Cactus Inc (WHD) 2018 Q4 法說會逐字稿

Good morning, and welcome to the Cactus fourth quarter and full year earnings call.

My name is Mary, and I will be facilitating the audio portion of today's interactive broadcast.

(Operator Instructions)

I would like to turn the show over to Mr. John Fitzgerald, Director of Corporate Development and Investor Relations.

You may begin.

Thank you, and good morning, everyone.

We appreciate your participation in today's call.

The speakers on today's call will be Scott Bender, our Chief Executive Officer; and Brian Small, our Chief Financial Officer.

Also joining us today are Joel Bender, Senior Vice President and Chief Operating Officer; Steven Bender, Vice President of Operations; Steve Tadlock, Chief Administrative Officer; and David Isaac, our General Counsel and Vice President of Administration.

Yesterday, we issued our fourth quarter earnings release, which is available on our website.

Please note that any comments we make on today's call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act.

Forward-looking statements are subject to 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.

Any forward-looking statements we make today are only as of today's date, and we undertake no obligation to publicly update or review any forward-looking statements.

In addition, during today's call, we will reference certain non-GAAP financial measures.

Reconciliations to these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release.

And with that, I'll turn the call over to Scott.

Thanks, John.

Good morning to everyone.

2018 was an outstanding year for Cactus with revenues of $544 million, up nearly 60% from 2017.

In addition, adjusted EBITDA at $213 million rose almost 90% year-over-year.

I'm proud to report we successfully managed the transition to a public company, and our team is excited about the future.

The fourth quarter, while challenging for well-documented reasons, further validated our value proposition.

Although our customers delayed completions to a greater extent than expected, our business demonstrated resiliency with total company revenues declining by only 7% sequentially during the quarter.

During the period, average U.S. market share in our products business, which we define as percentage of onshore rigs followed increased from 27.4% to 27.8%.

Further, we were pleased with our ability to hold margins relatively stable in both our product and rental businesses.

So in summary, revenues fell 7.2% sequentially, adjusted EBITDA decreased 12.7% sequentially and adjusted EBITDA margins declined from 40.7% in the third quarter of 2018 to 38.3% in the fourth quarter of 2018.

I'll now turn the call over to Brian Small, our CFO, who will review our fourth quarter financial results.

And following his remarks, I'll provide you with some thoughts on our outlook for the near term before opening the line for Q&A.

Brian?

Thanks, Scott, and good morning.

Q4 revenues at $139.8 million were 33.4% higher than the equivalent period last year and 7.2% lower than in the third quarter, as Scott mentioned.

Drilling-related activity was relatively flat, while completions-related activity witnessed a decline during the quarter.

Product revenues, which include consumables used in both drilling and production were 38.1% higher at $78.9 million than the equivalent period in 2017 and 0.6% lower than Q3.

Product gross margin at 42% was 760 basis points higher than Q4 '17 and 100 basis points higher sequentially.

A lot are due largely to product mix.

Rental revenues at $31.2 million were $6.7 million greater than Q4 '17 and $6.9 million lower sequentially.

The decrease was attributable to reduced completion activity from our customers towards year-end, while the increase compared to last year is due primarily to the increased investment in our rental fleet allowing us to increase market share.

Field service and other revenues in Q4 at $29.7 million were $6.6 million higher than Q4 '17 and $3.4 million lower than Q3 '18.

Lower revenues versus the third quarter were driven by a decrease in billable hours for our work tied to completions-related activity and the typical Q4 seasonality during the quarter.

The movement compared to last year is due to an increase in billable hours met by adding service technicians and related ancillary equipment.

Field service revenues represented approximately 27% of combined product and rental-related revenues during the quarter.

SG&A at $10.5 million for the quarter was $3.9 million higher than Q4 '17 and $0.5 million lower than Q3 '18.

The sequential decrease was primarily from lower professional fees, while the majority of the increase compared to 2017 was due to additional payroll expenditure and other costs associated with being a public company.

We would expect SG&A in Q1 '19 to be in the $12 million range due in part to an increase in professional fees and stock-based comp.

Net income at $38.7 million declined from $43.6 million in the third quarter.

Our income statement reflects the net income attributable to the noncontrolling interest owners and public owners of Cactus, Inc.

