ProFrac Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
March 13, 2024

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Pro Frac Holding Corp. 2023 Year End and 4th Quarter Earnings 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.

Operator

It is now my pleasure to introduce your host, Michael Messina.

Speaker 1

Thank you, Mr. Messina. You may begin.

Speaker 2

Thank you, operator. Good morning, everyone. We appreciate you joining us for Pro Frac Holding Corp. Conference call and webcast to review our Q4 and 2023 year end results. With me today are Matt Wilks, Executive Chairman Lad Wilkes, Chief Executive Officer Lance Turner, Chief Financial Officer and Matt Zinn, CEO of the Proppant Business.

Speaker 2

Following my remarks, management will provide high level commentary on the financial highlights of the Q4 full year 2023, as well as the business outlook before opening the call up to your questions. There will be a replay of today's call available by webcast on the company's website atpfholdingscorp.com as well as a telephonic recording available until March 20, 2024. More information on how to access these replay features is included in the company's earnings release. Please note that information reported on this call speaks only as of today, March 13, 2024, and therefore, you are advised that any time sensitive information may no longer be accurate as of the time of any replay listening or transcript reading. Also, comments on this call may contain forward looking statements within the meaning of the United States federal securities laws, including management's expectations of future financial and business performance.

Speaker 2

These forward looking statements reflect the current views of Pro Frac Management and are not guarantees of future performance. Various risks, uncertainties and contingencies could cause actual results, performance or achievements to differ materially from those expressed in management's forward looking statements. The listener or reader is encouraged to read Profrac's Form 10 ks and other filings with the Securities and Exchange Commission, which can be found at sec.gov or on the company's Investor Relations website section under the SEC Filings tab to understand those risks, uncertainties and contingencies. The comments today also include certain non GAAP financial measures as well as other adjusted figures to exclude the contribution of Flotek. Additional details and reconciliations to the most directly comparable consolidated and GAAP financial measures are included in the quarterly earnings press release, which can be found on the company's website.

Speaker 2

And now, I would like to turn the call over to Prophrac's Executive Chairman, Mr. Matt Wilkes.

Speaker 1

Thanks, Michael, and good morning, everyone. After my prepared remarks, Ladd and Matt Zinn will take a deeper dive into the performance of our subsidiaries and Lance will provide additional insight into our financial performance. While 4th quarter results were challenged, we continue to take strategic actions to better position ProFrac for growth in 2024 and we are already seeing improved results in the Q1. Despite the industry headwinds that persisted in the second half of twenty twenty three, we meaningfully grew free cash flow for the year to 293,000,000 dollars an increase of 173% over 2022. This substantial cash flow generation demonstrates the earnings capabilities of our vertically integrated operating structure and the resiliency and differentiation of our services in the face of market softness.

Speaker 1

We were hindered a bit in 2023 by our exposure to the spot market and our strategy to hold prices steady when activity flattened, but we have adjusted and now enter 2024 with positive momentum. I'd also like to highlight that in 2023, we grew our asset base and improved our capital structure, a strategy that we believe will pay dividends for years to come. We completed the acquisition of REV Energy Holdings and Producer Services Holdings, which added 6 frac fleets and expanded ProFrac's geographic footprint to include the Rockies and Bakken. We also completed the acquisition of Performance Profits, which demonstrated our commitment to the Haynesville, greatly enhanced our vertical integration strategy and made ProFrac the largest provider of sand in North America with a multi basin footprint. Then in October, we announced our intent to maximize the full value of our proppant production segment, which operates through the wholly owned subsidiary, Alpine Silica, and confidentially filed a registration statement on Form S-one with the SEC.

Speaker 1

Finally, in December, we refinanced our senior secured term loan through 2 new financings, which will both mature in January of 2029. This recapitalization provides a bifurcated capital structure to allow for future optionality designed to realize the full value potential of the proppant segment as well as enhance ProFrac's overall financial flexibility. The common theme of all these achievements and strategic initiatives is that they demonstrate how highly motivated we are to enhance ProFrac's position as a leader in the oilfield services industry. And these items were executed with a very targeted approach. We will remain steadfast in our pursuit of enhancing value and strive to navigate the market accordingly with the end goal of being the industry's best of breed.

