Mammoth Energy Services Inc (TUSK) 2017 Q3 法說會逐字稿

Good day, ladies and gentlemen. I'm Anne, and welcome to the Mammoth Energy Services' Third Quarter 2017 Earnings Conference Call. (Operator Instructions) As a reminder, this conference call is being recorded and will be available for replay on Mammoth Energy Services' website. I would now like to introduce your host for today's conference, Mr. Don Crist, Mammoth Energy Services' Director of Investor Relations. Sir, you may begin.

Thank you. Good morning, and welcome to the Mammoth Energy Services Third Quarter 2017 Earnings Conference Call. Joining me on today's call are Arty Straehla, Chief Executive Officer; Mark Layton, Chief Financial Officer.

Before I turn the call over to them, I would like to read our safe harbor statement. Some of our comments today may include forward-looking statements reflecting Mammoth Energy Services' views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements. These risks are discussed in Mammoth Energy Services' Form 10-K, Forms 10-Q, recent current reports on Form 8-K and other Securities and Exchange Commission filings. We undertake no obligation to revise or update publicly any forward-looking statements for any reason.

Our comments today may also include non-GAAP financial measures. Additional details and reconciliations to the most directly comparable GAAP financial measures are included in our third quarter press release, which can be found on our website, along with our third quarter earnings presentation. Now I'll turn the call over to Arty.

Thank you, Don, and good morning, everyone. The third quarter of 2017 was a very active one for the entire Mammoth team and a pivotal point in our portfolio's development. We executed on the substantial expansion of our frac and sand businesses into the Mid-Continent and grew our energy infrastructure services business known as Cobra, while realizing company-wide margin improvement.

Starting with our frac business. The expansion into the Mid-Continent occurred in line with previously announced plans, and we're very pleased with our team's performance. We rolled out 2 new fleets to the area with our fifth and sixth fleets starting in August and October, respectively, and find ourself fully utilized today operating in the SCOOP/STACK with top-tier customers.

We had approximately 4.6 spreads active during the period with closer to full utilization expected to contribute to our Q4 '17 results.

Our team executed well, broadening our customer base, getting stages in the ground and limiting margin compression associated with the start-up.

As we look forward, we're examining near-term options, which may include shifting some assets between Ohio and Oklahoma to supplement further work as well as building out a seventh fleet from some of our existing fleets with minimal investment. Leading-edge pricing continues to march higher, but not quite to the level needed to support new-build economics.

As you may recall, our prior expansion of new capacity was done with lower equipment prices given some unique opportunities.

Looking ahead, we expect our frac assets to be fully utilized into 2018 and inbound calls have been increasing versus just 3 months ago when we last met. It is important to point out our 3 crews at work in the Mid-Continent are being supplied for Mammoth sand mines and last-mile logistics we have in place. We feel this integrated approach remains a differentiating factor Mammoth brings to the table versus our pure-play peers.

Prices and margins have continued to improve across both frac and sand, and we've been in a position to participate in both. The DUC backlog has continued to grow, and we believe that there is still a shortage of pressure pumping horsepower in the market today, possibly as high as 1.5 to 2 million horsepower. We remain pleased with our frac margin of 27% during the period, which is up sequentially from 24% in the second quarter of 2017.

We pumped 1,617 stages in the third quarter, which is up 26% sequentially, and our equipment has been properly maintained during the period. We look forward to a strong fourth quarter and start to 2018 with our pressure pumping platform.

Turning to sand. The third quarter incorporated a full period of ownership of 2 new mines, substantially increasing our capacity. In addition, the 1-million-ton expansion of our Taylor mine is on track with construction expected to be completing in the coming months, bringing our total capacity to 4 million tons per annum. At Piranha Proppants, the integration of the Chieftain assets has been smooth with the plant operating at approximately 50% of capacity today, slightly ahead of forecast.

Piranha sand is shipping on the Union Pacific Railroad and supporting our Stingray operations in the Mid-Con. Once our Taylor expansion is complete, we expect to begin shipping upwards of 4 million tons per annum by early 2018, with half of that capacity to be consumed internally, approximately 1 million tons to be sold under contracts already in place at attractive pricing with the remaining 1 million tons to be sold in the spot market. We've identified a low-cost "de-monolithing" opportunity at our Piranha mine that is expected to add 400,000 tons per annum of capacity by mid-2018, increasing our overall capacity to approximately 4.4 million tons per annum.

