiled tubing utilization during the second quarter was 59%, which does include the small diameter unit we have parked.

Coiled tubing revenue was $38.9 million, an increase of approximately 1%.

In our Production Solutions segment, second quarter revenue totaled $21.6 million compared to first quarter revenue of $20.6 million.

Adjusted gross profit for the second quarter was $3.1 million compared to first quarter adjusted gross profit of $3.4 million.

During the second quarter, well services had utilization of 61%, which was down approximately 1% quarter-over-quarter.

Total rig hours for the quarter was 47,040, an increase of 2%.

Average revenue per rig hour during the quarter was $460, an increase of approximately 3%.

The company reported selling, general and administrative expenses of $21.8 million compared to $19.9 million for the first quarter.

This increase was largely due to stock-based comp expense and professional fees.

Depreciation and amortization expense in the second quarter was $18.5 million compared to $18.2 million in the first quarter.

The company recognized income tax benefit of approximately $2.7 million in the second quarter and overall income tax benefit year-to-date of approximately $2.3 million, resulting in effective tax rate of negative 10.8% against year-to-date results.

The current year impact of our valuation allowance positions as well as state and non-U.

S. income taxes are the primary components of our 2019 tax position.

During the second quarter, the company reported net cash provided by operating activities of $11.5 million, an increase of approximately 95% quarter-over-quarter.

The average DSO for the quarter -- second quarter was approximately 64 days compared to 62 days in Q1.

Total capital expenditures were $13.8 million, of which approximately 27% was maintenance CapEx.

Our original 4-year CapEx guidance of $60 million to $70 million remains unchanged with approximately 57% spent year-to-date using the midpoint of the provided range.

Also to reiterate Ann's comments, we expect CapEx to be down considerably in 2020.

During the second quarter, we repaid all of our outstanding ABL credit facility borrowings in full.

As of June 30, 2019, Nine's cash and cash equivalents were $16.9 million with $161.1 million of availability under the revolving ABL credit facility resulting in total liquidity position of $178 million as of June 30, 2019.

As Ann mentioned, our cash balance has increased significantly since June 30.

As of close of business on Friday, August 9, our cash position is approximately $59 million.

This increase is related to collections of past due receivables that were caused by changes to our MSAs with customers as well as vendor setup issue with certain customers' online payment portals.

I will now turn it back to Ann to discuss our Q3 outlook

Thank you, Clinton.

At Nine, we never anticipated a stronger back half for 2019 and we talked about a relatively flat quarterly run rate.

With so much uncertainty and volatility in the market in conjunction with operators' unwavering commitment to staying within capital budget, we do believe the rest of the year will be choppy from both an activity and pricing perspective, especially for specific regions and service lines.

As many of you know, approximately 30% of our total revenue comes from gassy basins, and the gas market has been extremely difficult with lower-than-expected demand this summer, sub-$2.50 spot pricing and the EIA is projecting that natural gas prices could be the lowest summer average since 1998.

This is causing a number of operators in the Northeast to suspend activity and temporarily reduce frac crews for Q3 and into Q4.

We are estimating that active frac crews could drop from as high as approximately 55 to 60 crews at the end of Q1 to as low as 35 to 40 in Q3 and potentially more, following the Thanksgiving holiday.

This decline affects approximately 20% of the frac crews we follow in the region.

We have been proactively working on navigating this activity decline and looking for work with new customers.

But this amount of activity decline will affect our back-half numbers from both a revenue and profitability perspective as pricing pressure increases with less work to go around.

As a reminder, we have approximately 20% of our revenue coming out of the Northeast with both wireline and completion tool exposure.

We are estimating revenue drop for this region quarter-over-quarter of 20% for both wireline and tools.

Our coiled tubing division is very active in the Haynesville, and we do anticipate activity declines in this region as well, which could affect revenues for both Q3 and Q4 for our coiled tubing team.

Today, approximately 9% of our total revenue comes from the Haynesville.

Our customers in other regions, specifically the Permian, appear to be moving forward with their plans as anticipated, but the environment to date does not facilitate potential price increases.