Fourth quarter adjusted EBITDA was $53.5 million.

This was 52.7% greater than the equivalent period last year but down 12.7% compared to Q3 '18.

Adjusted EBITDA for the quarter represented 38.3% of revenues, which compares to 33.4% in Q4 '17 and 40.7% for Q3 '18.

Our effective tax rate for the quarter was 11.4%.

The primary reason for this rate being lower than the federal tax rate is that the profits of the noncontrolling interests are not subject to U.S. federal tax.

Our public ownership remained at 50.3% during the quarter.

Internally, we prefer to look at adjusted earnings per share as it eliminates the impact of changes in ownership throughout the quarter and assumes the public entity held all units in its operating subsidiary, Cactus LLC, at the beginning of the period with the resulting additional income tax expense related to the incremental income attributable to Cactus, Inc.

With fully diluted shares expanding of approximately 75.3 million and an effective tax rate of 22.5%, our adjusted earnings per share this quarter is $0.45 per share compared to $0.52 per share in Q3, a decrease of 14%.

We estimate that the adjusted earnings per share in Q1 will have an effective tax rate of 24%.

Our cash position increased by $28.9 million during the fourth quarter to $70.8 million at December 31.

For the quarter, operating cash flow was $44.8 million, and our net CapEx spend was $13.7 million.

Additionally, we spent $1.8 million for finance lease payments in the quarter and $0.3 million for deferred financing costs.

Net working capital at the end of the fourth quarter represented approximately 26% of fourth quarter annualized revenues, slightly higher than in previous quarters due to the acceleration of inbound inventory shipments before the year-end with a view to minimizing, [the then] expected, but unrealized impact of additional Section 301 tariffs.

Early indications in 2019 are the working capital relative to revenue is reverting to historical levels.

Our CapEx for the full year of $68.2 million was in line with our prior indications following the third quarter.

As we look forward to 2019, we expect to spend in the low $60 million range for total CapEx.

This includes $45 million to $50 million for growth capital in our rental business with a significant portion going towards our new innovations.

That covers the financial review, and I will now turn you back to Scott.

Thanks, Brian.

Our products business continues to be primarily driven by the total number of wells drilled, which is abetted by improving secular trends such as more wells drilled per rig and larger pad sizes.

So far this year, our rigs followed has remained relatively stable despite the slight decline in the U.S. onshore rig count as we've successfully gained market share with new operators.

Importantly, our customers have resumed completion activity, and we've seen a more normalized level of production tree shipments, which had declined toward the end of 2018.

We now believe our Q1 2019 product revenues should be up in the high single digits quarter-over-quarter.

Looking further out, we remain cautious regarding the level of overall drilling activity despite the more modest than expected rig count decline to date.

As rigs roll off contracts, we would anticipate that private and public E&Ps will reduce spending.

That said, with the recent recovery in crude prices and a tightening of differentials in the Permian, we believe that the pullback while delayed may be more muted than previously thought within our customer base.

Regardless, we believe we remain well positioned to gain market share in 2019.

During the fourth quarter, our customers displayed a willingness to drill new wells at a fairly steady pace but were less willing to complete wells amid lower oil prices.

However, as budgets have reset in the new year, growth and completion activity has exceeded the growth of our product business during the first half of the quarter.

As we look to 2019, improvements in general completion activity should outperform the change in E&P budgets due in no small part to cost deflation in large ticket service items such as pressure pumping and sand.

We believe this improving backdrop could generate an increase in our rental revenues in the neighborhood of 15% sequentially in the first quarter.

Margins in Q1 are likely to witness a slight pullback as we ramp back up and deploy additional high-pressure equipment into the field following the slowdown experienced in Q4.

Turning toward our new completions innovations, we've been very pleased with the performance and reception witnessed in the field.

These offerings were designed in conjunction with existing customers and the efficiencies demonstrated on site have exceeded expectations.

We anticipate noticeable revenue generation during the second half of this year as we believe we've developed some truly differentiated technologies.

Based on our current forecast for growth capital to be directed towards these initiatives, we believe the year-end 2019 revenue run rate for our new innovations could represent an additional 20% to our current rental revenue run rate.

Moreover, we continue to think the market opportunity for these offerings is as large as our existing rental business as we build out our fleet of innovations over the next several years.