We sold approximately 439,000 tons of sand during the third quarter of 2017, which was 25% was brokered. The average sales price for the sand sold during the third quarter of 2017 was $41.14 per ton. Sand demand and pricing remains strong with our current available capacity sold out for the remainder of the year.

Current pricing for 40/70 is approximately $48 to $50 per ton with some spot market rates in the mid- $50s per ton.

Our team has done an excellent job at selling all grades. It is important to point out that third quarter costs are not representative of where we envision our cost to be given the ramp-up that is underway. We remain focused on lowering our costs as we expand and envision a continued decline in our sand production cost per ton towards the mid-teens by mid-2018.

We hope to be well within the top quintile of the industry, and we are well positioned logistically with unit train access on both CN and UP.

Let me take some time to talk about the regional sand market, as there has been a significant discussion on the topic of late. We have reviewed many opportunities in this area and have taken a hard look at potentially entering this market, and we continue to be inquisitive, but we have nothing to report at this time.

Logistics and last-mile trucking, specifically, has gotten very tight, with trucking rates up materially over the next few months and a merge now in place. The expansion of our last-mile operations is now complete with 62 trucks and trailers in the portfolio, largely operating in the Mid-Con. While some of our competitors have experienced logistical issues during the third quarter, we have been more insulated than many of our peers by having this business line as a part of Mammoth. As we sit today, a majority of our logistics needs are being met through internal sources.

Let me shift now to our energy infrastructure services business that we have been working on since late 2016, Cobra. The T&D business, the transmission and distribution business, has historically been somewhat fragmented, having seen larger players undertaking consolidation strategy for years on both a public and private basis. Over the summer, we identified and negotiated and closed 2 acquisitions and continue to evaluate others. These acquisitions helped develop our customer base and further broadened our management team. The acquired companies were starved of capital, which Mammoth has been able to provide together with our long-term experience on the equipment, logistics and infrastructure side.

Strategically, Cobra provides Mammoth a platform in a countercyclical industry. It offers quick deployment, earnings diversifications, stability and the ability to serve the infrastructure needs of our existing customers.

The team we brought on has an average of 25 years of experience providing top-tier infrastructure service to many investor-owned and municipal utilities as well as oil and gas companies. This business has been reported within our other energy services division.

Upon the acquisition of the 2 infrastructure companies, we quickly integrated them and deployed capital to expand their operations during the summer and plan to continue that expansion through year end, unrelated to storm-related activities.

Our crews were able to respond to the disasters in Texas and Florida associated with Hurricanes Harvey and Irma, and our teams executed very well.

We reported $14 million in revenue and $2.4 million in EBITDA across the division, with our Cobra results somewhat offset by a small loss at our lodging business. As a part of our strategic plan, we expect all of our operations to continue to grow sequentially into a more meaningful contributor to the portfolio in 2018.

Two weeks ago, we signed a contract with Puerto Rico Electric Power Authority, known as PREPA, to aid in the restoration of the electrical utility infrastructure in Puerto Rico. The contract called for services and payments of up to $200 million over a 120-day period. To give you an update, after the contract became effective on Friday, October 20, we mobilized the initial 60 people to Puerto Rico to set up a command and control base. Over the past week, we have mobilized equipment to the island via barges and heavy-lift aircraft with all of our equipment and personnel expected to be in place in the coming days. Our team has been in daily dialogue with the team at PREPA to coordinate the arrival of equipment and manpower. We expect to deploy more than 500 people in short order in close coordination with PREPA and other agencies to restore power as soon as possible.

The third quarter was a turning point for Mammoth and a positive one for our shareholders. We built critical scale in our frac, sand and energy infrastructure business lines, while seeing margin improvements across the entire portfolio. Consistent with the substantial expansion of our asset base, we've also made critical additions to our team during the period, and we welcome the new members of our acquired entities to the Mammoth family. We currently have more than 1,400 employees under the Mammoth umbrella, up from 554 at year-end 2016 and expect that number to grow substantially within our portfolio.