On top of activity declines in gassy regions, we have also begun to see pricing pressure within our composite plugs tools due to less activity in the Northeast as well as our current competitions lowering prices to try and win market share.

We have made a conscious decision to lower our prices and temporarily [concede] margins for the short term for strategic reasons as we look into 2020.

We feel it is imperative that we maintain these customer relationships and wellbores in order to eventually transition these customers to our new, cheaper and higher-margin tools in early 2020.

We are still able to maintain a strong margin and this strategy will facilitate adoption of our new technologies in 2020.

With that for Q3, we expect total revenue between $215 million and $225 million and consolidated adjusted EBITDA between $24 million and $29 million.

This decline is due to lost revenue and margin degradation in the Marcellus, Utica and Haynesville region.

Our 2019 priorities remain unchanged.

We are focused on the development and commercialization of our new SCORPION STINGER plug line, delevering the company and reaching our goal of onetime net debt-to-EBITDA by Q4 2020 through free cash flow generation and evaluating our existing service lines and geographies to ensure they are accretive to margin, cash flow and ROIC.

We still see a strong pathway in 2020 and beyond to increase free cash flow generation and margin expansion as well as a positive trajectory in our ROIC for the medium to long term despite difficult gas market conditions.

We anticipate a significant reduction in our CapEx spend looking into 2020, which will help generate significant free cash flow moving forward.

We remain committed to our asset-light model that blends service and technology, helping our customers lower their overall cost to complete and being good stewards of capital for our shareholders.

We will now open up the call to Q&A.

(Operator Instructions) Our first questions are from the line of Sean Meakim with JPMorgan.

So Ann, I'd like to focus on some of the more idiosyncratic growth drivers that you've been investing in this year for 2020.

And I think you gave a good amount of detail in the plans for tools.

But could you also maybe talk about your confidence in the MidCon build-out for cementing given the landscape now among your E&P customers?

Yes.

That's a great question, Sean.

We've been watching the MidCon closely.

As you know and just to remind the market, we're expecting delivery of 8 new cement spreads, and those will be largely in the back half.

Candidly, the demand for our cement business in West Texas is extraordinary.

We are short and we've run that at the present time.

So I think you'll see us shift some of those pumps to meet some of that West Texas demand.

And this is really has been, not only a record revenue year for us in cement, but also in profitability.

So this is market share gain in a declining new wells drill environment.

And I think we're really hitting on all fronts out there in West Texas.

So I think you can bank on the majority of that going to West Texas and slow walking and carefully walking the build-out of the MidCon as we wait to see operator spend plans specifically in that area in 2020.

Okay.

That makes sense.

Could you also maybe just talk about pricing in the completion service lines?

You mentioned composite plugs.

But can we talk maybe through cementing, wireline and coiled tubing?

You could spread it out geographically, if you like, however is the best way to characterize it.

But -- and even within those product lines if you're seeing differences in pricing between some -- simple jobs versus the more complex work that you try to focus on.

It'll be great to get an update of what you're seeing in the market for each of those service lines.

Sure.

Well, I'll just start with cement just because we left off with that.

I mean again, we talked many times about the deep moats around this business and the barriers to entry, both technical and capital.

And we're having tremendous success in our labs this year developing some really forward-leaning proprietary, lightweight cement slurries.

So that's been very helpful to us.

And you couple that with the execution, it's been great.

And so that allowed us to demand price from the operators, both for the differentiation in the slurries as well as the execution in the on-time rate.

So we'd say that pricing is good, Sean.

We don't expect too much to change there.

We're obviously -- the whole market is watching CapEx spend for Q4.

If you look at the Permian specifically, it looks, from our analysis, like most of the operators are kind of tracking 50% of their budget year-to-date.

So I think perhaps the cliff that we saw coming may not be as pronounced is what I'll say.

But having said that, I do want to be cautious that I think our customer base is more focused this year than we have ever seen them be moving within their capital budget.

So if those capital budgets increase for some reason or the spend -- the pace of the spend increases, it could -- you could see a shelf in Q4.

But barring that, I think cement pricing is great.

That service line is really panning out.