With that in mind, we've chosen at this stage not to publicize more details on these products until they are more fully brought to market.

We encourage you to view this relative silence as a reflection of our optimism around these offerings as we work to maintain and protect our competitive advantage.

Field service, which is driven by both product sales and rental revenue was adversely impacted by the completion slowdown in the fourth quarter.

This business traditionally accounts for higher non-billable hours around year-end holidays.

Early indications in Q1 are that the margins in this business have returned toward the more normalized levels seen during the first 3 quarters of 2018.

Going forward, we would expect revenue from this business to be roughly 26% to 28% of our combined product and rental revenue.

As previously noted, we expect our full year 2019 capital budget to be in the low $60 million range, depending on how quickly we choose to build out our fleet of the aforementioned innovations.

Maintenance CapEx should not exceed $5 million and roofline expansion will be minimal although we will add 2 new high-spec machines in Bossier City.

Regarding tariffs, we have largely mitigated the impact of the Section 301 tariffs that were set at a rate of 10% on products imported from our wholly-owned manufacturing subsidiary in China through a combination of factors discussed during our last call.

We're optimistic that the impact from tariffs will be limited to single-digit reductions in product margin percentages going forward as we move to fully replace pre-tariff inventories.

In recent days, the USTR officially announced it's postponed the increase in tariffs previously scheduled for March 2, 2019, and that the Section 301 tariff rate will remain at 10% until further notice.

So in summary, based on the first 2 months of 2019, we expect higher Q1 revenues across all of our business lines when compared to Q4.

We're encouraged by the rebound in activity we witnessed and optimistic regarding the potential for the successful deployment of our new rental innovations.

Following our significant growth in 2018, we are now a stronger, more balanced company, while retaining our flexibility and our ability to scale the business in response to market conditions.

We remain returns oriented with a focus on free cash flow.

Finally, in anticipation of questions about capital allocation in light of our increasing cash position, I can confirm that we reviewed no suitable M&A opportunities to date and that our board has made no decisions regarding dividends or a potential buyback program.

Before I turn it over for questions, I want to take this opportunity to congratulate Steve Tadlock, who has been appointed to the position of Vice President and Chief Financial Officer effective March 15.

Steve has done a masterful job managing various corporate operational finance functions as we transition to a public company.

I also want to thank Brian Small for his invaluable contributions to both the company as our CFO and to our family.

Over the last 19 years, Brian developed and implemented many of metrics by which we manage this business daily and through which we maintain our focus on operating margins.

As previously noted, Brian is transitioning full-time to a new role as Senior Finance Director, where he will oversee various corporate and operational finance process improvement initiatives without the distractions inherent in a public company.

So with that, I'll turn the call back over to the operator, and we may begin the Q&A.

Operator?

(Operator Instructions) Our first question is from the line of Marshall Adkins from Raymond James.

I was getting some feedback.

Let's go to the tariff impact.

You gave us a lot of good detail on what you know right now.

I'm curious on a couple of things.

First of all, just your latest thoughts on where this ultimately goes.

I'm not sure you have any more insight than, I guess, the rest of us, but it is a big deal for you all.

So I'm just curious on where you think it goes.

And secondly, and probably, more importantly, how are you positioned on the tariffs versus your competition?

I know you have manufacturing here in the states that probably helps you, but I'm just curious as to how that positions you in the competitive landscape given what the tariff situation is today.

Okay.

Well, in terms of where this is all going, I think, it's fair to say we're far more relaxed about the increase to 25% than we were during the fourth quarter of last year.

And I think evidence of that is our behavior in terms of imports.

So we accelerated, as Brian mentioned, our inventory receipts during the fourth quarter in anticipation of the 25 -- of an increase to 25%.

We have not taken similar steps this year, and I guess that decision was validated by the USTR's decision to put on indefinite hold the increase to 25%.

That's the reason also that Brian mentioned, that he felt like our working capital ratios would revert back to normal over the next period of time.

So I guess, the short answer is, it's not of, I think, a priority in terms of our concern landscape.

And we were, during the fourth quarter, sort of aided by the 3 factors that we spoke about at the last call that I don't think I need to reflect upon again.

What was your next question, Marshall?

Well, the competitive landscape.

How are you positioned?