Speaker 1

Moving forward, I am pleased to report on the transformative progress we are making as well as the improving visibility we see approaching in the current market. We remain hyper focused on the operational performance that we have discussed over the past few quarters, which includes vertical integration, benefits of scale, enhancing utilization and cost control across all of our subsidiaries. In addition, today we are working even more closely with each customer to ensure strong working relationships, providing valued solutions and maintaining long lasting partnerships. We are constantly evaluating all of our efforts and evolving these key priorities in 2024. Before I get to that, however, I do want to comment on the challenges of 2023, both externally and internally.

Speaker 1

As the market flattened out, our position of holding the line on price caused us to miss out on the large efficiency gains experienced throughout the industry. This combined with the ongoing integration led to lower market share as we reduced costs to accommodate. This was a mistake. We fully appreciate the negative impact this had on our financial performance in the back half of the year. We are committing to correcting that in 2024 and getting back to our foundation.

Speaker 1

The foundation we were built on, which is maximizing vertical integration and high asset utilization is core to restoring our per unit operating costs to the lowest in the industry. Prior to 2023, we were a profit leader in our industry. When comparing our metrics, we surpassed the overall peer group each year. In 2020, we were one of the few that had positive EBITDA. In 2022, we were the 1st in our peer group to reach record level profitability metrics.

Speaker 1

Profrac expects to outperform in 2024 and gain market share regardless of whether activity rises, falls or remains at constant levels. To achieve our goals, we are focused on 3 primary things. 1st, our customers. What we do best is pump. We always have and always will.

Speaker 1

This year, we are doubling down on our efforts to ensure the entire team's focused on providing tailored solutions for the customer, partnering with the customer to achieve long term results and generate long term value with constant improvement is our value proposition. This also means that we are partnering with the right customers that set us up for success to also achieve our next goal, utilization. We have expanded our targets for the benefits of utilization across the entire organization. Today, our utilization focus is not only on total fleet count and how many fleets are deployed, but also on the efficiency of active fleets and how many hours they were able to complete. We want to improve utilization of labor hours, the utilization of our manufacturing facilities, our sand mines, as well as every single asset and team at ProFrac.

Speaker 1

We are measuring it all and we plan to improve at each and every level. This is taking one of our foundational building blocks and ingraining it across the entire organization. We have 45 high quality fleets and we are not satisfied until they are all pumping stage. Finally, our focus will continue to be on cost. We believe that we have the lowest operating costs in the industry and we are going to keep it that way.

Speaker 1

In addition, if there is a strong value proposition to improve our capabilities, our utilization or our customer offering, we are prepared to deploy capital to meet that need. However, we are going to ensure that we remain lean and effective. With these priorities front and center for all of our teams, we expect our business to lead the industry. As we grew through acquisitions and scaled up our stimulation segment, we have adapted with a multi pronged strategy suited for all customer types and have built a more dedicated business model to deliver full cycle resiliency. This year, we expect to generate a significant amount of cash that will be focused on the balance sheet and we intend to delever to a point that will put us in a position to talk about returning cash to shareholders.

Speaker 1

Our focus in 20222023 was to build the business that we have today, exploit the cash generation capability of that business and pass these rewards on to our shareholders. We will continue to execute upon our strategic goals and maintain focus on our key priorities to create long term value for our stakeholders and provide best in class services to our customers. We believe we are well positioned in 2024 for profitable growth. With that, I'll turn the call over to Ladd.

Speaker 3

Thank you, Matt. I want to start by thanking our amazing team for their hard work and dedication and commitment to safety. We're extremely proud of the reputation that our people have built with our customers. This is a direct result of an extreme focus experience and the strong culture throughout our entire organization to make customer service our number one priority. We also recognize that the team is vital in order for us to accomplish our 3 priorities in 2024.

Speaker 3

Now diving into our 2023 results, I'd like to give a state of the union for Holdings. On the pressure pumping side, we have activated 10 fleets as we focused on utilization and a dedicated customer base. We believe our profitability per spread should revert to the $20,000,000 to $25,000,000 level in line with expectations for our peers and exclusive of profit generated by the profit segment. Our focus on utilization is shining through. Starting in late Q2 2023, our white space in our frac calendar reached unsustainable levels and our pumping hours per active fleet dropped.