I'm so tremendously pleased that we've put those dollars to work there.

I'll shift to coiled tubing specifically in gassy basins like the Haynesville.

Very tough.

We have a lot of incremental unit coming on into North American land in the back half.

Certain public companies making a few hundred [dollars of] EBITDA in any given quarter.

And that means that they are becoming very fierce with pricing, changing their kind of average pricing upwards to 50% down.

So I think there are real challenges, not our ability to differentiate, but it's really fighting off what I'll call the slow-dying companies or folks that are on life support, and that's something we're going to have to muddle through on the OFS side for the next couple of quarters, so we see some companies that just don't recapitalize their equipment or don't have the cash flow to be a sustainable entity.

So we're certainly dealing with that, and we've obviously talked about that in the call.

When you think about wireline pricing, this is one of the service lines that has a lower barrier-to-entry, a lot more saturation of equipment in North American land.

But it's also not a capital-intensive business.

So you can beat your margin down a bit more and you can still maintain returns -- hurdles in that business just because you don't have the CapEx needs going into those units.

So that's something where we're -- for instance, in the gassy markets in the Northeast, we're willing to take a knee for a couple of quarters because of where we see the market and our position in the market in 2020.

But I would say pricing remains very challenging there.

It is very much a 0 defense mentality from the operators without kind of significant premium in pricing.

What I mean by that specifically is the efficiency demands from our customer base are probably the toughest that we have ever seen them, and you anticipate pricing would move in conjunction with that.

But I think given the volatility in the commodity prices, we just haven't been able to garner increases in prices there.

And I would not suspect and I would not model any increases in prices for wireline in the back half of 2019.

Completion tools, we have a unique phenomenon going there on the composite plugs side.

We have not seen new entrants, Sean, but we have seen a massive -- a degradation in the pricing there as people fight for market share.

And if you look at some competitor tool companies, you can see margins that really aren't reflective of completion tools.

And so that again gives you an idea of where people are going, and the approach generally has been to gain market share and not hold profitability.

Now we are doing that temporarily, as I said, because we have products to fill those wellbores where we think we're fundamentally going to be able to shift the profitability of the corporation.

And I wouldn't be surprised once we get a run rate going next year if we could put 700 basis points on the margin from the midpoint of my guidance.

So the midpoint of my guidance is about a 12% adjusted EBITDA margin.

And given what we're doing with -- potentially doing with certain geographies in this company as well as certain service lines, plus the profile of the tools, our big focus for 2020 will be to really bust the profitability lever as well as the cash flow generation while dialing back the CapEx.

And we certainly consummated a couple of transactions in 2018 that gave us the platform and foundation to do that.

We have some cleanup in the strategy and execution of the business this year as it relates again to certain geographies and service lines, which we hope you'll see some progress on.

And then again, we are very confident in the SCORPION STINGER line.

So a couple of quarters have taken a knee here and then very excited for 2020.

Our next questions are from the line of Chris Voie with Wells Fargo.

Just wanted to ask on CapEx first.

You mentioned it could be down considerably next year.

And I think if I did the math right, it was about 10% maintenance CapEx last quarter, 27% this quarter.

I think you're on an annual rate of about maybe $15 million this year.

What kind of growth projects do you have in mind next year on top of that kind of underlying rate for CapEx?

I'll be candid with you.

My Chief Operating Officer and I, when we look at the business over the next 12 to 24 months, we're really looking at maintenance capital.

We've put a lot of growth capital into the business in 2019.

We're really building out that cement business, which we love.

We've put growth capital into wireline.

As I've mentioned before, completion tools, which will be the greater -- greatest driver of profitability in 2020 doesn't need CapEx.

So my answer to you is this is going to be a maintenance CapEx story for 2020 and likely for 2021.

Okay.

That's helpful.

And then to follow up.

I think last quarter, you talked about maybe $4 to $5 a share in cash flow from operations target.

Obviously, it looks like you're taking a knee the next couple of quarters and kind of regrouping due to the market environment.

Can you give maybe an updated target for that this year?

Yes.

I don't think it's unreasonable for you to think about the bottom end of that range.