Let's just say, it stays at 10%, how are you positioned versus all the -- your key competitors?

So most of our key competitors rely upon China.

China, as we've remarked before, has a -- still has a competitive advantage.

We felt like it had a competitive advantage even at 25%.

There are not very many U.S. manufacturing facilities as you know and you made reference to.

About half of what we do, half of our cost of goods sold relates to Bossier.

About half of product cost to goods sold relates to China.

So I feel like we're in pretty good shape in that regard.

That's not to say we could replace China with Bossier City.

We don't have nearly enough capacity to do so.

You know that, that our major competitors, one of them has a manufacturing facility in Western Europe.

Our view is it's probably not competitive with China, although it won't suffer from the tariff risk of China.

The other major competitors and certainly the Tier 2 and Tier 3 suppliers rely very, very extensively on China.

My gut feeling is, and Joel can maybe expand upon this, we're probably less exposed than that next tier of suppliers in terms of China.

I think we are.

And I think we've done a good job with our supply base in China.

We've looked at other countries as well and again the conclusion we've come to and we did this again, we've done it repeatedly over the last several years.

We've looked around at other options and still with the tariff being at 10% or 25%, there's still a cost advantage to bring your product in from China, which is where we continue to expand our supply base.

Perfect.

That's very helpful, guys.

Last one from me is on the same issue.

It appears that we're going to get some pretty -- if you go back to historical levels of working capital that the buildup you had in Q4 should translate to a pretty healthy boost in this free cash flows in this year.

Is that the right way to be thinking about it?

I think you're directionally correct, Marshall.

Our next question is from the line of Chase Mulvehill from Bank of America Merrill Lynch.

So I guess I want to come back to the guide a little bit.

Obviously, a pretty positive guide on the top line.

Do you care to kind of elaborate a little bit how you think margins unfold in the first quarter across each segment?

Well, I mean, that's something I really want to do, but I'm happy to give you some idea.

Just maybe directionally.

I mean, you said slightly down.

Is that slightly down overall?

I would say for rental and product, the margins should be down slightly.

I think for service, they should be up considerably.

And of course, service is 26%, 27% of what we do.

The reason for, I guess, what I think to be a realistic approach to margins and rental in particular is really twofold.

We did bring in some rental items into the fourth quarter, just like inventory to avoid the 25% potential tariff increase.

Secondly, the product mix within our legacy rental fleet changed in the last, I'm going to say, 60 days, and we expect there to be a change going forward.

And what that means is because we rely to a large extent on our Far East supply chain for rental items, some of the items that we had expected and were in short supply in the summer became less dear and items that we had in our inventory -- existing inventory, the high-pressure valves became in much greater demand.

So we focused a whole lot of attention on redeploying those assets, and I can tell you having done this for quite a while and I reflected back on the end of 2016, whenever we have a period of fairly robust increase in rental valve demand, it's always manifested itself in increased repair costs as we begin to harvest the assets that we already have in stock in addition to buying new ones.

In terms of product, the product margin compression is largely anticipated as we begin to roll out the pre-tariff inventory that we spoke about earlier and an increasingly high percentage of the inventory that flows to cost of goods sold flows through at the higher tariff applied costs.

Okay.

And maybe you could help us and I don't know if you know this off the top of your head, but in fourth quarter how much of that high tariff cost flowed through in the fourth quarter?

And how much of that do you expect to flow through in the first quarter?

I don't think I can answer that question.

Maybe, Brian, are you comfortable?

I don't know that we have broken that down.

All I can say obviously is that for Q1 '19, basically the whole of Q1 '19 is going to have product coming through with the tariff price.

And for Q4, broadly speaking, it could be 50-50, 50 pre-tariff, 50 post-tariff.

And Chase, I wish we could be more precise.

We don't really track it.

Yes, yes.

No, that's good.

I guess, and we think about -- you gave us some good top line guidance here, especially kind of in products and rentals.

Coming back to products, what do you think your market share looks like quarter-to-date on the product side?

I think it's up slightly.

Okay.

All right.

Last one, and I'll turn it back over.

I think we're all pretty excited about what you got coming on the completion side and I know you don't want to talk too much about it.

But maybe could you just talk about barriers to entry with what you're doing?

What kind of moat?

I mean, how comfortable are you around the barriers to entry?