Speaker 3

In 20 24, we plan to improve utilization by at least 30%. While we did see some lost time in January, primarily due to weather, I'm happy to share that January was a stellar start to the year. And in the month of February, we achieved a pumping efficiency that was 20% higher than what we averaged in Q2 and Q3 of last year. And we think there is room to grow that figure as we continue to align with dedicated high efficiency customers that have strong backlog of work. Now that our recent acquisitions have been fully integrated into the pro frac umbrella, we have refocused on our core, pumping stages and selling sand.

Speaker 3

In addition, our leadership teams have been spending a lot of time on location with our operations teams across the organization, instilling a laser like focus on our strategic initiatives so that all segments are aligned in our shared goals. This has already led to quicker decision making, more direct allocation of capital and improved customer service across our business lines and we continue to improve on those fronts. Additionally, we continue gearing up and preparing fleets for reactivation this year to accommodate anticipated customer demand. We remain focused on dedicated agreements with operators at favorable prices. Current pricing levels are constructive, especially when coupled with higher utilization and optimal cost structure.

Speaker 3

We're targeting approximately 80% of our fleets to be working for customers with larger programs on a dedicated basis. We also continue to maintain a strong presence and reputation with the customers in the gassy place which we believe will pay dividends in the future. Moving forward, we continue to believe we are well positioned to be the preferred pressure pumping and proppant provider for large multi basin operators. These operators require service providers with equivalent scale that can provide custody over the supply chain of materials. This is exactly what we were built for at Pro Frat.

Speaker 3

On the profit side, we have made a lot of progress on diversifying our customer base and we think we are poised to see the increased utilization that we have discussed. Entering 2024, we made organizational changes that support our strategic initiatives for enhancing growth and we are very excited to welcome Matt Zinn and Rick Reynolds to our profit business. Matt has over 18 years of industry experience driving results and will lead the proppant business as CEO. Rick Reynolds is COO and joined us with the Performance acquisition. Rick has over 35 years of mining experience driving operational improvements and peak utilization.

Speaker 3

We have the utmost confidence in Matt and RIG and both have already provided critical value to the business in the RFP and budgeting season, setting Alpine up for major success in 2024. Today, I've invited Matt Zinn to join us and give additional commentary on current operations and our expectations for the year. Matt, take it away.

Speaker 4

Thanks, Vlad. I am honored and humbled to be chosen as the steward of the profit production segment. We are extremely excited about the assets we have and the transformation taking place within the organization. On our last call, Ladd spoke about how we are marketing all 8 mines for the first time with a focus on securing term contracts with customers at sustainable prices that support our goal of consistent high utilization of our mines. I am pleased to report that we had success over the recent RFP season.

Speaker 4

The contracts that we secured with customers over this process are a mixture of traditional take or pay and percentage of customer demand. These percentage of demand contracts, while not as desirable as take or pay contracts, align with our desire to develop long lasting partnerships with our customers with upside potential as our customers become more efficient or expand their completion activity. While we have a great foundation with this commercial approach, we have seen weather impact us in Q1 along with customer impacts related to natural gas prices. We estimate we lost approximately 300,000 to 400,000 tons of sales in January February, but expect to further increase production into the warmer months. Our Q1 utilization is expected to increase slightly from the Q4.

Speaker 4

However, we then expect utilization to increase to 65% to 75% starting in the Q2. We are confident that our focused effort on commercial and operational growth in our proppant segment will meaningfully improve 2024 metrics and results. Alpine is in the middle of a transformation and will produce higher throughput, higher utilization and lower cost per ton, and we believe that it will soon emerge as the sand market leader in 2024. I will now hand it over to Lance to provide more detail on our consolidated financial results.

Speaker 5

Thank you, Matt. To recap the year, we generated $688,000,000 of adjusted EBITDA on 2.6 $1,000,000,000 in revenue for an overall EBITDA margin of 26%. We also generated $293,000,000 of free cash flow in 2023 that was used to significantly expand our asset base both in Stimulation Services and the proppant production segments. 4th quarter revenue totaled $489,000,000 a sequential decrease driven primarily by the lower fleet count as it bottomed in the middle of the Q4. EBITDA was $110,000,000 as we experienced slightly lower efficiencies on our active assets and lower pricing for our products and services.

Speaker 5

For the Q4, Stimulation Services revenues were down sequentially to 403,000,000 dollars About 75% of this reduction was driven by our lower number of fleets. The remaining decline was driven by slightly lower pricing for our services. The number of integrated fleets fluctuated with our active fleet count, but we continue to supply approximately 30% of our fleets with materials. Adjusted EBITDA for the segment was $58,000,000 for the 4th quarter. This segment was impacted by approximately $10,000,000 in shortfall related to our supply agreement with Flotek.