And I think that's still a reasonable forecast.

And again, when we look at the back half of this year, we've spent a lot of time building the team's positioning within the market.

And so the decremental margin coming from Q2 to Q3 looks -- it looks a bit obnoxious but it's purposeful, and it's because what we see in 2020, where we need those wireline crews to help us pull through the tools and technology.

But from a cash flow generation perspective, what is a great part of this story is in a declining pricing activity environment, you can still have a very cash-generative business.

And this has been part of our transformation of this business into the capital-light model so that we can generate that cash flow in what we think could be a flat CapEx spend environment next year.

And so when you think about this business it's -- WTI remains between $50 to $60, and North American CapEx spend is flat, we want a business that high-teens normalized EBITDA margin and very cash generative and very differentiated.

And that's where we plan to go, so $4 is [the goal].

Our next questions are from the line of John Daniel, Simmons Energy.

Ann, can you speak to your willingness to potentially buy assets from some of your struggling peers you may need to divest them to raise cash?

Yes.

I probably am not interested in that, John.

I never liked to be exclusive.

And we certainly have folks here that literally turn over every rock and consider everything deeply.

But again, there's -- we've got enough good growth capital with differentiated equipment in our capital-intensive businesses.

That would have to be something very, very compelling because, as you know, my feeling on discounted assets and OFS is that, number one, they rust.

And number two, the real value is the collection of workforce.

So it would be challenging for me to think about that.

Fair enough.

And then just as we go into the second half choppiness, can you just speak to how you balance headcount just given softer utilization, but then an expectation for a rebound in 2020?

Sure.

I mean you're obviously, first and foremost, looking at the liquidity profile, the cash generation of the business.

We're very focused on rightsizing the balance sheet and hitting our onetime net debt-to-EBITDA target by Q4 of 2020.

So we would not do anything to the business that we felt would impact our ability to get there.

And I think when you think about headcount and you think about talent and you think about sitting around that 12% or 13% margin, although we're not crazy about that margin level, we really see a path for success in 2020.

So we don't want to fundamentally impede that or our capability to rebound with the market in Q1.

So we're holding on to some cost that you would not have held onto in 2015 and '16 when your operators had no clue whether they were ever coming back to work.

So again, I would say we're balancing that carefully.

I certainly entrust the team in the field to make those decisions, which they have been making very wisely.

But my message to them is do not dismantle what you've built for years when you know -- you already know your customers' plans for Q1.

Our next questions are from the line of George O'Leary with Tudor, Pickering, Holt.

Talked a little bit on the last quarter's call about customers really intently picking different metrics, operational metrics.

I think there was a comment that you guys were monitoring things with a stopwatch.

And you guys monitor efficiency and operations metrics very closely.

I'm wondering if you can share what areas your customers are most -- are duly focused on improving efficiencies, improving ops and what's left to do there for you all.

Sure.

So if you start with cementing, I mean there's a number of different metrics the industry uses.

But the primary metrics, the primary key performance indicator is the on-time rate.

And that may sound simple, but the reality is everything in North American shale now is time.

And so if you're late for a cement job, the ripple effects all the way through the completion phases of the well are significant.

So that's the metric that I highlighted where we have over 95% on-time rate.

We think some of our competition is down in the 70% mark, although we can't prove that.

And so we think we're really beating on that particular metric.

If you look at wireline, I think I said in my last call, one of our great customers measures us on over 290 line items and they're measuring not just efficiency rates, they're measuring flat times.

They're certainly measuring nonproductive time.

But what they're looking at there -- for there is efficiencies in stages.

So for instance, you -- all your guns in a cluster of fire.

How long does it take for you to re-head tables?

So a number of things all related to the time it takes you to complete the stage and really the efficiency in which you do that.

And wireline has been one of the more score carded service lines in the industry.

So we're actually getting quite good at that.

Completion tools, it's really not drill time of the plug anymore.

That's kind of a thing of the past.

Your plugs better drill out in a good amount of time.

It's really what we call stump-to-stump or plug-to-plug time.

So how well does that entire plug drill up and move from stage to stage?