And do you feel like you have a competitive moat that you'll be able to sustain in that business?

So I'm going to let Steven maybe respond to that.

Yes, I think you know that our goal with these completions innovations was to build a similar moat around our rental offerings that we enjoy with our products -- our drilling products.

And there is no doubt that a lot of the industry focus right now is centered on completions efficiencies, and we're being purposely opaque about the technologies because we don't want to tip our hand, but some of these technologies were developed to improve upon existing technologies.

So things that we saw that were in the field that our customers came to us and wanted to try and do things better and some technologies are just completely new to the industry.

So we're in a unique position that we work collaboratively with our customers to develop these.

So it's hard for me without going into more detail to answer that question maybe, but what I'd say is, this is a focus in the completions part of our business that previously have been reserved just for wellhead.

And I think you're going to see similar levels of innovation on the rental side that you've seen in drilling.

Chase, let me just -- I want to just slightly elaborate on that and then we can move on.

This Cactus' business model has been to innovate and execute.

So you can't innovate without executing, and that -- I don't know how much of our moat would be attributable to innovations with respect to drilling and how much to execution, but it doesn't do any good to innovate if you don't -- if you can't be on time and service it adequately.

So it's sort of our same philosophy.

Yes, these innovations, we believe, are highly differentiated, but don't minimize the importance of the Cactus execution model.

Our next question is from the line of David Anderson from Barclays.

Well, Scott, that's quite a tease on the new products here.

So I guess, we'll just have to trust you and stay a little patient here.

On a different subject, I want to ask about on the wellhead side.

You've been gaining share basically every quarter, really kind of every year since 2011.

I'm sure service, and yes, as you said, execution is a big part of that, but I also have to think you have to attribute a bunch of your share gains to your differentiated offering, which is ideally suited for unconventional.

I guess that sort of begs the question what your larger competitors are doing.

We don't really hear them much for them on the subject.

I mean, should we take it to mean that they haven't really closed that technology gap at all?

I get the sense they may not even be trying.

I mean, could you just kind of give us a little concept -- a little color on kind of what you're seeing on the competitive side of the market?

David, somebody asked me a couple of calls ago what keeps me up at night.

And I said, 2 things keep me up at night, safety and our competitors.

So yes, our competitors see what we do, thanks in part to being a public company now.

And you have to assume and we always assume that they're doing their best to close the gap and that's part of what pushes us to continue to innovate.

So we talk about the frac innovations, but I want to give you some comfort from this call that we haven't stopped innovating in terms of our wellhead offerings.

So the short answer is, yes, they are responding.

I think, at a large degree, the industry is probably doing a better job overall than they did 2 years ago, as they view our success, but it just pushes us harder.

Kind of curious if I can shift maybe on your frac tree side.

I guess, obviously, another part of your business, which is clearly differentiated.

Where are you today on kind of the utilization of your frac tree assets?

Are you kind of 100% utilized?

And kind of a follow-up question, I'm just kind of curious, I know this is an area you've been spending some capital and building this out on your rental fleet there, but can you give us just kind of a rough sense of how much it's grown over the last year, how much it's going to grow this year?

I mean, is it 10% this year and 10% next year?

I'm not asking for numbers, just sort of kind of give me the ballpark of kind of how you see the business growing.

So David, are you asking about investment in rental assets...

Right.

Well, so I know it's kind of sort of one of the areas that you've been spending money on, just building out those frac trees.

I'm just kind of curious just by sort of kind of the number that you can put out in the field today.

Kind of how much bigger is that today than it was last year?

And how much bigger is it going to be, say, at the end of this year, do you think, in terms of addressing that market?

Mr. Tadlock has offered to respond.

At the end of 2017, gross rental PP&E was about $85 million.

And at the end of '18, it was about $124 million.

And I think we referred to about $50 million of rental CapEx for '19, so that gives you a sense of the totals.

We really don't think about it in terms of individual frac trees because every frac tree is different.

We always think about it in terms of gross PP&E as well as paybacks.

Okay.

That's helpful.

I guess, Scott, this is the final question sort of related to that.

We've just heard from -- Chevron and Exxon just came out of their Analyst Day, kind of emphasizing their Permian programs.

