Atlas Energy Solutions Q1 2023 Earnings Call Transcript

Quartr
Provided by Quartr
May 9, 2023

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Atlas Energy Solutions First 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 Turlington, Vice President of Investor Relations.

Operator

Thank you, Kyle. You may begin.

Speaker 1

Hello, and welcome everyone to the Atlas Energy Solutions conference call and webcast for the Q1 of 2023. With us today are Bud Brigham, Chairman and Chief Executive Officer and John Turner, President and CFO. Both Bud and John will be sharing some comments, after which we will open the call up 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

Security 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 our registration statements on Form S-1 filed with the U.

Speaker 1

S. Securities and Exchange commissioned on January 31, 2023, in connection with our initial public offering, our quarterly report on Form 10 Q and our other SEC filings. You should not place undue reliance on forward looking statements, and we undertake no obligation to publicly 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.

Speaker 1

With that said, I will now turn the call over to Bob Brigham.

Speaker 2

Thanks, Kyle. Hello and welcome to the Atlas Energy Solutions earnings call and webcast for the Q1 of 2023. This is our very first earnings call as a public company and I want to welcome our new investors. Thank you for believing in us and supporting our mission. I also want to congratulate our early existing investors.

Speaker 2

What you have helped us create is very special And we're only just beginning. I would like to start this call with some preliminary remarks about who we are and the Atlas mission before getting into the normal course operational and financial commentary. I've said it before, But I really did not expect to take a 3rd company public. We're here because this is a very special company with a lot of opportunity ahead of it And we're excited to be taking the next major steps forward, in my view, to accelerate the Permian's maturation from a world class oilfield to an even more differentiated world class energy manufacturing center. The oilfield in general and the Permian particularly has been evolving.

Speaker 2

And I believe that Atlas is uniquely positioned given, 1, that we have the scale It is necessary and sustainable to match the growing scale of Permian operators 2, our E and P experience, including with infrastructure and right of ways and 3, our track record in the basin to deliver the next constructive disruption to accelerate the Permian's transformation. The prior constructive disruption, Sourcing local sand was extremely beneficial to the Permian and further differentiated it relative to other basins. By securing what I call the guar of sand reserves and building state of the art plants with redundancy, Atlas emerged from that disruption in an advantaged position as a premier profit producer in the Permian. In addition, Atlas has delivered industry leading environmental benefits by reducing energy consumption, emissions and the aerial footprint of our mining operations benefiting from our giant open dune deposits and our unique dredging operations with more to come. Atlas has been sold out of proppant and our customers continue to sign new contracts of increasing term.

Speaker 2

We think that excitement over the Dune Xpress and its societal and environmental benefits are part of this. But the market as evidenced by the demand for our product has been telling us it needs more Atlas proppant. Our expansion project has been underway since last year. It is on time and on budget. And we expect it to grow our production capacity by roughly 50% as we exit the year.

Speaker 2

So with all that said about our proppant production, Atlas has commenced the next constructive disruption in logistics and delivery systems. As everyone in the region knows all too well, the Permian road infrastructure and communities are intensely pressured and negatively impacted by heavy hauling, particularly of mission critical proppant on our commercial roadways, which are shared with the residents and workers in the community. Given our differentiated scale of production At this mission critical element that must be delivered to every Permian horizontal well as well as our E and P and infrastructure experience, Atlas is uniquely positioned to deliver a step change advancement in delivery systems, thereby enhancing reliability, dependability and efficiencies with major environmental and societal benefits. These initiatives are very much underway. They will enable Atlas to reduce emissions and save lives, while making the Permian Basin a better place to live and work.

Speaker 2

I call this sustainable environmental and social progress or SESP. It's also what I term the harmony of capitalism. It's the reason our country enjoys among the cleanest and safest air and water of any major country. By responsibly focusing on our fiduciary obligation to also benefit. It's virtuous and it's sustainable, compounding constructively for all our stakeholders.

Speaker 2

As a result of our intense focus on our fiduciary obligation to our shareholders, I would put our company's environmental and societal accomplishments up against any peer. As you can see in our presentation, Our innovative and unique logistics platform has been delivering proppant from our state of the art production facilities, utilizing our fit for purpose logistics assets all the way to the blender. This asset Base continues to grow as deliveries of equipment progress and as we obtain new logistics work around the basin. We've successfully completed jobs with payloads close to 100 tons per truck, which is roughly 4 times the industry standard and which illustrates the potential of our logistics offering to drive efficiencies for our customers even prior to the Dune Express in service day. And of course, this is being implemented to ultimately integrate with our Dune Xpress, which will compound to further advance logistics in the Permian.

Speaker 2

The Dune Express was the use of proceeds in our offering. It's an innovative and state of the art 42 mile conveyor system to transport proppant into the heart of the Permian and its construction is very much underway. I should also point out that these logistical initiatives, particularly the Dune Express, are very personal to me given that I grew up in Midland. The current situation in the region is unacceptable and we intend to change it. We estimate that for deliveries fulfilled using the Dune Express, We'll be able to cut out on average 70% of the miles driven on public roads as compared to deliveries performed from competitor plans in the Winkler trend.