Of course, how does it drill out?

What are the key things, and I'm talking about other key composites?

What are the key pieces look like when they come back?

So for every different tool, it's obviously a different metric.

Obviously, your casing flotation tools need to burst at the right pressure.

So I could go on and on about different metrics.

But they are paramount right now.

And they are the deciding factor for folks because everybody is looking at how much efficiency these operators can drive in a flatter commodity price environment.

And of course, we've seen huge drilling efficiencies this year, huge completion efficiencies.

And I think every time folks think North American shale just can't get any more efficient, it does.

And I think dissolvables will be a big contributor of that and days saved and time to get product to market.

One other point on that, George.

If you think about efficiency, we've often said we think the U.S. market is anywhere between 10% to 15% of the stage count is dissolvables.

And if you think about -- you just think about, say, 850,000 stages next year in 2020.

Well, you think about the Permian basin, about 53% of North American stages are in what we call cold or low-temperature environments.

And the Permian makes up 51% of that.

So basically, the bulk of the low-temp environment, which we think is still largely untouched by dissolvable technology.

So there's a lot of room for efficiency there and days to drill out per well.

So I'm excited for our customers for that evolution to come to that market.

That's very interesting.

Just given all the different ways you guys touched the well construction and completion side of the equation.

Curious if you guys have noticed anything interesting with respect to changes and well designs or pad designs year-to-date.

It seems like there have been a couple of issues in various basins and guide maps or revisit the way they -- the [MC] wells.

Just curious what you all are seeing.

Yes.

I mean I think the age-old frac heads and downspacing is something the E&P community have talked a lot about and optimizing the downspacing on those wells.

I think one thing we've seen is we have seen operators some who were kind of more 3 well pad folks move to 6 to 8 well pads.

So I think we're continuing to see operators increase the number of wellheads per pad.

But I think the biggest change or revelation for the E&P community, and they would tell you better than me, but has been that downspacing and ensuring that they're not stealing production from wellbores nearby with their frac design.

But if you're talking about, are they changing from sleeves to plug and perf, we have not seen any massive shift change in completion design that's notable like a sleeve, plug-and-perf shift, if that's kind of where you're going.

(Operator Instructions) Our next questions are from the line of J.B. Lowe with Citi.

I wanted to ask about kind of the dissolvable market uptake in general, and it kind of dovetails into the new technologies you guys are working on now.

Has there been -- was the reason you guys are kind of working on a lower cost, high-temp variance, is it -- are you guys struggling to push the concept of using dissolvables across the entire wellbore?

Is it more a matter of -- is there some competition coming into the dissolvable space at all?

What was kind of the methodology behind coming up with the shorter high-temp version?

Yes.

It's a great question.

And specifically, it is to reduce the switching costs.

So that completions engineer, that's looking at the upfront AFE, we are trying to get that completions engineer.

We're trying to get her to say, hey, I'm going to fill the wellbore with 100% dissolvables because I save up costs and -- IRR considerably because I get the product to market that much faster.

And we have found a price point for which we need to be at to do that and that's what we're launching.

So have there been any notable new entrants into the dissolvable space recently?

Or maybe new offerings from existing players that you guys are keeping an eye on?

[St.

Clair's] is a kind of acquisition of Magnum in October of 2018.

Can you talk about your market share position both on the metallic and nonmetallic side?

Yes.

And that also, J.B., remains roughly the same where we really don't -- in the polymers, and we're working on obviously the low temp.

So we're really hoping to be a significant player once we launch those products.

And we've not given out our composite plug market share.

There's obviously quite a bit more competition in the composite plugs market and there have been a lot -- we have had a lot more competition for a while.

We have not had new entrants -- new significant entrants this year in that market.

We've just, as I said, had a lot more pricing pressure from folks deciding to turn on the market share button.

Got you.

And one last quick one, just shifting gears to the MidCon spending build-out, I understand the rationale behind pushing more of those units towards the Permian.

But have you guys spent any significant amount of money on facility build-out in the MidCon?

And what's the status of that if you're going to be shifting most of those spreads out of Permian?