Speaker 5

The profitability per active fleet for the Q4 was also impacted by white space in the calendar. In the Q1, as our focus on dedicated high efficiency customers takes hold, we expect to improve profitability per active fleet. In general, we expect 60% to 70% incrementals on increased efficiencies when all else is equal. Proper Production segment generated $383,000,000 of full year revenues, which was up substantially when compared to the $90,000,000 generated in 2022 due to the sand mines added during the year. Revenues for the Q4 were $93,000,000 down approximately 6% driven largely by lower sand pricing.

Speaker 5

Approximately 75% of the volumes were sold to 3rd parties during the Q4, which is in line with our commercial strategy to focus on customers where we can add the most value. Adjusted EBITDA for the profit production segment totaled $45,000,000 for the 4th quarter. The manufacturing segment generated revenues of $34,000,000 down approximately 22% from the 3rd quarter. Approximately 83% of this segment was intercompany revenue as we expanded our 3rd party sales during the quarter for this segment. The decrease in sales in the 4th quarter was a continued result of stimulation services reducing purchases and focusing on utilizing inventory on hand.

Speaker 5

Adjusted EBITDA for the manufacturing segment was $1,800,000 which was comparable to the prior quarter. This segment is also focused on reducing inventory levels and lead times on its product It has been impacted as steel prices have retreated and is working through raw materials purchased in 2022. We expect to remain at these levels of profitability until it works through its high cost inventory over the course of 2024 and starts adding lower market priced raw materials in the second half of twenty twenty four. Selling, general and administrative costs were $59,000,000 in the Q4, down approximately $2,000,000 primarily due to lower stock compensation costs. This was combined with a significant reduction in acquisition related as we have made tremendous progress on the integration of the recent acquisitions.

Speaker 5

Cash capital expenditures totaled $33,100,000 in the 4th quarter, down 37% from the 3rd quarter. As we've mentioned on previous calls, when we reduce our fleet count, CapEx usually takes more time to be reduced. We are pleased with our ability to act swiftly to right size our spending levels to more accurately reflect the demand we are seeing from customers and we will continue to prudently evaluate our spending going forward. As we laid out in our earnings release, we expect to incur maintenance CapEx between $150,000,000 $200,000,000 for the full year. In addition, we are targeting an estimated $100,000,000 in growth capital focused on fleet upgrades and mine optimization.

Speaker 5

We believe maintenance CapEx will be approximately $3,000,000 to $4,000,000 per fleet per year in the Stimulation Services segment. In addition, the profit production segment is planning to spend approximately $30,000,000 to $50,000,000 in total capital expenditures for the year. We will remain disciplined with our capital allocation plans and focus on allocating capital where it can achieve the best return on investment. Operating cash flow was $42,700,000 during the 4th quarter. Working capital was reduced by approximately $10,500,000 while we continue to manage our receivables and payables.

Speaker 5

In addition, we saw a $35,000,000 reduction in inventory and remain committed to utilizing our inventory on hand and expect to see continued reductions in 2024, particularly as we prepare to deploy fleets. Despite these inventory reductions, we expect total working capital to increase through 2024 as we seek to deploy additional fleets, increase efficiencies and sell more sand. Total cash and cash equivalents as of December 31st was $25,000,000 including $6,000,000 attributable to Flotek. Total liquidity at quarter end was approximately 103,000,000 dollars Borrowings under the ABL credit facility ended the quarter with 117,400,000 approximately $1,100,000,000 of debt outstanding, majority of which does not mature until January 2029. Our primary objective in the near term remains generating free cash flow for delevering the balance sheet.

Speaker 5

Everyone within our organization is laser focused on operational execution, efficiencies and providing best in class service to our customer. We believe this focus will improve our relative positioning within the market and lead to improved results in 2024. That concludes our formal remarks. Operator, please open the line for questions.

Operator

Thank you. We will now be conducting a question and answer session. Our first question comes from the line of Luc Lemoine with Piper Sandler. Please proceed with your question.

Speaker 6

Hey, good morning. Matt, with reactivating 10 fleets, it looks like you're probably displacing some competitors. Can you talk a little more about just kind of the market structure, how you're attacking this? And as you see it right now, is 10 reactivations about the right number? Or is the goal to eventually work back up to 45 fleets?