Speaker 2

We think that's going to be powerful in terms of avoiding traffic accidents and protecting human lives. Again, the reason we started looking at this project was to drive returns to shareholders. But it's such a wonderful thing to deliver high impact infrastructure that provides major safety benefits to the Permian Basin community. It's also very rewarding for me personally given that it will be located right there in the community I grew up in. Now to get into the update on the business and industry, we're pleased with our Q1 results.

Speaker 2

We remain very bullish about the company's prospects and have an optimistic outlook for the industry. Briefly, regarding the outlook for our industry, in my view, the macro headlines, which were created by excessive government spending and associated subsequent monetary disruptions may mask, but does not change the underlying major structural Given the lack of capital invested in energy over the last 7 years, I am very concerned about our ability to meet the demand growth that is coming, particularly in the developing world Over the next 1, 3 and even 5 or 10 years, in my view, a lot of responsibility and opportunity will fall to the Permian as a premier oil producing basin in the U. S. Regarding our performance, We are proud of the operational execution that underpins this quarter for Atlas as the company set new quarterly operational and financial records on sales volumes, sales, adjusted EBITDA and adjusted free cash flow. The margins generated by this enterprise are better than any company I've been associated with.

Speaker 2

Thus, our financial metrics, As illustrated in our presentation on Slide 13, compared very favorably with the best performers in the oil and gas industry. Atlas has generated meaningful value for its equity holders. And over time, our exceptional margins, Cash generation and growth should be recognized in the market. The company is well capitalized on the heels of our recent IPO. And as will be discussed further, we are progressing nicely on the Execution of our growth initiatives including the permanent facility expansion and construction of the Dune Express.

Speaker 2

Briefly regarding the dividend, this will be our 6th distribution over the last 20 months. The last four distributions have been $50,000,000 per quarter and we're distributing $50,000,000 again this quarter. At our current run rate, that's approximately 19% of our adjusted free cash flow of approximately $77,000,000 in the Q1 of 2023. For the time being, this should be considered a variable distribution. During the course of this year and next, we will look forward at our forecast on a quarterly basis to be sure that we retain plenty of flexibility to fund and complete our growth CapEx projects.

Speaker 2

The fact that we enjoy such exceptional margins That we're over 90% contracted this year and that we expect to be about 80% contracted for 2024 by year end should provide us a good deal of flexibility in this regard. However, if conditions change and our forecast changes well, We can retain more of our free cash flow in subsequent quarters for our higher rate of return on growth CapEx projects. Also, during the course of this year and possibly next, our Board will be deliberating, developing and implementing a longer term dividend policy. So we are in a window of substantial CapEx investment With both our Kermit plant expansion and the Dune Xpress, they will both be completed over the course of the next 18 months to generate a material expansion of our production, revenue and cash flow capability. We expect given our strong margins That in the process of winding down these substantial capital investments, Atlas will become an even more powerful distributing enterprise.

Speaker 2

With regard to the broader industry outlook, activity levels across the Permian drilling and completions market remained robust during the Q1 with the Permian adding 33 new rigs year over year. The Permian is very important to the global oil supply picture as it contains some of the most economic rock in North America with low oil price breakevens. Importantly today, Given the higher oil cut that is exhibited by most Permian wells, the Permian economics are not particularly sensitive to natural gas pricing. That's important to keep in mind for us as we're selling 100% into the Permian. So we're not exposed to the negative dynamics affecting service providers with the footprint in the gas basins.

Speaker 2

In fact, we potentially stand to benefit from the relocation of equipment from gas basins. For every incremental frac crew that relocates from gas basins to the Permian, there is incremental Permian sand demand associated with that crew. That incremental sand increases the total sand demand in the Permian and provides market tailwinds. Regarding the sand market in the Permian, given our highly contracted position, we were not a large participant in the spot markets during the Q1. Our contracting strategy allows us to have stable, consistent and forecastable pricing.

Speaker 2

Our expectations for the Q2 average pricing have us landing in the mid to low 40s range for mine gate pricing With continued light and selective participation in the spot market, we are expecting proppant consumption to continue to increase As long as oil prices remain in the current range, which I view as likely prior to eventually heading higher. We also expect completions efficiencies to continue to drive proppant consumption upwards across a range of oil prices As completion cycle times continue to improve with increased SinoFrac adoption, which we see as currently Only about 10% to 15% of the market. This is expected to drive growing demand in future periods. Restating and summarizing on our capital projects and John will cover the numbers. We are progressing nicely on our Kermit facility expansion, which we still expect to come online in Q4 of this year on time and on budget.

Speaker 2

In fact, the new silos for the expansion are going vertical right now. And as I mentioned earlier, we officially kicked off the process of building the Dune for us during the last quarter. We broke ground on March 21. Just a reminder, we have previously secured the necessary right of ways, Obtained all required federal and state permitting and previously secured 2 anchor contracts to take delivery of sand from the Dune Express. We have ordered more than 50% of the equipment and materials required for the project, which are generally contracted, providing for greater budget visibility.