Our support teams across accounting, HR, IT and Safety have all done an excellent job absorbing the growth. I'm very proud of how our team executed during the third quarter and am thankful to both our customers and vendors as we move forward.

Let me turn the call over to Mark to take you through the financial performance during the quarter after which, we'll take some questions.

Thank you, Arty. I hope that all of you have had a chance to read our press release. So I will keep my financial comments brief and focus on certain highlights. Mammoth had a strong third quarter of 2017, with revenue coming in at $149 million, up more than 50% from the second quarter of 2017. The startup of our fifth and sixth fleets, the incorporation of 2 new sand mines, improved equipment utilization and improved pricing for our services, all contributed to the higher revenue compared to the prior periods.

Net loss for the third quarter of 2017 came in at $800,000, which is an improvement of approximately 32% when compared to the second quarter of 2017, which came in at a loss of $1.2 million. On a per-share basis, net loss came in at $0.02 during the third quarter of 2017, as compared to a loss per share of $0.03 during the second quarter of 2017.

Adjusted EBITDA for the third quarter of 2017 came in at $28 million, up approximately 84% from the second quarter of 2017. Our adjusted corporate EBITDA margin remained strong in the third quarter, coming in at 19%, up more than 19% from the second quarter of 2017. We remain confident that our corporate EBITDA margins will remain in a similar range in the coming quarters.

Selling, general and administrative expenses came in at $8 million in the third quarter of 2017, generally in line with the second quarter of 2017. SG&A expenses as a percentage of total revenue came in at 5% in the third quarter of 2017, compared to 8% during the second quarter of 2017. Going forward, we expect SG&A to trend slightly higher on a nominal basis as we grow, but remain in the range of 5% to 7% of total revenues, which we feel compares favorably versus our peer group.

As it relates to Cobra, we expect the core continental United States businesses to generate EBITDA at least in line with our current corporate margins. As you can imagine, we are mobilizing substantial resources to Puerto Rico to support our contract and it is still premature to provide any margin guidance at this time. We are focused on a seamless execution of our restoration efforts over the next weeks as resources arrive to the island and our teams can be fully deployed restoring power.

CapEx during the third quarter of 2017 was approximately $36 million, the majority of which was related to the acquisition of new pressure pumping horsepower and associated equipment, the expansion of our logistics business and growth capital for Cobra's continental U.S. operations. With approximately $102 million spent during the first 3 quarters of the year, we are maintaining our 2017 CapEx expectations of $143 million. CapEx for the remainder of the year, primarily relates to the expansion of the Taylor facility and growth CapEx at Cobra.

Our borrowing base remains at $170 million with net debt of approximately $80 million. Net debt was comprised of $94 million drawn at the end of the third quarter, offset by cash on hand of approximately $14 million, resulting in liquidity of approximately $90 million.

As stated previously, we expect this net debt balance to decline going forward as our aggressive addition of assets during 2017 supports an increase in free cash flow in 2018.

We thank our shareholders for their support and look forward to a strong end of the year. As many of you are aware, we filed a registration statement on Form S-3 with the Securities and Exchange Commission at the close of business yesterday. November 1 was the first day that we were eligible to file a registration shelf following our IPO on October 14, 2016. This filing, once declared effective by the SEC, will provide us flexibility over the next 3 years to access the equity markets on an opportunistic basis.

This concludes our prepared remarks. Thank you for your time and attention. We will now open the call for questions from the research analysts that cover our stocks.

(Operator Instructions) Our first question comes from the line of Jim Wicklund with Crédit Suisse.

This is the first conference call of the season where nobody mentioned the word Permian Basin. I think that's frankly amazing, but -- so since you all didn't mention it, I will bring it up. You are, obviously, taking a huge piece of market share and booming business in Oklahoma in the SCOOP/STACK. You've got some exposure to the Permian, but that hasn't been your primary area of growth, which is different from everybody else. Can you talk about -- Arty, what you guys plan to do? What's TUSK going to do in the Permian over the next year or so and what are the expansion plans?

