Atlas Energy Solutions Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 31, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Atlas Energy Solutions Third Quarter 2023 Financial and Operational Results Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, This conference is being recorded. It is now my pleasure to introduce your host, Kyle Turnington, Vice President of Investor Relations.

Operator

Thank you, sir. You may begin.

Speaker 1

Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the Q3 of 2023. With us today are Bud Brigham, Chairman and Chief Executive Officer John Turner, President and CFO and Chris Sciola, Chief Supply Chain Officer. Bud, John and Chris will be sharing their comments on the company's operational and financial performance for the Q3 of 2023, after which we will open the call for Q and A. Before we begin our prepared remarks, I would like to remind everyone that this Call will include forward looking statements as defined under the U. S.

Speaker 1

Securities laws. Such statements are based on the current information and management's expectations as of this statement and are not guarantees of future performance. Forward looking statements involve certain risks, uncertainties and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially. You can learn more about these risks in the perspectives we filed with the Securities and Exchange Commission on September 12, 2023, in connection with our UPCE simplification, our quarterly reports on Form 10 Q and our other SEC filings.

Speaker 1

You should not place undue reliance on forward looking statements, and we undertake no obligation to update these forward looking statements. We will also make reference to certain non GAAP financial measures such as adjusted EBITDA, adjusted free cash flow and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in yesterday's press release. With that said, I will turn the call over to Bud Brigham.

Speaker 2

Thank you, Kyle, and thanks to everyone for joining us today for our Q3 conference call. Despite a 10% drop in the Permian rig count since the beginning of the year, demand for Atlas profit remains resolute And we are rapidly growing our logistics platform. We are pleased with our Q3 operational and financial results as our team continues to deliver across a range of Importantly to investors, Atlas continues to generate industry leading margins, which in my view are underappreciated, benefiting from our exceptionally low cost structure. And we continue to work to drive costs down even lower. Over the course of 2023, we reduced our operating costs on a per ton basis and we expect to achieve further reductions in the middle of next year When our 2 new fit for purpose dredges come online and achieve their planned utilization levels, all of which should benefit our industry leading margins.

Speaker 2

Our 3 major capital projects to grow our business, the Dune Express conveyor system, the new Now I will briefly review our growth initiatives, but I'll also encourage you to watch the video update summarizing these initiatives, which is linked on Page 3 of our updated presentation. Starting with our production expansion, Our new facility at the Kermit location is now in the continuing process with commercial in service expected late in Q4. As a reminder, this new facility will increase our Permian leading production by approximately 50% to over 15,000,000 tons, further enhancing our scale, which is crucial in order to reliably match the scale, demand and efficiencies of our large scale customers. The second area is our logistics offering, which includes our innovative high Capacity Trucking and Delivery Assets. Our logistics and delivery assets enhance efficiencies and reliability for the industry.

Speaker 2

And as a result, our market share is growing as Chris will discuss in a bit. Our logistics offering is also important given that these trucking and delivery assets will seamlessly interface with the Dune Express, which is expected to come online late in 2024. As a reminder, we rolled out our innovative high capacity trucking and delivery assets to prepare the market for the Dune Express and facilitate a more seamless transition to that infrastructure based solution. This brings me to our 3rd major growth initiative, Our Dune Express conveyor, which is really more similar to a midstream asset. Like the other capital investments, The Dune Xpress remains on time and on budget with an expected commencement in the Q4 of 2024.

Speaker 2

We have ordered approximately 90% of the equipment and materials for the project and have also contracted approximately 80% of the installation and labor, which significantly reduces budget risk. Today, we have taken delivery of more than 57 miles of conveyor belts and over 100 miles of fiber optic cable. We believe that Dune Express and our logistics offering will provide substantial environmental and societal benefits as we aim to vastly reduce the number of trucks on commercial roads in the Permian, which is expected to reduce emissions and save lives. Furthermore, our logistics offering has the potential to enable our customers to realize Gains by increasing the throughput potential of proppant to serve frac crews that continue to find ways to pump faster and consume sand at increasingly impressive rates. In terms of sales, despite an estimated 10% reduction completion activity in Q3, Atlas sale volumes remained sold out in Q3 and were flat sequentially, demonstrating correct alignment with prominent Permian Basin customers.

Speaker 2

For 2024, We currently have 6,200,000 tons of production contracted, which represents 40% of our anticipated Production capacity of 15,500,000 tons for next year. It is worth reminding investors that Oil and gas companies have been working on their 2024 budgets and are just now entering the early stages of contracting their sand and logistics needs for 2024. These negotiations will run from now through the first and into the Q2 of 2024. As expected, there was very little contracting in August September with our existing customers and potential new customers. Our 2nd leading margins benefiting from our low cost structure, which should only get lower with the fit for purpose dredges around mid year 2024 And lower again in 2025 with our Dune Express combined with our expanding revenue streams provides us with confidence that we will be able to layer on the additional contracts and accomplish our financial goals, which includes growing distributable cash flow into next year and the years to come.

Speaker 2

Of note, Atlas has adjusted its overall portfolio over the last 2 years to ensure contractual continuity through staggered terms with regards to both contract duration and timing of renewals. Our goal remains to have 80 plus First, we're currently in negotiations for several million annualized tons of sand and logistics in rolling contracts with existing customers, where historically we have had very high retention rates. Current contract discussions include not only Sand and Logistics supply agreements, but also some more complex and long term conversations about a revolutionary infrastructure based solution for the Permian. In addition, we have a number of meaningful opportunities to add volumes with new customers, including large customers that stand to benefit from the Dune Express. Our growth in the logistics business and our progress on the Dune Express combined with our unmatched reliability and scale uniquely positioned Atlas to meet the growing demand, but to also grow our market share in the Permian.