Maybe can you just talk a little bit about how that's changing your market at all, I mean, maybe how this customer differs from your traditional E&Ps in terms of the technology they're requiring, how the pricing is, procurement?

Clearly, it's a shift in sort of your customer base.

I was curious on what that actually means to Cactus in the next couple of years.

Well, first let me just tell you, David, we love all our current and potential customers, but I don't think it'd be any secret or any surprise if I tell you that we find that independents and the large publicly traded E&Ps embrace our innovations more enthusiastically.

So we get a much better reception when we make a proposal to sort of the non-Chevron or XTO customer base.

I would say that in terms -- so that's on the drilling side.

I'd say on the frac side, completion side, that's not the case that we see the IOCs very receptive to innovations.

So can you help me understand the difference between why on one side, do they like the innovations, but the other side of the business, you don't?

I'm kind of surprised by how they look at one versus the other.

I don't want to -- this is my very, very personal feeling.

Majors or IOCs are just more risk-averse, and so on the drilling side, if what they're using isn't broken, isn't shutting down a rig, they're less likely to embrace change or the independents are going to take execution for granted because they are very, very critical in terms of suppliers who don't perform and they focus more -- they have focused at least in our brief history far more on efficiency gains and willing to take the risk of trying something new.

So I think it's really a risk profile.

It's the fact that the customers with whom we do business are probably flatter organizations, less committees, and drilling has always been a very, very high profile despite the fact -- item despite the fact that it represents 1% or 1.5%.

On the frac side by contrast though, I think you probably know there are maintenance issues on a frac pad and maintenance issues on a frac tree or another supplier cause an outsized impact on the economics.

And so because perhaps the failure rate or the reliability rate has been lower, the majors view that to be -- that risk of change is minimized in terms of a potential reward.

So on the one hand, you have a product that may not be breaking down but promises rig time savings.

On the other hand on a frac location, you have products that are more susceptible to reliability problems.

Our next question is from the line of J.B. Lowe from Citi.

Just to follow up on the question about the majors.

The more accepting of -- you talked to guys on the frac side of the business.

Is there any potential for you to kind of use the frac side of the business as a pull-through to get them to talk about your wellheads?

And how do you go about doing that?

We try it every day, 2 different departments -- never mind, 2 different departments.

You have the drilling department.

You have the completion and production department.

It is very helpful, but it's much better to start with a customer with whom you have an MSA, you have a record in terms of safety and reliability.

It makes the next sale so much easier, but it's certainly not a slam dunk as evidenced by our market penetration or lack thereof.

Right.

Got you.

And then just a question on the -- you mentioned the -- your exit '19 rental revenue could be 20% higher than your exit '18 rental revenue due to the new innovations.

Is that assuming that your legacy frac business is flat?

Or is the growth rate on the innovation side bigger assuming that -- and that means that the legacy side is getting a little bit smaller?

It does not assume that our legacy rental business will -- it doesn't assume suffering in our legacy rental business.

Our next question is from the line of Tommy Moll from Stephens.

So recently you -- including this morning, you mentioned you're planning to add 2 more CNC machines at Bossier.

So I think that brings you to 16 total.

Pro forma for that, where does it put you in terms of utilization at Bossier?

Or asked a different way, if you keep taking wellhead market share like you have been in recent quarters and years, how long of a runway do you see before there might need to be more growth CapEx there?

Or is it far enough out that it's still hard to tell at this point?

This is -- we made this decision last year basically to provide us with additional capacity for some of the drop-in orders plus additional capacity to continue to maintain the rental CapEx.

So I feel like we're in good shape.

I don't really feel like we've got much in the way of further requirements.

The facility right now runs at about, I would say, 60% to 65% of capacity.

I do need some additional machine tools right now with some of these changes that Scott spoke about with the rental CapEx fleet to be able to provide some of these higher pressure valves.

Okay.

That's helpful.

And then as a follow-up, there has been quite a bit of discussion on the margin impact from tariffs and then how you have mitigated that to some extent by pulling forward some orders in Q4.

If 1Q margins will be pinched a little bit, how far into 2019 should we expect that trend to continue?

I don't think you're going to see further pinching.

That wasn't very eloquently stated.

Our next question is from the line of Martin Malloy from Johnson Rice.

Just looking at the new products for the rental side, will there be any impact as you ramp up through the course of the year and add field personnel related to these products on the margins?