Well, Jim, in fact, we did expand in the Permian with our logistics operations. We bought 20 trucks that we are placing down there. We think logistics and trucking becomes a critical element of everything down there. So we have been spending some money down there in the Permian. And I will tell you, we see a lot of opportunities, especially with E&Ps that are looking for contractual opportunities for us to move in. So we've moved our logistics in there, and you always got to have an answer on how you move sand and from transloads to the wellbore, and we have that answer. And we look -- we're looking very hard at things in the Permian. As you well know, we get an awful lot of deal flow. We've looked at 142 deals so far this year, and we continue to work and some of them are located. We've done some things, we've looked at some of the regional sands, and we are also, as you well know, a group that is focused on return on capital, and we're not going to pay a lot of blue sky for investments that we make out there.

And for that, we very, very much appreciate it. I think it's an interesting thing that the oil service industry is focused on return on capital before the E&P industry knows how to spell it. So that up.

Jim, you know the best part of our story, all the way from when we talked about last year, the first 75,000 of horsepower that we got at $0.37 on the dollar, the additional 60,000 that we got soon after that, the mine that we bought out of bankruptcy for $36 million. We are absolutely focused on return on capital for our investors.

And I'm glad you are going to keep that up. So keep that as a focus, sir. Appreciate it. Cobra has made news lately because of Puerto Rico, but not just Puerto Rico but because of another company that's operating there, and I know you're both called to Washington. I don't expect you to make any comments about the Montana-based company, but I don't think you guys have hired the Secretary of Interior's son as an intern, and I know you have more than 2 full-time employees. So we won't talk about the Montana company, but can you talk about how you guys expect to address the hearings in Washington on Puerto Rico?

Yes, we haven't -- there has not been anything. And I will tell you, we are absolutely -- we did everything absolutely right. Let me give just a little bit of a backdrop of how we did this. We did this the old-fashion way on the 13th of October -- and we had this competency within our group. We had performed extremely well when the hurricanes, unfortunately, hit South Texas when Harvey and Irma went through. So we had this ability, built on our logistics group that we have, built on our lodging group that we have and experience. So myself and my President flew down to Puerto Rico on the 13th of October. We met with people, started meeting on Saturday at the convention center where everybody was there, that's the command and control center. We went from meeting to meeting, talking with FEMA officials, talking with the governors, officials, talking with officials from PREPA, that resulted in a meeting that evening -- Saturday evening at around 7:00 p.m. with PREPA. We had a fully self-contained plan that nobody else has -- had put together for them. That includes having berthing barge, that includes housing our folks. We have, in fact, began the logistics aspect of that with the first barge that departed on the 29th loaded with 75 pieces of equipment, mostly buckets and diggers. Yesterday, another barge departed from Fourchon, Louisiana, with 28 pieces of equipment. We'll have more barges departing. We've actually sent large cargo planes full of equipment as well. So our mobilization, the way that we have done this, it's been right from the very beginning, and our goal and our operational is to get the lights turn back on in Puerto Rico with our team. We've got a very...

A very legitimate effort, a very legitimate effort.

Yes, sir.

And finally, if I could, on sand. We've had a couple of sand companies here report. Can you talk about what pricing momentum is that you guys see in the industry for sand? And I know frac intensity has been an issue. Halliburton said that sand per well is going down every place, but in the Permian, nobody else seems to have seen that. Can you talk about frac intensity in terms of sand used and sand price just briefly?

Jim, we're continuing to see our customers pump a high level of sand in both the Utica and in our operations in the Mid-Continent, so we continue to see the frac intensity. In regards to pricing, we're seeing spot market trades on 40/70 right now in the low $50s. So the sand pricing has moderated a little bit, but we're still seeing some increased pricing on the sand side and demand for all grades.

And our next question comes from the line of Jason Wangler with Imperial Capital.

You mentioned in the prepared remarks, Arty, about how the potential to, maybe, move some frac equipment down to the -- to Oklahoma from the Utica. Would that be the one crew not contracted or could you, maybe, just give us some color on the thought process as you look at the markets and how they are shaping up for next year?

Sure, sure. We are in -- most of our work has been up in the high pressure that requires a lot of additional equipment. We are now seeing some lower pressure work that gives us the ability to put less pumps on, and we think, for a minimal investment, we would be able to come to the Mid-Con area. And probably, we would have to buy a blender or we would have to buy a hydration unit. It's very, very small amount that we would have to spend in order to do that, as you make the transition from pads that use 20 pumps versus pads that use 12 to 14 in some cases. So that is something that we've already considered. And you know us very well, Jason, we try to get the most out of what we got before we go, and we just don't think the prices are there quite yet for new-build economics.