Speaker 2

While operators generally Control the timing of the initiation of these contracts, we control the access to future volumes that would go down the Dune Express. For these reasons, we remain assured that we will exit contract season with not only a strong contract backlog, that alignment with the most efficient and highest quality customers. Regarding sand pricing, Investors should recognize that there is stratification and differentiation in the proppant and logistics markets. Some of the factors in proppant marketability and thus pricing include the company's ability to scale up to reliably meet the needs of increasingly large operators in the Permian, particularly given the increase in pad development drilling and SimaFrac activity. In this regard, Atlas is unmatched in our ability to deliver proppant with the scale and reliability required for these projects in order to effectively debottleneck sand in these massive completion operations.

Speaker 2

Associated with that are our innovative logistics offerings and associated incremental dependability and reliability which they provide to our customers. Our expanded logistics offerings differentiate Atlas in the market, further enhancing our industry leading dependability and reliability. In my view as a former operator, I can state unequivocally that dependability and reliability are of major importance to our customers And they are absolutely mission critical in the value proposition we offer. Given our unmatched scale, Our historical delivery execution and our ongoing logistical innovations, we feel confident in our ability to deliver the step Change in performance that our large scale operators need. Another point on sand pricing is the fact that there are numerous Variables involved.

Speaker 2

For example, are you selling wet or dry sand? Atlas currently sells Only dry sand and we've been sold out all year, while others have had to sell meaningful sand volumes on the spot market. All of that to simply say that investors should not read too much into discussions of spot pricing. While lower spot pricing can directly be indicative of pricing trends, there are reasons that some products fly off the shelf and are even contracted before other products are sold and there are reasons that some products on the shelf have to be discounted. And of course, the distance to the wellhead and associated delivery cost plays an important role in sand processing and the all in cost for the operators.

Speaker 2

Importantly, the Dune Express will eliminate the distance related benefits of some of the wet sand options in the Delaware Basin. Further, when you add in the advantage Atlas has in inventory, security of supply, quality and throughput potential, Our customers' ability to pursue operational excellence on a scaled basis will only be enhanced. As the largest proppant producer in the Permian with the largest and highest quality reserves, our differentiated advantage also makes our results less volatile As evidenced by our quarter to quarter performance, while that benefits and is of significant value to our customers, those attributes including our Unique dredging operations also benefit us by lowering our cost structure. Regarding the macro environment we are operating in, despite the drop off in activity, the Permian proppant market remains healthy, driven in part by the continuing advancements in efficiencies. Frac crews are continuing to pump more profit on a per day basis.

Speaker 2

On the supply side, Permian proppant producers have been disciplined with modest supply additions recently coming in response to a long period of significant undersupply in the Permian, bringing the market into a more balanced position as we enter 2024. Optimism surrounding the recent movement in oil prices and early signals from customers leads us to believe that a strong recovery in frac And expected ramp in activity next year, combined with continued increases in proppant per frac crew per day Against the supply side that is much more patient in making growth investments than we've seen historically leads us to believe that the sand In Q4, particularly given how heavily contracted we are. With the current geopolitical uncertainty, the call for more Permian barrels has never been greater and more crucial for energy security in the United States. In addition, The previously announced corporate reorganization transaction or UPCE simplification closed on October 2nd. We now trade under a single class of common stock with the previous dual class stock structure now eliminated.

Speaker 2

We are optimistic that our simpler, more efficient corporate structure will enable us to broaden our investor base. Finally, given our strong margins and quarter end liquidity, we're excited to put forward another quarterly dividend of $0.20 per share. Similar to the previous quarter, the dividend is comprised of a $0.15 per share base dividend with a $0.05 per share variable dividend. Last, I want to point investors to Slide 12 in our investor presentation. As previously mentioned, Atlas leads all the other public companies in oilfield service sector in both margins and growth.

Speaker 2

This is truly a remarkable enterprise And we've now demonstrated that performance on a consistent quarter to quarter basis without the volatility experienced by others in our space. Given those margins and the growth we expect to achieve in 2024 2025, while our major CapEx initiatives are winding down, We expect to enjoy exceptional cash generation flexibility, which should increasingly be recognized in the market. With that, I will turn the call over to our Chief Supply Chain Officer, Chris Schola to provide you with an update regarding our trucking and logistics business.

Speaker 3

Thank you, Bud. We continue to build out our fleet of high capacity logistics assets and provide seamless delivery of double and trailers to our customer well sites with payloads that exceed the industry standard tonnage by 3 to 4 times respectively. Our customer base and multi trailer operations continue to grow as evidenced by an over 100% increase in multi trailer jobs and adoption by some of the largest operators in the Permian since the beginning of this year. As shown in our investor presentations, We added an additional drop depot facility during the quarter, which almost doubles our existing heat zone multi trailer delivery areas to over 1,000 square miles. We expect to commission our 3rd drop depot facility during Q4 of this year, which will expand our multi trailer delivery area to over 1500 Square Miles in the Delaware Basin.

Speaker 3

We also commissioned our remote in field command center, which is presently located 18 miles west of our current facility. This command center was designed to be completely remote and mobile We'll eventually be placed in the heart of the Delaware Basin near our end of line loadout facility upon completion of the Dune Express. Our new infield command center puts our logistics base of operations significantly closer to customers' well sites, ultimately supporting superior in field customer service. With that, I will turn the call over to our President and CFO, John Turner.