Speaker 2

We've also ordered more than 40% of the services related to installation and labor, which again means we're de risking the project's overall cost by agreeing to pricing with many of our vendors. We've cleared about 15 miles of the route of which 5 miles has been graded and we've laid about 15 acres of caliche pads for our transfer stations, Lay down yards and overhead crossings. While we're still early in the construction, all of this activity gives us increased comfort in our planned timeline for commercial in service, which we anticipate will occur in the Q4 of 2024. In summary, and then I will turn it over to John, we're very pleased with the performance of the company and we're optimistic in our outlook for the remainder of the year. We view the macro setup as compelling and are extremely excited about our transformational logistical initiatives.

Speaker 2

We appreciate your support as stockholders and we're working hard to create value. With that, I'd like to turn the call over to John Turner, our President and Chief Financial Officer to discuss our financial results in more detail.

Speaker 3

Thank you, Bud. Today, I will review our Q1 2023 operating results and comment on our financial position. We had a Strong quarter from a revenue standpoint and generated a quarterly reported adjusted EBITDA of $84,000,000 representing a strong margin of 55%. As we'll get into, this was an excellent quarter despite elevated plant operating costs, which will moderate going forward for the rest of 2023. In the Q1 of 2023, we set a company record for quarterly sales volumes of 2,800,000 tons.

Speaker 3

This annualizes to a run rate of just over 11,000,000 tons per year. We were highly contracted in the Q1 and remain Highly contracted for the remainder of 2023, we expect to renew and to add incremental contract volumes for 2024 and beyond As we move through the year and expect that as we grow our logistics fleet and get closer to the Dinexpress in service date that our contract position will continue to grow on the logistics front as well. For the Q1, we generated record sales of $153,000,000 representing a 2% sequential increase. On product sales, our volumes grew by approximately 91,000 tons, representing a 3% sequential increase. Mindgate pricing in the Q1 of 2023 was $0.76 per ton higher than it was in the Q4 of 'twenty 2.

Speaker 3

For our service sales, which is revenue generated by our logistics business, we saw a sequential decrease of $2,700,000 which was associated with Lower than expected freight pricing experienced during the quarter. As a reminder, prior to the start of 2023, our service sales were limited to our asset light, Low Margin Well Site Coordination Services Business. Profit and Logistics is an area of significant focus, growth and margin potential for us as we build out our fleet and ultimately transition to a logistics model in the Delaware Basin that includes shortened hauls off the Dune Express. Cost of sales excluding DD and A decreased by $4,700,000 quarter over quarter to $63,000,000 This decrease in COGS was primarily associated with a meaningful reduction in our contract labor and last mile logistics costs. As we continue to transition our dredge mining operations fully in house, we expect our mining costs to continue to moderate in subsequent quarters as our electric dredges exhibit improving utilization rates over the course of 2023.

Speaker 3

As electric dredging increases, Our mining costs and associated emissions will decrease considerably on a per ton basis and this is a significant component of our overall cost of goods sold. So by extension, we see COGS moderating as we move through the year. SG and A expense for the quarter was $8,500,000 representing Since net came in at $3,400,000 for the quarter, most of this was associated with our term loan, which bears interest at 8.47% and has a 2027 maturity. DD and A expense for the quarter increased to $8,500,000 representing a sequential increase of 9.3%. This increase was due to higher depletion expense associated with higher sales volumes and additional depreciable assets placed in the service as compared to the prior period.

Speaker 3

We generated net income of $63,000,000 for the Q1, representing an impressive net income margin of 41%. Given that our IPO occurred in the middle of the quarter, our diluted earnings per share for the Q1 only included income allocated to the Class A shareholders for the last 3 weeks of the period. So you'll see diluted earnings per share of $0.03 presented on our income statement. Of course, generated $63,000,000 net income for the period as a company and we have 100,000,000 shares outstanding across our Class $22,000,000 increase in accounts receivable. This increase was due to timing and we have seen our accounts receivable balance normalized since the end of the quarter.

Speaker 3

Adjusted EBITDA for the period was $84,000,000 representing a sequential increase of 12% and adjusted EBITDA margin of 55%. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx was $77,000,000 representing a sequential increase of 15% and adjusted free cash flow margin of 50%. During the Q1, we converted 92% of our adjusted EBITDA to adjusted free cash flow Given our low levels of acquired maintenance capital expenditures and we are primarily investing that cash flow back into the business today, results were strong across the board and are highlighted by our strong margin profile. Capital expenditures for the quarter were $68,000,000 This includes $61,000,000 spent on growth projects, which is primarily the Kermit expansion and $7,000,000 spent on maintenance capital projects. We expect our capital spending on growth projects to increase through the year now that the Dune Xpress project has commenced.

Speaker 3

We expect Capital expenditures for maintenance to grow modestly over the course of the year. Note that as previously mentioned, we are funding the 2023 CapEx associated with the build out of our logistics with capital leases, so you won't see those expenditures hitting the investing section of our cash flow statement. And instead, you will see us making payments in the financing section of the statement of cash flows over the course of the 4 to 7 year lease terms. As Bud mentioned earlier, we've been distributing $15,000,000 per quarter and are doing so again That's a $0.15 per share dividend for our Class A shareholders and a corresponding $0.15 per unit distribution for The unitholders, for now, I'll reiterate this is a variable dividend and we'll continue to evaluate our plans as we work with the Board to develop and communicate a formal return of capital framework. Turning to the balance sheet, we ended the quarter with a cash balance of $353,000,000 After the IPO, we took steps to de risk our liquidity position by investing our cash into insured bank accounts and T Bills.