Okay. And so then, the idea would be to move, I guess, not necessarily an entire crew, so to speak, but just to, maybe, shift the horsepower allocation between the two and try and maximize that. Is that a fair way to look at it?

That's right. It is being moved in pieces and parts to maximize that effort.

And our next call comes from the line of John Daniel from Simmons.

Arty, one of the things that we have seen out there, and I'm sure you guys have noticed. There are a few sand mines in Oklahoma. And just given your exposure to SCOOP/STACK, can you speak to opportunities to potentially develop a mine in the state?

You know, John, we look very, very seriously at it. We've hired actually a geologist to help us out, to look at different areas and different things, and we have -- we think the regional sands with 100 measure are going to be a player in the future. So it's very logical that we're going to -- I can't comment on anything, specifically. There is nothing to comment on, but we are absolutely looking at regional sands on a very strong basis.

Okay. Just 2 more for me. One is the expected cost improvement in terms of the production costs. Can you just give us a few examples of some of the, maybe, specific examples or initiatives that you've got going on to bring that down?

So John, as we've gotten in primarily into the Piranha plant, we've identified a few efficiencies as we've done across our other plants. You've seen the improvement at Taylor since we've operated that mine. We've gone -- the team has gone through Piranha and done an excellent job of identifying some processes to reduce some of the cost involved with transporting the sand from the wash to the dry plant and then some efficiencies within the dry plant that we expect to reduce our cost.

We also have identified some things from a very small capital expenditure that would get us some additional 400,000 tons a year that we would anticipate putting in place next year.

The final one for me is, just as I looked at the slide, the thing that jumped out was the need to get 500 people or more to tackle the project in Puerto Rico. I'm just curious, where do you find these folks? And are they the same labor pool that you target for traditional oilfield work and could that be a potential limitation on...

No, this -- John, this is very highly specialized with our Cobra operations. These are professional linemen that are really situated all over the U.S. And these guys are highly qualified experts of doing everything from changing out transmission and distribution poles all the way to bare hand to a lot of the other type of work that you have to do with it, as far as pulling cable and everything like that. So these are very highly qualified professionals that we have been able to recruit and bring on.

(Operator Instructions) Our next question comes from the line of Henry Shortess with Johnson Rice.

So a quick question, kind of a 2-part question on the sand side. The large take-or-pay contract has started in October. Are the volumes there, under that contract, currently running at 720,000 tons per year or are they still ramping? And then a little more broadly, if you could just address how you're fulfilling that contract and supplying all 6 fleets moving to the fourth quarter?

That contract actually went into place October 1. And we are supplying that on a full-time basis. Now there is another 300,000 sand contract that goes along the Gulfport. So we do have 1 million tons per year that are contracted out. And we are fulfilling that as well, as we speak. But we are able to -- with the ramp-up above our additional mines, able to satisfy the sand elements here in the Mid-Con for our sales and for those customers. So we are very effectively moving that sand.

That's helpful. And then maybe if you could just discuss a little bit on the strong performance, EBITDA-wise, for the noncontractually committed Gulfport fleet. So if you could just talk about the performance of those fleets and the ability to drive further pricing and efficiency gains going forward?

So we're very proud of the execution of the team and the rollout of the Mid-Continent fleets. On a go-forward basis, we would expect efficiencies in the Mid-Con to pick up as we move from more of a single-well pad completion type environment to hold acreage to more of a full-scale field development type scenario.

This concludes today's Q&A session. I would now like to turn the call back over to Arty Straehla for closing remarks.

Thank you. We want to thank everyone for dialing in today during this very busy time. I want to personally thank all of our employees. Without each of you, we would not have -- not be where we are today. 2017 has been a very busy year so far, as we have been in dramatic growth mode. As we look to 2018, we anticipated that the fruit of our labor will be realized. As we have stated previously, the maintenance capital required to maintain our asset base is relatively low, which is expected to allow for increased cash flow, which will be used initially for debt repayment. We look forward to speaking with you, again, on our year-end call in early 2018. Good day.

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program. And you may now disconnect. Everyone, have a great day.