Speaker 4

Thank you, Chris. Today, I will review our Q3 2023 financial and operating results and comment on our financial position. For the Q3, we reported total sales of $158,000,000 Our profit sales revenues were $115,000,000 Our profit sales volumes were relatively flat over the period, while our average mine gate price declined moderately. The sequential price decline is a function of higher priced shorter duration contracts rolling off and being replaced by new contracts at lower rates as well as quarterly pricing resets on certain contracts. Moving to service sales, which is revenue when compared to our prior period.

Speaker 4

This increase in service sales is related to an increase in the number of active jobs during the period enabled by an increase in the number of trucks deployed and continued customer adoptions of our single and multi trailer logistics offerings. As of October 31, we had taken delivery of 97 trucks, which is an addition of 35 trucks since the last quarter and expect to take ownership of a total of 120 trucks by year end. In total, cost of sales excluding DD and A for the quarter increased by $4,000,000 to $68,000,000 This increase was primarily driven by Higher trucking and last mile logistics costs resulting from the increase in the size of our fleet and increasing number of active jobs. For the Q3, our per ton plant operating costs were $9.66 which is in line with that of the prior period. Further, we expect the delivery of our new specialized dredging equipment in early 2024 to provide for incremental improvements in operational performance and further reductions in our mining costs once those assets are fully commissioned by the middle of next year.

Speaker 4

Royalty expenses for the quarter were down 16% $3,600,000 due to lower realized mine gate prices. SG and A expense for the quarter was $18,000,000 representing a sequential increase of 17%. The increase was driven primarily by increases in consulting and professional fees, which includes $3,000,000 in non recurring transaction costs related to the Upsea simplification and the refinancing of our term loan. Interest expense for the quarter was $5,000,000 which was offset by $3,000,000 of interest income generated during the period. We expect our interest income to decline in future quarters as we draw down on our cash reserves to fund our growth projects.

Speaker 4

Depreciation, depletion and accretion expense for the quarter increased 8.4 percent to $10,000,000 This increase was due to an additional to depreciable assets placed into service as compared to the prior period. We generated net income of $56,000,000 For the quarter, represented a strong net income margin of 36% and earnings per share of $0.51 per share. Net cash provided by operating activities for the quarter was $55,000,000 compared to $104,000,000 during the 2nd quarter. $38,000,000 of this decrease was associated with changes in operating assets and liabilities that were largely associated with an increase in accounts receivable during the quarter combined with lower net income. We have seen the accounts receivable balance normalize since the end of the quarter.

Speaker 4

Adjusted EBITDA for the period was $84,000,000 representing a sequential decrease of 9.4% and an adjusted EBITDA margin of 53%. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx for the quarter was $69,000,000 representing a sequential decrease of 21% and an adjusted free cash flow margin of 43%. Looking into the Q4 of this year, we expect our EBITDA to be flat just down slightly when compared to the Q3 depending on the degree of seasonal and holiday impacts we see this year. During the Q3, given our low levels of required maintenance capital expenditures, we converted just over 81% of our adjusted EBITDA to adjusted free cash flow. Capital expenditures for the quarter were $139,000,000 This includes $124,000,000 spent on growth projects, which includes our new Kermit Facility,

Speaker 1

the Didd

Speaker 4

Express, our well site delivery assets and production enhancements at our existing facilities. We incurred $16,000,000 of maintenance CapEx during the quarter. We expect growth capital expenditures to continue to increase as we progress On Dune Express Construction, which will be partially offset by declining new Kermit facility expenditures as construction activities taper off as we approach commercial in service of that additional capacity before the end of this year. As of September 30, We have spent $132,000,000 out of our budgeted $400,000,000 on the Dune Express. For our New Kermit facility, we have spent $180,000,000 with an additional $25,000,000 remaining.

Speaker 4

The new Kermit facility is currently being commissioned and is expected to be fully online by the end of this year. As of September 30, 2023, our total liquidity was $439,000,000 This was comprised of $265,000,000 in cash and equivalents, dollars 74,000,000 of availability under our ABL facility under which we had no borrowings outstanding and $100,000,000 of availability under our delayed draw term loan facility. We streamlined our capital structure during the period with a New $180,000,000 term loan that refinanced our previous term loan and finance leases. The principal balance of our new term loan sits at 180,000,000 And our current finance lease balance is $500,000 So our total debt outstanding currently is $181,000,000 and we ended the quarter with a debt to LTM adjusted EBITDA ratio of 0.5 times. That concludes our prepared remarks And we will now let the operator open the line for questions.

Speaker 4

Thank you all for joining our Q3 call.

Operator

At this time, we will be conducting a question and answer session. A confirmation tone will indicate that your line is in the question queue. We ask that you limit yourself to one question and a follow-up so that others may have an opportunity to ask questions. Our first question comes from Luc Lamont with Piper Sammis. Please proceed with your question.

Speaker 5

Hey, good morning. Bud, you talked about 6,200,000 tons already contracted for 2024. And then you talked about in negotiations of several million tons with existing customers, which would pretty much take you to your 'twenty three production levels. I guess within that 6,200,000 tons you've already contracted, can you talk roughly about new versus existing customer mix And then on the incremental production volumes you're adding, is the goal to try to place as much as this possible with operators that can offload From the Dune Express or is there a wet versus dry consideration as well or just kind of some of the variables there?

Speaker 4

Yes. So, hey, Luke, this is John. Obviously, talking about our contracting, we don't really talk Specifics on what we're currently working on, but as you said, we're currently have 40% of our 2024 volumes contracted at very attractive pricing. We're currently in discussions with a number of existing customers and new customers regarding volumes. We expect these particular discussions to go on throughout the quarter and be wrapped up by the end of this quarter and early next.