Speaker 3

As of March 31, 2023, our total liquidity was $427,000,000 This was comprised of $353,000,000 in cash and equivalents and $74,000,000 of availability underneath our ABL facility under which we had no borrowings outstanding. The principal balance of our term loan sits at $141,000,000 and our current capital lease balance is $27,000,000 So The total amount of debt outstanding is currently $168,000,000 leaving us in a net cash position of $185,000,000 at the end of the year, which translates to a total debt to latest 12 month EBITDA multiple of 0.5 times. Our outstanding share count at the end of the quarter inclusive of both our Class A and B shares was 100,000,000 shares. That concludes our prepared remarks for the Q1 of 2023. I will now turn the call back over to the operator

Operator

Thank you. Our first question is from Chase Mulvehill with Bank of America. Please proceed with your question.

Speaker 4

Hey, good morning, everybody. I hope everybody is doing well. I guess Good morning, guys.

Speaker 5

Good morning,

Speaker 4

Good morning. Just want to kick it off with a question about Permian frac sand fundamentals. Obviously, you provided some nice Color in the presentation on the supply and the demand side and kind of your outlook there. But can you talk about what you're seeing out in the market today? Is pricing momentum continuing to out in the market in the Permian, or fundamentals continuing to tighten?

Speaker 4

And just kind of your thoughts around the ability to for the market to absorb kind of incremental capacity that's coming into the market?

Speaker 2

Yes. Thank you. This is Bud. And I'll start with some general comments and these guys may want to add to it, John or Jeff. As we stated on the call, we are sold out of sand.

Speaker 2

We've been over 90% contracted, which In our view, it's uncomfortable level of contracting, contracted volumes, but of course we want to keep our customers happy. We'd like to have more flexibility to participate in the spot market. It seems pretty steady right now. Jeff was talking about the fact that Halliburton stated in their call that since 2019, fleets have seen a 60% improvement in efficiencies. We see demand continues to be up into the right and we're continuing to add contracts and add term on our Thanks.

Speaker 2

John or Jeff, I don't know if you want to add anything to that?

Speaker 6

Yes. I'll just this is Jeff Ellis, Executive Vice President of Sales and Marketing. I'll just add to the fact that with the product offerings that we've had historically had, we've with a good product, Large inventory and many, many years of running room with us coupled with our new offerings on the logistics side on the trucking as well as the Dune There is a definite bifurcation here that we're exhibiting within the sand and logistics market and the customers are recognizing that. As a result, we went on a we were on a quest last year to strategically target Customers that are aligned with our long term goals and we are very successful with that as Bud said over 90% contracted. And we're and as we move forward in the tangibility of our Dune Express and our logistics line come on, we're seeing a very large attraction Added contracts with these current customers as well as new contracts.

Speaker 6

And last year, we brought on contracts 3 to 5 years in duration. So we still see a strong market and a strong demand for our products and services.

Operator

Oops, sorry. Yes.

Speaker 2

I might just add one thing on that is, we were talking about the fact that our current expectations are that as we exit the summer For 2024 to be about 50% contracted and we exit the year, we expect to be about 80% contracted in 2024. So hopefully that helps with the visibility.

Speaker 4

Absolutely. Good color. Appreciate that. And just kind of related follow-up, Obviously, it sounds like things are staying tight on the frac sand side. I mean, you've got continued growth on the logistics side.

Speaker 4

So like directionally, how should we think about 2Q EBITDA? Should we think about growing flat? How should we think about 2Q directionally versus 1Q?

Speaker 3

Yes. This is John Turner, Chase. As far as the 2nd quarter EBITDA, look, I mean, we're going to have similar sales that we did in the Q1. I think we're going to have some additional, obviously, logistics sales coming on. But our real opportunity there is and we talked about it and we'll talk about it again a little bit later, I'm sure someone's asked a question about our OpEx.

Speaker 3

Our operating margins are going to improve as we continue to improve our operating costs. So obviously, we think that Something that's a little north of what we're doing today as far as EBITDA goes, but Looking like it's going to be a pretty similar quarter.

Speaker 2

Yes. I mean, as you know, Josh, the dredging is a unique advantage that we have and we're in a transition to in house to our own dredging operations, which is going to drive down our costs. And so that will show up in subsequent quarters And really improve our cost of mine and enhance our margins and obviously it's also very environmentally beneficial as well.

Speaker 4

Yes. All makes sense. I appreciate the color. It was great seeing everybody at the WAT the other week.

Speaker 3

Yes. Thanks, James.

Speaker 2

Thank you. Thank you.

Operator

Our next question is from Derek Podhiser with Barclays. Please proceed with your question.