Yes.

We should be done with that, for sure, by the end of the year, and it's a very immaterial, insignificant amount of capital.

The real capital is in the [pump].

Our next questions are from the line of Chase Mulvehill with Bank of America.

I guess I want to follow up on J.B.'s question on the MidCon build-out and cementing.

Can you maybe just talk about the competitive landscape a little bit there and maybe just kind of how fragmented the cementing market is in the MidCon?

Sure.

It's actually not -- it's really not that fragmented, Chase, and that's one of the beauties of cement.

Our choices there are just because we have some very large customers that we want to continue to gain incremental market share with and we need those pumps in an area where we're driving a lot of profitability that we think has a long way to run ahead of it.

So our choices to deploy those assets in West Texas is really more organic to us and then also specifically because we think the spend from the customer base in the MidCon could be lower than anticipated, not because there's incremental competition there or it's highly fragmented.

The large cap play in that area and there's a really good small cementer in that area.

But it's the kind of area where once again, you can count the number of competitors on your fingers.

Okay.

Great.

Appreciate the color.

Coming back to wireline a little bit.

Talking with some of the larger players, it seems like there's a big push to kind of have a -- to integrate more frac and wireline.

So kind of what's your thoughts on integration of frac and wireline?

And then maybe also talk to the impact that preassembled guns are having on your wireline business.

Sure.

So the bundling concept has been one that's been in the oil patch for a decade.

And it's one that we've faced constantly and consistently as well as through the previous downturn.

And I think some operators that have fracked, that is a strategy that they take.

As you know, I don't intend to put frac in the company for all the reasons that I just highlighted previously as it relates to a differentiated capital-light model.

So that won't be something that we're pursuing.

And so -- but again -- but it is something that certain companies do and some do it better than others do it.

But that's something we've contended with the whole time.

And what was the second part of your question?

Oh, the integration.

The preassembled guns -- yes.

Yes.

Those are great.

We love them.

I mean I think any time you can take human hands out of gun building, you just reduce potential risk for misfire error.

So we really like the integrated gun system.

We think it's contributed a lot to efficiencies this year and completions.

And I don't know if you had a further question on this, but we really like this system.

Okay.

All right.

A couple of other kind of cleanup questions for the model.

SG&A in 2Q came in a little high.

Was that more related to R&D?

And should we kind of run that number, that clean number through the income statement for the rest of the year?

So I think when you look at total SG&A, one of the things that drove an increase from Q1 was the stock-based comp.

So if you're including that, that was an increase so that's the issuance for '19.

But also when you look at it in Q2, if you look at some of the one-off items we've talked about before, there's some transactional bonuses related to Magnum that have flowed through there.

That will be declining as we go through in the year and as you get to the end of October, it will not continue in November and December.

Okay.

But even if we remove some of that, it's still a big step-up in SG&A on -- if we kind of back all that stuff out.

And so would...

The other item we (inaudible) was the professional fees.

So there were some onetime professional fees related to a few projects that are ongoing.

Those will not continue as we get to the latter half or the second half of the year.

So that will decline as well.

Okay.

All right.

Last one, just on inventories and how should we think about inventories as we go into the first half of the year with the build-out of the completion tools.

So one of the things we had talked about in the first quarter was that we had a build in our inventory in the first part of the year, and that was related to us bringing in-house the assembly.

So we purchased some of the remaining inventory from our suppliers.

We'll continue to work that down as we go throughout the end of the year.

If you look at one point in the first quarter, if you look at our days of sales of inventory, it was above 90.

We are targeting to get that down as we get into 2020 to 45 days.

So you'll continue to see that decline.

Now the one thing I will highlight is the timing as we launch the new products.

We will have an initial bill that we'll incur as we launch new products in the early part of the year and then work through that as we bill through 2020 as well.

We have now reached the end of our question-and-answer session.

I would like to turn the floor back to Ann Fox, CEO, for closing comments.

Thank you for your participation in the call today.

I want to thank our employees, our E&P partners and investors.

Thank you.

This concludes today's teleconference.

You may disconnect your lines at this time and thank you for your participation.