Speaker 4

And we also have a lot of contract renewals coming up in the 1st and Q2 of next year, many of those discussions have not yet started and we don't expect them to until we get closer to the renewal dates. Finally, there are a number of new opportunities that we're starting that are starting to come out. We're evaluating these to see if we have the tonnage to meet these additional contracts. So Just as a reminder, our run rate is 11,000,000 tons this year and we currently plan on selling 15,000,000 tons next year. We're currently working on contracts that would far exceed those numbers.

Speaker 4

Our stated goal for next year is to be 80% contract on 15,000,000 tons. It should be noted that it's not a requirement to exit this year and be 80% on 24 volumes given all the renewals that happened in the 1st and second quarter. This is not really a race to see how much of our 2024 volumes we can contract as quickly as we can. There are more than enough opportunities out there for us to be 100% contracted. And our primary goal here is to secure contracts with high quality operators and pressure pumpers who stay busy, will take what they contract and pay So anybody want to add anything to that?

Speaker 2

Hopefully that helps you, Luke.

Speaker 5

Yes, yes. Definitely, I appreciate the comments Working on deals for over 15,000,000 tons, so it's definitely helpful and kind of paints the picture. I appreciate it.

Speaker 2

You

Operator

bet. Our next question comes from Derek Heizer with Barclays. Please proceed with your question.

Speaker 6

Hey, I just want to ask about Q4 seasonality in So you said in your opening comments, you're going to be very busy in Q4. The guide was EBITDA to be flat to down slightly compared to Q3. We have to think about the Kermit expansion online by the end of the year. You talked about the wet plant coming online. Could you help quantify for us how you're thinking about About volumes, pricing and activity as we go into Q4?

Speaker 2

Yes, maybe I'll start and then John and the team may want to add As per our release, we were sold out in the Q3. We've also continued to be Very, very busy here through October. So it's but It is the holiday season. And so, it just it does create more of an error bar as far as The winter weather and then the holidays and all of that, but we're in a really good place right now in terms of activity And sold out, I don't know

Speaker 3

if you guys want to add to that. Yes, I

Speaker 4

mean, we always expect a slowdown in the Quarter. In December, you see the holidays, like Bud said, and then there's the weather. That's always very unpredictable. We do use this time for some needed maintenance. Like Bud said, October is one of our busiest months at conception from a volume and service perspective.

Speaker 4

Based on what we know right now for the Q4, volumes will likely be flattish. We had a busy October and as of right now we see Activity slowed in November December. And if the weather is worse than expected then those numbers may go down some. On the logistics side, we see activity as flattish Flattish as well. As far as activity in the Q4, we hear both sides of the coin.

Speaker 4

Some companies are taking breaks And some are continuing to potentially picking up activities. Recently, we have a couple of companies indicate they plan on extending some activity in the Q4. And as of right now, We really don't know if that's going to happen. If it does, there could be some upside in the Q4. And we really expect a real pickup in activity to begin in the Q1 of

Speaker 2

Yes, I might add, I think John makes an important point there as a former operator. I know we would be thinking about You know, as we recognize that activity is going to pick up in 2024 that we want to be at the front of the line, Generally, we wanted to be at the front of the line on that. So that's the question is how many operators kind of pick up a little bit earlier here in the Q4 as opposed to the Q1 of 2024. I'm highly confident there is going to be A meaningful uptick in activity in 2024. It's just a question of how much.

Speaker 2

And we are getting some positive signals, but it's a question of how many How many of the operators do pull forward a little bit into Q4?

Speaker 6

Got it. Okay. That's all helpful. So fair to say if you think volumes should be likely Flattish. We don't know how November, December are going to shake out.

Speaker 6

It seems like the EBITDA guide flat to down, it's more of the some more pricing reset That might drive that down more so pricing than volume?

Speaker 2

Well, I mean, maybe I'll start and these guys might add to it. Our Q3, Our sand price is just over $40 a ton. The market is pretty balanced right now And as we're moving through the Q4, so we'll see. We're in discussions Now regarding next year, but anticipating an uptick in activity, we're having those discussions right now and we'll see how it plays out for next year. I don't know what you want to say anything.

Speaker 2

Yes.

Speaker 4

No, I mean, let's look at the guidance There I mean, we may have some maintenance expense in there. I mean, there's just we said flattish, there's obviously opportunity for weather, But that's kind of what we're seeing right now.

Speaker 6

Got it. Okay. That's helpful. And then follow-up on operator M and A. Obviously, we're seeing a lot of deals going on Exxon Pioneer Chevron has a lot of publics buying up privates.

Speaker 6

This tends to lead to potentially more risk around customer Concentration around pricing and volumes, I guess how are you guys approaching and attacking this M and A wave that we're seeing and how do you win in this type of environment?

Speaker 2

Yes, this is Bud. I'll start on that. The M and A is certainly inevitable that it's going to continue. There's real Leverage with scale and given the uptick leverage down per unit cost And benefit from that scale and with more automation. Atlas is very much differentiated in that regard.

Speaker 2

It's the largest pop in producer With growing logistics offerings that nobody else can match. So it really placed our strength over the long haul. Nobody is better at providing large amounts of profit timely and reliably than Atlas is and with our growing logistics offerings and The solutions we're providing, particularly the Dune Express, it's only going to get better. So the M and A activity plays to our And we'll continue to over time. So do you guys want to add to that, Jeff or John?

Speaker 7

Yes, I'll just say One example is a recent M and A has created an overall market share increase opportunity within the NewCo as a result of 1, our Current position in both sand and logistics within the independent entities of the M and A, our proven reliability that we demonstrated internally, And 3, our new industry leading scope, scale and offerings. So this is all translating into an Atlas advantage for the NewCo moving forward. So overall creating an accretive union.