Speaker 7

Good morning, guys. I know you already talked on your prepared remarks about your installation from the natural gas activity weakness that we're seeing Across a lot of these basins, primarily Haynesville, Eagle Ford, Mid Con, a little bit in the Northeast. But maybe can you talk about any threats that we should be The Permian supply demand dynamics that we're seeing. Maybe just expand a little bit more on your level of insulation from that natural gas weakness that we're seeing.

Speaker 2

Yes, maybe this is Bud. I'll start and these guys may want to add to it. Obviously, the disruption occurred back in 2017 2018 because the cost of transport sand from whether it was Illinois and Wisconsin or from Central Texas It was just so high relative to local sand. And so it is kind of interesting that we Tend to get grouped with the other oilfield service providers in the Permian, given there has been cost inflation And the concern that operators have about that cost inflation and pushing back and as frac crews and other Equipment that's on wheels moves into the Permian, there's more supply of services relative to the demand, which could provide the potential to reduce the cost of those services. And the irony is that it goes the other way for us.

Speaker 2

The more frac crews that come into the Permian, the more sand demand The Rios, which is a tailwind for us and it means more demand for our sand because Sand from outside the basin, when you're talking $100 delivered sand from Illinois and Wisconsin with Northern White, It's just not competitive with what Atlas provides here in the basin. So it actually plays To our benefit, the softness in natural gas and equipment moving into the Permian. And one thing as you know as well is that The Permian is the highest rate of return drilling in the country. And so it's therefore a bit insulated even when Oil prices do get a little bit soft. Operators tend to migrate their activity to the Permian, particularly to the Delaware Basin where the Dune is located and because that's the one area where they can generate a return on capital.

Speaker 2

And today the half cycle returns are Extremely attractive. So John, I don't know if you want to add anything to that.

Speaker 3

No, I mean, I think that's just like Bud said, and then So we entered we exited 2022 I guess entered 2023 with 60,000,000 tons of production capacity last year, we're estimating that we'll see we're going to see around 10,000,000 tons come on this year. And that includes the 5,000,000 tons that we're bringing on. So I mean that When you look at that, that brings you to around 70,000,000 tons of production capacity and that's still below the estimates out there for 2023 sand. I think Right. That has 77,000,000 tons out there per year.

Speaker 7

Great. I appreciate all that color. Just as a follow-up, I mean, we're hearing a lot of talk from the E and on the public stage and their earnings call talking about profit as an area of service price relief in the back half of the year. I I mean hearing from you and hearing from your largest peer doesn't really seem to be the case. So I'm hoping that you could just help us reconcile those comments from what we're hearing from the E and Ps as far as would be great.

Speaker 2

Well, I mean, it's a matter of supply and demand. And as John pointed out, the Supply of sand locally is south of current demand and that's why roughly 10% of the demand is being met by Northern White, which There's not enough supply to meet the demand because that is just not cost competitive with the local sand. Now that said, Yes, the land rush for sand, of course, happened in 2017 2018 and we tied up the best reserves were tied up then. It's a little bit like oil and gas and what happened with shale. And now you do have some Tier 3, Tier 4, some lower tier Deposits that are being mined locally, which is beneficial for those local operators because the transportation cost is lower, but it's lower quality reserves and it's like Small oilfield that it goes on to decline faster, it's just not sustainable over the long term.

Speaker 2

So those volumes that are out there Do help on the margins, but as these guys talked about, that's 10,000,000 tons that's added in the course of this year, $5,000,000 largely from those smaller deposits, which helps on the margin. But in terms of the total supply stack, it's just not that material.

Speaker 7

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

Operator

Thank you. Our next question is from Jim Robison with Raymond James, please proceed with your question.

Speaker 5

Good morning, Bud and John.

Operator

Good morning, Jim.

Speaker 5

Bud, you talked a little bit about Dune Xpress, just obviously kicked off construction, ordered a bunch of your long lead time items. Maybe spend a minute just on kind of how pricing, availability, delivery times, things like that for the Dune Xpress. I mean, at the end of the day, I think you Summed it up that you still feel like you're on time for 4Q 'twenty four operating date, but just kind of curious some of the Sausage making on how available the equipment is and pricing meeting your expectations, delivery times, etcetera.

Speaker 2

Well, yes, thank you for the question. And maybe I'll start and John can really get into more of the detail on it. But We have a history of building our own projects. We built both plants. We're doing our expansion and of course the Dune Express and We're very good at it.

Speaker 2

Our team is really good at it, having control of all the processes helps us control the budget and also the timing. And so we've been able to deliver as we are with the current expansion on time and on budget and we're off to a really good start on the Dune Express, which frankly is not as complex a project It's building our plants and the current expansion. So very optimistic about our delivering. We've worked hard to Under promise and over deliver. John, do you want to talk more about the specifics on that?

Speaker 3

Yes. So as we said on the call, we'd ordered more than 50% of our And we expect this number to be continue to go up probably be close to 70% by the end of 70 plus or minus percent by the end of When we put this project together, like Bud said, we built all of our projects. We saw when we were planning, where we saw supply chain pressures And we built that into our timetable. We feel real good about obviously The equipment that we've ordered and about the cost and the plants coming online at the end of 'twenty four, Everything as we see it right now is still on time and on budget. We got a pretty good start out of the gate here.