No.

In fact, all of our existing personnel on location will operate these technologies.

So there's no additional service required.

That provides kind of a moat as well, if you can appreciate that.

So the incremental cost of the customer won't include additional personnel as it may with competitive offerings.

Okay, great.

And a follow-up question just -- and this has been asked twice earlier.

But just on the IOCs, is it a matter of time, do you think, for them to test and accept your wellhead products and eventually you're going to start to see more inroads made?

Well, yes, Martin, that's been asked many times, not just twice, but the majors, the IOCs that are of interest to this group probably have 125, 135 of the U.S. rigs, okay.

There's some other IOCs in there, but the ones that, I guess, have garnered all the attention.

We wouldn't be doing our job if we weren't hot behind those prospects, and we haven't stopped.

(Operator Instructions)

Our next question is from the line of George O'Leary from Tudor, Pickering, Holt & Co.

I just had one question around -- you guys tend to be very collaborative with your customers, and I think that's one of the underappreciated parts of your stories.

As E&Ps have pushed into more of a kind of cash flow and returns-focused business model, is there any change on the items that they want to collaborate with you on?

Or said another way, any areas that they're acutely focused on adding efficiencies to or reducing nonproductive time?

So George, that's a very good question, and I have to answer it.

There are 2 responses.

The first is NPT has -- the focus on NPT has continued to increase, which we view as a positive thing.

And it's harder to quantify, but it exists and so it makes a pitch towards technology that addresses that much more compelling.

That's one side of the equation.

When oil prices dropped to $45, as you might imagine, the collaboration gets sidelined in favor of procurement.

Procurement is less interested in talking about NPT and more interested in talking about price.

And that, of course, is not terribly constructive for this business, although it does, as it did in 2016 and '15, provide us with some introductions that we might not normally have had previously.

So we'll take an introduction on any basis, be it to discuss price or be it to discuss innovation, because an introduction is an introduction.

So I wish I could be more clear, but it really is coming -- I think that the level of interest comes from 2 different areas.

That's helpful color, and I certainly appreciate it.

And then just following on from -- you guys gave good color on the rentals guidance sequentially Q-over-Q in the first quarter of 2019.

I was wondering if maybe you could parse out how much you think of that is -- that impressive growth rate is kind of underlying completions activity improvement versus the low levels we saw most notably in December and how much of that may be market share.

Maybe just talking about January versus December and February versus January would be helpful.

And then not to be too short term, as we look at 2019, you mentioned your completions might actually be given some of the other moving pieces on the completion side.

So if you could speak to maybe your outlook for the cadence of completions in 2019 and how that progresses.

Any color there would be greatly appreciated.

Let me talk to you about the cadence of completions.

So we saw and in terms of -- well, I'll touch on all of that, and then I'll let Steven supplement my remarks.

We saw a number of customers, who at the end of the year had just flat, laid down their frac crews.

So we saw a return of that in January, but we also saw market share cadence in January.

I don't think we've gone back to maybe quantify how much of it was market share gain versus how much of it was a return to just whatever normal activity levels, however, you define that.

But I'm gratified to say that while we normally maintain that our frac market share was in the 10% or below, we're comfortable in saying now we are north of 10%, south of 15%, probably more south than we are north.

But there's no question that our market share has increased in terms of the frac rental side of our business.

In terms of the cadence, what I think is -- what I would caution and I mentioned this at the last investor conference, don't look at these DUCs the way you looked at them before.

I think there are a lot of DUCs that probably will never be completed.

I think there is a level of DUCs that most of our customers want to maintain in inventory for reasons of flexibility and efficiency.

You know all that.

So the question is what will this -- the takeaway improvements, how will that manifest itself in additional completion activity.

We're just not assuming a tremendous benefit from that.

Although I think that we all share the thought that there will be a pickup in completion activity in the third and fourth quarter, I don't think that it's going to be perhaps of the magnitude that a lot of people have maybe mentioned.

It's not going to be a panacea, but honestly we're happy to slug away with slowly increasing our market share, paying attention to our capital investment, relying upon our new innovations to build a moat.

So we're looking for more of maybe a smooth increase, I think, in our frac rental business.

(Operator Instructions)

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Mr. John Fitzgerald, I turn the call back to you.

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