Speaker 2

Yes, I mean just in the big picture when I think back to several decades ago, the Permian was Probably dominated to a degree by smaller operators, kind of mom and pops. And I think that day has kind of has John, it's all about scale and the leverage associated with that. And so these operators need a scale And logistics solutions provider and that's what Atlas is positioned to provide.

Speaker 6

Great. Appreciate the color. I'll turn it back.

Operator

Our next question comes from Jim Ralston with Raymond James. Please proceed with your question.

Speaker 8

Good morning, gentlemen. And Bud, you mentioned just when we talked about pricing and the different dynamics in the market on wet sand versus dry, scale guys that need to hit the spot market versus contracted. And obviously, you guys have done a fantastic job Over your history of growing the scale and being reliable, etcetera, I'm curious how you view The value to that scale and reliability when it comes to kind of pricing premium Over the spot market numbers that we all see quoted in a market like we've been in where things have kind of softened a little bit. Now we feel like we're bottoming and starting to turn, but Just maybe some color commentary on pricing premium for what you guys actually provide.

Speaker 2

Yes. Well, thank you. Well, as far as just some general comments, there's a reason that Some companies, specifically Atlas, are fully contracted, while others have proppant to offer on the market, in the spot market. And as I mentioned in my comments, a lot of it does is a function of reliability and dependability. And Yes.

Speaker 2

And operator, there's nothing that will upset your quarter, your rate of return on your projects and Your production and your goals and not having the profit when you need it and not having quality profit when you need it. And so That is mission critical for us and I think it's what differentiates us in the market. Some of the smaller profit providers and some of the different You know, the wet sand has its own issues, etcetera, are just not as optimal for the large scale operators who really are dependent on that reliability and dependability as well as the other infrastructure solutions that we're offering that continue to enhance that. So I think there is a real bifurcation in the market and so I do think spot pricing can kind of be a little bit indicative of pricing trends Directionally, but I do think there's been too much attention on the spot pricing in the market And maybe an over extrapolation of what that indicates, I'm saying. Yes.

Speaker 4

We've been told by a number of our customers that they With Atlas because of our reliability and service and they also indicate that they pay more at Atlas more than they do other standard logistics companies. I really don't have an answer to that. We don't have an answer what that amount is. Our customers don't tell us what they're paying our competitors for standing in service. But what I will say is that I do think an example of our quality is shown in our level of contract and our high level of activity over the past few quarters.

Speaker 4

I mean, you've seen a 20% decrease in the frac market over the past 6 months and we've maintained very high activity levels during that time.

Speaker 3

Yes, I'll add that this is nothing new, right. We know those players and folks that come in and offer extremely low prices. We've seen that Throughout our 5 years of existence and throughout the cycles, I think what we don't I have any peers that are pure play Permian, San and Logistics companies that are public to See that and quantify that price for you, but I will say that we price our products and services According to that value proposition for our customers and we've been extremely successful pricing them appropriately.

Speaker 8

Yes, I didn't expect you'd give an absolute number, so the color is very helpful. And John, maybe as a follow-up, when

Speaker 9

we think about costs,

Speaker 8

Obviously, you guys had to step up in costs late last year as you were rolling from 3rd party to internal on the dredging side And those have kind of come down. It seems like they've flattened out. As we think about this over the next 4 quarters or so, Should we think about OpEx generally being relatively stable until the new dredges come in and are fully functional and operating in mid next year? And then Maybe just a little kind of color on how much that should improve costs, maybe on a percentage basis?

Speaker 4

Mac and So we have plateaued. I do think we're working on some things right now that could potentially have an impact on that. But the biggest impact you're See is like you said is when the dredges come on fully commissioned which is expected by middle of next year. Our lowest ever, I guess, OpEx per ton was around $6.50 a ton and that's when we were 100% dredge mining. That dredge mining provides us with around a $2 to $3 cost advantage versus traditional mining, which we still are doing Quite a bit of that.

Speaker 4

So at least at some point next year you're going to start seeing our costs trend down more towards that $6.50 I mean probably more in the $7 $7.50 mid-seven type range and that's kind of where we're focused right now. That's helpful. Thank you.

Operator

Our next question comes from Ati Motak with Goldman Sachs. Please proceed with your question.

Speaker 10

Hi, good morning, team. You noted some progress on the Dune Express. Obviously, it stays on track, But maybe help us understand the steps that you're looking at till it gets commenced in the Q4 of next year and any factors that you are keeping an eye on?

Speaker 2

Yes, maybe I'll just start. Lisa, I may add to it. We built both of our plants. We did the expansion That's nearing completion here in the Q4 ourselves. And obviously, our team is really Very skilled and have been very successful at these probably more complex projects Then building the Dune Xpress, which Dune Xpress is kind of a rinse and repeat process down the length of the line, building it.

Speaker 2

I don't know if you guys can answer. It's an area given that we've ordered the majority of the material and contracted the labor, I think as I mentioned in my conference call, Tex, that really mitigates the risk to the budget. Yes. It's not a very complex project in terms of the construction of the new exploration. I

Speaker 4

mean there's like as far as that equipment goes, I mean there is I mean there is opportunity to make sure that it comes in on time and making sure that it comes in meeting our specs. And so we're reaching out to a lot of our vendors right now. We're actually doing Vendor audits, we do this pretty periodically to make sure that the equipment we've ordered it making sure that it will show up on time and on spec. We've taken like we said, we've taken we've already haven't so we've already the number of the equipment starting to start in the ride. You've got Concrete sleepers are starting to arrive.