Speaker 3

We've broken ground on the Texas side. We've been we've cleared right away. We plan to start on the New Mexico side probably in the next couple of months. As far as supply chain goes, we haven't seen anything that we did not anticipate. And we did factor the long lead time items Into the original forecast.

Speaker 3

So, overall, we feel really good about where we stand on the project right now.

Speaker 2

And I might this is Bud. I might remind everybody that doesn't know, we built 5 miles worth of conveyor in our 2 plants, which have worked very, very well. We've had no problems with them Over the 5 years plus of their operations. So anyway, that's helpful to folks to know that We built conveyors and they're very efficient and reliable.

Speaker 5

Great. That's good color and helpful. And just one other question, Budd, for you. Seeing couple of the larger operators in the Permian like Pioneer and just yesterday, Devin Now working the guys that are acreage blessed that can do this, but working on 3 mile laterals. And I'm just curious kind of how you View that as an opportunity for you guys because that's obviously when you start going out that far, that's a lot of sand that has to be delivered in a fairly short period of time for those that type of completion.

Speaker 5

So Curious if those moves are helping you on the demand side of things as you think about delivering capacity on the Dune Express down the road?

Speaker 2

No, thank you. No, it's a real good point and just one of the number of trends that are going to play out That are going to increase the demand for proppant. Obviously, the longer laterals is just another example of efficiencies that our industry continues to drive, whether it's drilling wells and completing wells that all drive up Demand for proppant, I mean, the longer laterals mean every rig out there working and every frac crew out there working is going to be Pumping and needing more sand. The other thing is, as operators get into more of the Tier 2 and Tier 3 rocks, We think that's going to require for the tight rocks higher profit loading. In fact, in our non op business, We're seeing we're still seeing when operators experiment with higher loading and as I step into new areas in most cases, not all, but in most cases, They're seeing better economics.

Speaker 2

So, and I think particularly as you move down the road and you get into further into the Sima fracs And we're going to see more of this development drilling and more SEMA fracs. That's going to all of these things are going to compound together And increase the sand demand as we go forward. So thank you for the question.

Operator

Yes. Appreciate your answer. Thanks. Thank you. Our next question is from David Smith with Pickering Energy Partners.

Operator

Please proceed with your question.

Speaker 8

Hey, good morning and congratulations on a strong Q1.

Operator

Thank you. Thank you, Dave.

Speaker 8

I was hoping to circle back to the comments about production costs. If I'm triangulating correctly, I'm guessing your average production cost per ton came down around $0.50 or so sequentially. Wanted to check if that's in the ballpark, if that's fully due to progress on Brimin, your mining operations, the dredge mine operations fully in house and how you see production cost per tonne trending this year relative to Q1, If there's any range of cost per ton improvement that you might be comfortable providing?

Speaker 3

Yes. This is John Turner. In the Q1, Our plant OpEx was around $10.77 a ton before royalties, I believe, is what the number was. And you look at that was down from a high of around Just around $13 a ton in Q4 'twenty two. The biggest decline Down from that was due to contract mining and third party labor costs, which are really associated with bringing the Dune, I mean, bringing the dredge mining in house.

Speaker 3

In 2021, our plant OpEx was around $6.50 a ton. When you compare that with our cost today, the biggest difference is cost associated with bringing that dredge mining operation in house. So yes, as we continue to bring that Process fully in house, we expect our cost to continue to go down and continue to decrease And down to those lower levels that we've achieved in the past. So yes, that's a good observation. And our OpEx is trending in the right direction.

Speaker 3

We've already seen it happen here early this quarter early in Q2 as well.

Speaker 8

That's great color. Appreciate it. If I could ask one more. Also congratulations on the approximately 200 payloads in Q1 delivered with over 70 times per truckload. Am I correct that those deliveries started sometime in March?

Speaker 8

And more importantly, how should we think about those volumes progressing through the year?

Speaker 9

Yes. This is Chris Schola, Chief Supply Chain Officer. Just to give you some color of our delivery timeline and our intense evolution On March 20, we delivered our first double trailer to the well site with a 70 plus ton payload. And then April 5, we delivered our 1st triple trailer to the well site with almost 100 ton payload. And to put that in perspective, as we talked about earlier, That's about 4 times the standard payload that you see delivered to location today.

Speaker 9

I think a big part of your Future look question is, look, seeing is believing, right? We've had major operators and service companies out to Our logistics operation running in the field in person. Seeing the fit for purpose double and triple trailers being delivered to the well sites, It really brings reality to the transformational logistics solutions that we'll be delivering in the Permian. We've seen a high level of interest and expect additional customers to transition to Atlas Logistics solutions throughout Q2 and the rest of the year. From that perspective, look, there just aren't a lot of customers that don't want to be a part of a 70% reduction of associated traffic on public roads.

Speaker 9

That's what we see as our progression on logistics.

Speaker 8

You just answered my follow-up question. So thank you. And that's all I got.

Speaker 2

Great. Thank you.

Operator

Thank you. Our next question is from Doug Decker with Capital One.

Speaker 10

Curious how conversations are going around signing up additional customers with the Dune Xpress. How important do you view signing up contracts in advance? And is it reasonable to expect Some more views on this front over the next, say, 6 months?

Speaker 2

Yes. I think now that I think for some in the market, it was The Dune Express sounded like an ambitious concept and now it's very real. So I think the level of discussion and Jeff can speak more specifically to it has increased. It's really unusual for companies to contract out as far ahead as those 2 majors did For deliveries on the Dune Express, I mean, as you know, we have a history as operators and typically you only contract out your next budget year. Unusually at times and it would be unusual, you might go out a couple of years.

Speaker 2

And so for those 2 majors to step out like They did was really unusual. Now I do think now that the Dune Express this year is real and in their minds and it's happening. Jeff can speak to the fact that the discussions have increased, but a lot of them are just kind of trying to bridge their way forward To be there and be in the front of the line to be on the Dune Express deliveries once it's up and running. Jeff, do you want to add to that? Yes.

Speaker 2

Thanks, Budd. And this kind

Speaker 6

of follows on to the question that was asked earlier about, we're seeing more Simulfrac activity, 3 mile laterals, meaning more profit And more efficient logistics solutions. This plays right in to Atlas Energy Solutions' strength as we move forward. And what we're seeing is what we have coupled that with that right now is we have tangible surety to these customers That this project is in fact going forward. We got construction beginning. We've had several tours on our locations demonstrating this The trucks are running, the heavy payloads are running, and this surety coupled with the tangibility of what our solutions offer and as Chris

Speaker 10

Shola mentioned

Speaker 6

earlier, with regard to the sustainable benefits from the environmental social safety perspective It's just it's acting as a very large attractant to these things in terms of long term commitment. So Bud mentioned earlier on in the conversation, we expect these on a quarter by quarter basis to grow our contract volume commitments to grow And coupled with some of their roll offs that are expected as well. So look for a real favorable contract exception moving forward in the next 6 months.

Speaker 10

That certainly sounds encouraging. And just everything you've been talking about today, the outlook for Permian frac sanding supply, demand looks very favorable. What are your thoughts on just formally moving forward with Phase 2 of the Kermit expansion?

Speaker 2

Yes. I mean, a couple of comments on that. We are going to have Material growth in our production as we exit the year with this first expansion coming online. Let me just say that I think that we're very optimistic about our ability to grow production Very efficiently, when you look back at original plant design, the production expectations from those Plants was 3,000,000 tons of plant, 3 to 4, and we're producing 5,500,000 tons from each plant. I think a potential Phase 2 expansion would come next year, but I think I'm very optimistic that we're going to be able to have some maybe exceed expectations in terms of CapEx Relative to production growth in the foreseeable future.

Speaker 2

John, do you even thought it'd be more specific? Yes.

Speaker 3

I mean, and I think really what we're looking at is like Bud Sid, originally our plants were designed to produce 6,000,000 tons total. We're on a run rate right now of 11,000,000 tons. We're going to evaluate the situation as we move into the end of this year and early next. The dune express itself is 13,000,000 tons and we're going to see We're going to look at all the different options and see what kind of efficiencies we get out of the current operations. We've been very efficient In the past, and it's not taking the plant expansion off the table.

Speaker 3

It's just looking at what's the best way to achieve Those additional volumes for the Dana Express?

Speaker 2

Yes. What's the most productive capital to put to work to grow our production? And we think we have some we're very encouraged by our Opportunities in front of us to grow production very efficiently, just to put it in summary form.

Speaker 10

That makes sense. Thank you.

Speaker 2

You bet.

Operator

Thank you. Our next question is from Michael Ciatt with Stephens, please proceed with your question.

Speaker 11

Good morning, everybody. I Just was a little surprised on your decision to pay a variable dividend while you're in the growth mode here.

Speaker 5

Just want to see if

Speaker 3

you could give us any indication of

Speaker 11

the things The Board will be considering as it looks to implement a longer term shareholder return program?

Speaker 2

Yes, maybe I'll start and then John will add. This company has really remarkable margins. In fact, it's Very hard to find companies that have margins and generate cash the way that this company does. And I'll also thank there are some fundamental reasons that our industry has transitioned to Distributing capital back to investors, personally, I think it's really important because it just demonstrates The transparency of your business and your ability to generate cash and return that capital to investors And transparency with regard to your value creation. And in the case of this company, while we do have significant CapEx in front of us, We raised $300,000,000 in the offering and we're generating very substantial cash flows.

Speaker 2

We are 90% contracted this year over 90%. We think we're going to exit the year over 80% contracted next year. We just feel like we've got great visibility on the cash generation from this enterprise To accomplish both, to fund these high growth CapEx projects, high rate of return CapEx projects and to continue to distribute capital back to investors. And I do think as those CapEx investments wind down during the course of This year, that we'll become an even more powerful distributing enterprise. So I think it's a to me, it's an important message to send our investors that you are very important to us.

Speaker 2

John, do you want to add anything?