Speaker 4

That's what the Dune Express will sit on. We're starting to take delivery of like a lot of fiber optic cable. So I mean there's a number of things that we're currently working as we currently work to continue to construct it. Things that we can do in the interim is just to make sure that the new Express comes on time and on budget.

Speaker 2

Did that answer your question?

Speaker 10

Yes. Thank you so much. Appreciate the answer. Just on a follow-up, you mentioned in the press release that there were some quarterly price Presets on certain contracts, maybe help us understand that a little better. Like what does that exposure look like on your overall contracted volumes and how does that actually work?

Speaker 2

Jeff, do you want to take that?

Speaker 3

Yes. As we depending on

Speaker 7

the market and how it's working, the quarterly resets have been a part of Pricing Strategies and Portfolios for a long time. Within some of The pricing agreements that we have now, we have some quarterly resets and you can see some of our pricing is in this Q3 and moving into the Q4 is an effect of the pricing. We have roughly 25% to 30% of our pricing historically on quarterly resets, probably moving to more of a 50% we move into 2024. And the quarterly resets really adjust to the market pricing, not only with regard to numerically, but with regard to the trend. And so we feel that with an uptick And the activity moving forward in the back half, this should yield some positive results for us.

Speaker 2

Yes. I mean, our view is and I think everybody can see it, that we kind of move through a Trough in the rig count and the frac spreads and I think we certainly and I think most of the industry is anticipating A pickup in activity in 2024. So I think I mean the quarterly recess give customers and us Comfort, we have great relationships with these guys and we'll be able to adjust to changing market conditions. And in my view, it sets up very well for 2024.

Speaker 10

Thanks. I'll turn it over.

Operator

Our next question comes from Saurabh Pant with Bank of America. Please proceed with your question.

Speaker 11

Hi, good morning, Bart and John. Maybe I'll just start with a quick one on the Bluenix, clearly you're making a lot of good progress on that, including on the ground. Just want to ask in terms of how Customers look at it and they see that progress. Are you seeing more interest customers coming to you asking on the project, getting familiarized With that and showing interest in contracting volume through that, just talk to how your customers are responding to the progress that you're making on the ground?

Speaker 2

Well, I mean, I think clearly the customers are excited about the Dune Express coming online. And so I do think That does, Jeff can talk about, of course, we have our existing customers, but we have a number of new potential customers that we're in discussions with That we think it's obvious that the Dune Express is very attractive to them and compelling. So We'll be having those discussions over the next 3 to 4 months and We expect to grow our customers. Jeff, I don't know if you want to add one? Yes.

Speaker 2

One thing to

Speaker 4

know is this, the Dune Express is just over a year away. So any contracting that we're doing right now in the Delaware Basin is going to is contemplating taking sand off the Dune Express. So and yes, Yes. There is a lot of interest from some operators that are out there in the Permian, especially the Delaware, I mean, the Delaware that are looking for that size and scale.

Speaker 2

And I'm also ready to get the trucks off the road.

Speaker 4

That's a real issue out there. The efficiencies that coming with this is with the Dana Express.

Speaker 7

Yes. As John stated earlier, it's not a race to get to 2024 volumes contracted, but more of an effort to align with high quality clients Both E and Ps as well as pressure pumpers that are sustainable on a go forward basis. Current contract discussion are not just Sand and logistics supply agreements, but more complex and long term conversation about revolutionary infrastructure based solution for the Permian. And let me define infrastructure solution based infrastructure based solution. It means a compilation of sand production expansion to meet the needs of our large scale high efficiency customers.

Speaker 7

A unique logistics solution that Chris alluded to earlier with 3 to 4 times transit Capacity with a phased interface of multi trailer delivery from the drop depot model to the eventual Dooms Press delivery solution, but just approximately a year out. This all leads to security and reliability of supply for years to come. So it's a journey and we've had tremendous amount of attraction early on. So we're working this we're just taking these ideas and putting them to paper right now with the customer.

Speaker 4

I mean, this is something we've been talking to these customers for about For a long time, 3 or 4 years now. And now it's just within a year. And

Speaker 3

so Yes. Yes.

Speaker 11

Yes, yes, yes. Now that the project is within a year of completion, right, customers see progress on the ground, there should be more traction, right? And it sounds like there is more traction. So that's encouraging. Okay, perfect.

Speaker 11

And then a quick follow-up, more of a housekeeping question on CapEx, cash CapEx particularly. John, maybe you can remind us how much of CapEx associated with the viewing experience has been spent at this point? How much more is left? And then just for the Q4, How should we think about CapEx and the residual CapEx related to the comment expansion that's coming online this quarter?

Speaker 4

If Brian has those numbers, I'm going to let him answer those. Yes. We've spent $180,000,000 on the Kermit expansion, so there's $20,000,000 $25,000,000 left. And On the Dune Express, we've got $132,000,000 behind us and another $268,000,000 over the course of the next 5 quarters. Okay.

Speaker 2

Okay. Okay, guys. Thank you. Yes, I got that. Okay.

Speaker 2

Thank you. I'll stand it back. Thank you.

Operator

Our next question comes from Jeff Jay with Daniel Energy Partners. Please proceed with your question.

Speaker 5

Hey, guys. Just a quick one for me. Thinking back to the M and A question a little bit, obviously, as companies either get together or I guess Rumor to get together in the future and lateral lengths increase. I'm just kind of curious what that does in your mind that kind of overall sand demand and sort of what that kind of means for you guys and your business?

Speaker 2

Yes. This is Bud. I'll start. These guys may want to add To my comments, but I did touch on it earlier. I think, first, it's hit or miss as the Company is it an existing customer or not, but generally the larger customers or the larger operators are customers of Atlas Energy Solutions because we match up Really well to provide the scale and the liability that they need.

Speaker 2

So I do think long term it is Very beneficial for Atlas. It's more difficult for mom and pop type operators to match up with these large scale operators, particularly given increasing pad Drilling and completions, increasing SEMA fracs, which just require a lot of profit very quickly. And we're uniquely positioned to provide that. So I think it's very beneficial in our skill and our growing skill is really important in that. I don't know if you guys want to add to that.

Speaker 4

I think that I agree with you. I think that larger scale operations means larger Scale services that need to go along with that and we've seen it in other basins you saw in the Eagle Ford like 15, 10 to 15 years ago. I mean when the large operators move in, It's a larger service companies that can service their needs across the entire and across their entire operations is what they're They need that reliability because they're putting a lot of money in on this and they want to make sure they execute on that.

Speaker 2

I'll mention one other thing because Your question may also stem from a concern, does it mean less drilling activity? And again, it can in that Some of the smaller private operators maybe are actively growing their production to make them more attractive as an acquisition target. However, as you've seen from us on a quarter to quarter basis, our results are very stable because we're contracted To a large degree with these large operators that have very steady and longer term planned activity. So Again, we just match up really well with these companies that are combining and creating more scale. So I don't think and the other thing is and we've included the Rystad chart in the appendix of our presentation.

Speaker 2

It really is remarkable What a great job that operators and pressure pumpers are doing increasing the efficiency in the field. And so The profit pump per day per frac crew just continues up into the right. So I think all these drives for more efficiency that To some degree are associated with scale, to drive up the efficiencies and drop down the cost per unit. Again, they all play to our strengths.

Speaker 5

Excellent. Thanks. That's really helpful.

Speaker 2

Thank you.

Operator

Sorry, go ahead, sir.

Speaker 5

I'm sorry. That answered my question. Thank you.

Operator

Our next question comes from

Speaker 4

Michael

Operator

Scialla with Stephens. Please proceed with your question.

Speaker 8

It sounds like you're pretty confident you can be fully contracted on about 16,000,000 tons per year next year. Is it fair to think you can go beyond that if the demand is there at a price you're okay with and You don't need to spend any additional capital to do that with the efficiencies you're seeing at Kermit. And Is the CapEx number that the consensus has yet right now for next year about $325,000,000 does that seem like a good number to you?

Speaker 2

Yes. As Jeff touched on, we are in discussions for volumes and John touched on as well that are in excess Of that 16,000,000 tons. That said, when we built our original plants, We thought that the expectation was they would produce 3000000 to 4000000 tons and they produce 5,500,000 tons. And so our expansion, We'll see, we may be able to produce more at Kermit with the expansion than what we're anticipating. So Tom will tell on that.

Speaker 2

And we do have opportunities to further grow our production base. John, I don't know if

Speaker 4

you want to add to that. Yes. I mean, Like we said earlier, I mean, it's $16,000,000 I mean our goal is 80% of $16,000,000 I mean of $15,000,000 really. If you When you look at that, we want to keep some on spot, it will be a decision that we need to make at the time, whether or not it Depends on what our customers want. Like we said, there's new opportunities that are out there that we're evaluating to see what those additional volumes were looking like.

Speaker 4

And so on the CapEx numbers, I think we're going to have to I mean, we'll Need to come back on those because I know that there's a lot of we do our best to forecast how CapEx is going to be spent And that never we're never ever successful in forecasting that the ebbs and flows of that, but you have to put a timing of it, but for But right now, I mean, the Dune Express, we plan to spend $400,000,000 total on that. And then obviously, the plant expansions on time and on budget. I think we mentioned those numbers in our call, but we can circle back on that. Does that help you?

Speaker 8

It does. Yes. Thank you. I guess on the logistics side, do you expect you've obviously had some Tremendous growth there, surprised now for a couple of quarters in a row. Do you expect any further step up there before Dune Express is completed?

Speaker 8

Is it Just a matter of further adoption of these double and triple trailers. I know you mentioned the next drop depot You're planning for the Q4, I guess just any visibility on further growth before Dune Xpress goes into operation? Yes.

Speaker 2

We'll let Chris answer that for you.

Speaker 3

Yes. Look, we've always projected that growth into the Dune Express. And you look at where we've come from earlier this year to where we're at now, as you said, right, Dedicated fit for purpose assets, multi trailering offering that is differentiated in the market no one else can offer. And all of that, meanwhile opening and expanding our drop depot footprint, That growth that you will see over the next year, the plan is not to show up with Dune Express Day 1, hit a button and That everything to be delivered at that point. Well in advance of the Dune Express, we want to be delivering 100% of those volumes, Sand and logistics to the well site, so that when the Dune Express comes on from a customer perspective, it's a seamless transition and they don't even see a difference.

Speaker 3

Hopefully that answers your question.

Speaker 2

We've added another heat zone drop deeper, you might touch on that. Yes. It's a step towards that.

Speaker 3

Yes, exactly. From the transitionary period, we've got over 1,000 miles of accessible 1,000 square miles of accessible multi trailer operations out there and plan to add another one in Q4. While we show flattish in Q4 Based on just activity volumes as we talked about earlier, we do expect to grow in that last mile with the Q1 pop as well.

Speaker 2

That help you? It does. Thank you very much, guys.

Speaker 12

You're welcome.

Operator

Our next question comes from Doug Becker with Capital One. Please proceed with your question.