Speaker 3

I think that as we move through the year with the Board, I mean, I think it's going to be, hey, look guys, what is the What's the highest return on investment for our investors? And obviously, I think what there's multiple ways to get return back to Investors either through returning cash, investing in I mean, in growing stock price through additional growth projects We have that. So And potentially buying shares. And potentially buying shares at some point. So I mean, they will be considering all those different factors when we announced that.

Speaker 3

But we want to get closer to the launch of the Dune Xpress, when we say the launch, Finishing the completion of the Express so that we can get so we can build in a fixed dividend. The plan would be just to build in a fixed dividend And then grow that fixed dividend over

Speaker 5

time. I appreciate all the color. That's great. I guess with

Speaker 11

the Kermit plant expansion on time and on budget, you said you're at a kind of a run rate of 11,000,000 tons per year. Can you give us any sense on what you'd expect in the Q4 given where you're contracted, maybe both in terms of Production and how the CapEx cadence will look over the course of the year?

Speaker 3

So there were 2 questions there. One was that as far as before we'd be in the 4th quarter production and on CapEx cadence?

Speaker 11

You're right. Sorry, one to two questions together there. Sorry about that.

Speaker 3

Well, obviously, I think that As far as capital expenditures go, we'll be into the we'll be completing the Dune Express, But we will be

Speaker 2

In the Q4 this year, we'll be completing the expansion?

Speaker 3

No, we'll be completing the expansion, sorry, and we'll be right in the middle of the Dune Express Forecast, I don't think we've provided guidance on the exact what the timing of that CapEx will be,

Speaker 2

but Generally, we're comfortable with the analyst numbers that we've seen out there.

Speaker 3

Yes, that's right. So And then on the

Speaker 2

But I do I probably should restate that color that this company has had a history Delivering more production relative to CapEx in the past. So We're always innovating and we're always updating our modeling and analysis. And so we are optimistic That we can the expectations as we go forward as we have in the past. But We will also, in addition to working on a dividend policy with the Board, over time, we'll also be working on a policy regarding forward guidance. But At this point in time, we're comfortable with what the analysts have out there in general.

Speaker 5

Got you. Appreciate it, guys.

Operator

Yes. Thank you. Thank you. Our next question is from Keith MacKay with RBC Capital Markets. Please proceed with your question.

Speaker 12

Hey, good morning and thanks for taking my questions. Just wanted to start off with Your contracting your sand contracting really approach. So you're Highly contracted currently, but we do consistently hear E and P commentary in the market about Getting costs down. So just how do you think about looking for whether to contract the next Ton of sand or letting it float in the market. Is there a specific price where you'll be agnostic to taking on the risk of where the Forward market may go or is there other factors that really drive it?

Speaker 2

Well, this is Bud. I'll start, Jeff will probably he's definitely on the front lines on the market. But I'll just say that Again, there's a real bifurcation. When you look at pressure pumpers, The supply demand dynamic there is very different from sand. We still have 10% of the supply in the basins being provided by Northern White.

Speaker 2

We're not it's just a completely different environment for us and market for us relative to some of the other oilfield service providers. We have a non op company, so we do have real time data On the cost inflation that has occurred. And I'll just say that the rate of return on drilling projects at Current oil prices is very attractive. The Tier 1 rock is around 100%, a plus or minus. And even in the Tier 2 rock, it's 40% to 60% IRR.

Speaker 2

So I think the rate of return on projects for operators is very attractive at these levels. Jeff, do you want to answer more specifically on how the market is

Speaker 6

shaping up? Yes, I'll answer and it's really, really We manage our contracts and our clients on a portfolio basis, which means that we approach each one case by case. And what goes into consideration of that is obviously strategic value pricing and how they aligned with our strategic goals as well. And we're finding that in most cases, the high quality customers in the basin do it back align with that. So again, case by case

Speaker 12

Got it. That's helpful. And just on the Dune Express, good to hear that you've Got a bunch of the materials ordered. As you've made those orders relative to any agreements you would add before or Continental, Any anything you would have done before during the spring perhaps or in the winter? What inflation or deflation, if any, have you seen on the actual materials you've ordered relative to the pre order phase?

Speaker 3

I'd say it's come in right where we thought it was. We've been in the market prior coming up to this project with our Kermit expansion. So Things like steel costs, belts, drives, we had a pretty good handle on where the costs We're going or where we thought they would be. We haven't seen any surprises on that front yet. And we did have a number of POs prepared that were written that we were working on prior to the before we decided to launch.

Speaker 3

So, But we haven't, I mean, like I said earlier is, we've done these projects before. We forecasted And also in part of that, used our current market information to forecast. We've factored that into the forecast when we were putting this together. So we hadn't really seen any surprises on that side. Got it.

Speaker 3

That's it

Speaker 12

for me. Thanks very much.

Operator

Thank you. There are no further questions at this time. I'd like to hand the floor back over to Bud Brigham any closing

Speaker 2

comments. Thank you, operator. Thank you all for joining our call. We really appreciate your participation and look forward to reporting on our

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Earnings Conference Call
Atlas Energy Solutions Q1 2023
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