Speaker 9

Thank you. I wanted to follow-up on logistics, but on the margin side, It looks like they were down just a little bit in the Q3, at least in part because of the shorter haul distances. What's the expected trajectory on margins as we move toward Dune Xpress at the end of next year?

Speaker 3

Yes, I think through next year, We've been we've run historically in that 10% to 13% margin. I think as we get into next year, we're going to see more of 18% to 20% margin business, approaching the Dune Express. Is that longer term? Longer I mean longer term once the Dune Express is up and running, Upward 50% margins.

Speaker 9

And so just to refine that kind of 15%, 20% through the 1st three quarters of next year and then a step up as Dune Express comes on?

Speaker 8

That's right.

Speaker 4

As we ramp into it, I wouldn't expect it to happen immediately, but I think as

Speaker 2

Not day 1, but it will be

Speaker 3

a ramp up with the new Express volumes.

Speaker 9

Yes, makes sense. And just on the timing of Kermit, I know I've been highlighting late Q4. I've been assuming December 1, but just wanted to get a sense, is there potential Or any visibility as a little bit earlier, a little bit later, obviously can have a pretty big impact on the Q4?

Speaker 4

I think we're still looking at a December start up on that when it comes to the When it comes to coming on, I don't know that we're going to get that on any sooner than that or get those volumes available earlier than that.

Speaker 8

Thank you very much.

Speaker 2

Great. Thank you.

Operator

Our next question comes from Keith McKee with RBC Capital Markets. Please proceed with your question.

Speaker 4

Hi, thanks and good morning. Just following Upon Doug's question on the Kermit volumes, can you just talk a little bit more about how those volumes should trend, The sales volumes should trend through 2024 as the plant expansion comes online. Is it a step up in Q1 or is it a Slow and steady ramp throughout the year. We haven't given any guidance on that, but it's going to be more of a slow and probably more of Probably a slow and steady ramp is what we're thinking. However, we do we brought we're bringing this on because we were asked to by our customers.

Speaker 4

I think we could see some increased activities, but we'll just have to see if it's probably going to move more slow and steady is probably what we're thinking. Yes, got it. Got it. And just one last one on the dune sagebrush lizard dinner. There was some discussion about that Potentially becoming added to the endangered species list and you feel you've mitigated a lot of potential risk around that.

Speaker 4

But can you to give us an update on your latest thoughts around that potential.

Speaker 2

Yes, this is Bob. Maybe I'll start and these guys can add. I mean, we feel like, obviously, we're in great shape given that we're one of the early members of the Conservation agreement, so even if it is listed, we will it should be fully operational and shouldn't affect our business. Numerous and very voluminous responses have been To the potential listing, it's going to take up, I'm told by our General Counsel, Rick Fletcher, That it's going to take probably quite a while for Department of Interior and Fish and Wildlife to work through And respond to all of those. And so it's probably at least a year or a couple of years out It's our best projection right now before a determination on that.

Speaker 4

Yes. And So we just like Bo said, we just responded to the question period With the Department of Interior that put out. So we're in that CCAA. We're early adopters. We were Instrumental in getting it put in place.

Speaker 4

And so, I mean, we feel like it's in the event of a listing that we're pretty well covered. All right. Thanks very much. Appreciate the comments.

Operator

Our next question comes from Scott Gruber with Citigroup. Please proceed with your question.

Speaker 12

Yes, thanks. Just a quick follow-up on logistics. If the revenue trend there It's flattish in 4Q, but you continue to add trucks. It seems like you guys will be a bit underutilized. Just trying to get a sense of as you step into 'twenty four and completion activity improves, How quickly do you think you can get the asset turns on the trucks back to where you were kind of mid year in 'twenty four.

Speaker 12

Is that a 1Q event? Is it 2Q? Kind of how quickly to get those assets nearly fully utilized?

Speaker 3

Yes. Thanks, Scott. Just as a reminder, from an asset side of things, we've been fully utilized Our trucks and trailers at this point, we do have strategic third party partnerships as we Started this business, right, with 3rd parties and transitioned to a mix of having our own and third parties. We do still run a significant amount of 3rd party trucks on that. So as we continue that Flat and growth trend in the future.

Speaker 3

We'll make sure that our trucks are also remain at that 100% utilization rate.

Speaker 12

So you'll be able to we did some kind of tracking revenue kind of per truck. So will the 1Q kind of be Back to a 3Q rate then?

Speaker 3

Yes. Our revenue per truck Should on the 1Q, I would agree with that being aligned to the Q3 rates.

Speaker 12

Okay. Okay, that's it. Thank you.

Speaker 2

Good. Thank you.

Operator

We have reached the end of our question and answer session. I would now like to turn the floor back over to Bud Brigham for closing comments.

Speaker 2

Well, I want to thank everybody for joining our call, and we look forward to reporting on our Q4 results. Thank you again.

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Key Takeaways

  • The new Kermit facility is expected to enter service late in Q4, boosting Atlas’s Permian production capacity by approximately 50% to over 15,000,000 tons.
  • The Dune Express conveyor remains on time and on budget for a late-2024 start, with about 90% of equipment ordered and 80% of installation and labor contracted.
  • Atlas has already contracted 6,200,000 tons (40% of its projected 2024 capacity) at attractive rates and is negotiating several million more to target over 80% coverage next year.
  • Q3 results featured net income of $56 million (36% margin), adjusted EBITDA of $84 million (53% margin) and adjusted free cash flow of $69 million (43% margin), highlighting strong cash conversion.
  • The logistics platform saw a >100% increase in multi-trailer jobs and the addition of new drop depots, expanding delivery coverage to over 1,500 square miles.
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Earnings Conference Call
Atlas Energy Solutions Q3 2023
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