Speaker 1

Yes. So we've added 10 and the majority of those have come in the Q1. And so there was only 1 or 2 that was actually in Q4 that we added. And we expect to end at some point in this year around 41, 42. And if the market is there, we're going to go ahead and take it 45 and get full utilization across the platform.

Speaker 6

Okay. And then you cited your February pumping hours, setting a record, you added the 10 fleets. LAD, you talked about getting EBITDA per fleet back to 20 $1,000,000 to $25,000,000 annualized just kind of within the stimulation segment. Is this where you guys currently are? Or when do you see this transpiring

Speaker 1

this year? Not to put a specific date on it, we're not quite there yet, but we expect to be there in the first half.

Speaker 6

Okay. And then maybe just one quick one. I know you're not disclosing your fleet count, but just kind of trying to triangulate this roughly in 4Q, where you kind of maybe in the mid-20s and now you're in the mid-30s?

Speaker 1

That's correct. Okay. All right. Thanks, Matt. Thank you.

Operator

Thank you. Our next question comes from the line of Alex Skiblauser with Stifel. Please proceed with your question.

Speaker 7

Hi, good morning, everyone, and thanks for taking my question. Just to start us off here, just kind of following up on the prior question line, if you could just on the 10 fleets that you reactivated, I was just wondering if you could comment on sort of the pricing dynamics in the market as well as overall supply and demand and what you're seeing given what gas prices have been doing, etcetera?

Speaker 1

Yes, I think top line, the market is flattish. And so we're coming in, we're adding fleets in an environment where there's not an increase of active fleets in the market. So that is having an impact on top line. But the utilization and absorption of costs and reducing our per unit costs across the business far outweighs any concessions we make on the top line. And we expect that trend to continue as far as costs.

Speaker 7

Got it. Appreciate the color. And then just shifting gears to the drop in segment. I'm just wondering if you could comment on the current spot pricing for frac sand. And I guess just kind of your exposure to that market given your comments on contracting year to date work

Speaker 8

per quarter?

Speaker 1

I'll defer to Matt Zen on this one.

Speaker 4

We're still seeing spot pricing in the 20s depending on the market up into the 30s and some other segments, not necessarily the Permian. And we continue to see some exposure to that market, but our focus is continuing to wire longer term supply term agreements with customers and have as minimal exposure to the spot market as possible.

Speaker 7

Got it. Appreciate it. If I could squeeze one more in. I was just wondering if you could provide some additional color on your 2024 free cash flow expectations and any kind of target we think about for leverage ratio exiting the year?

Speaker 1

On services, I don't want to guide too aggressively, but we expect to generate a tremendous amount of free cash, pay down debt and it's not unreasonable for us to be able to cut our debt in half this year.

Speaker 7

Got it. Appreciate the color. With that, I'll turn it back.

Operator

Thank you. Our next question comes from the line of Arun Jayaram with JPMorgan. Please proceed with your question.

Speaker 8

Hey, good morning, gentlemen. I wanted to see if you could give us a sense of the type in pricing concessions did you yield, call it, relative to the leading edge in order to improve the utilization from the beginning of Q4? And thoughts on could this what has been maybe the reaction from your peers, from some of your market share gains? And could this do you worry that this could have maybe a destabilizing impact on the level of pricing discipline that we did observe in the industry last year?

Speaker 1

Good morning, Arun. I really don't care what it does to our competitors. I don't spend a lot of time thinking about them. We're doing what's right for pro frac. We're taking market share.

Speaker 1

We're not going to hold up pricing to their benefit and feed market share to do it. We're taking our market share back and don't really care what it does to them. What I like is what it does for us.

Speaker 8

Got it. Got it. And Matt, Ladd mentioned that a target to get to $20,000,000 to $25,000,000 in EBITDA per fleet, fleet. But we're just trying to think about our modeling on the next couple quarters, where do you think you're at from a profitability perspective as we sit here today?

Speaker 1

As we sit here today, high teens.

Speaker 8

High teens, okay. That's helpful.

Speaker 1

Mid to high teens and then before this half ends, we expect to be in that 20% to 25% range.

Speaker 8

Understood, understood. And maybe just the focus.

Speaker 1

The biggest driver for it is cost absorption and utilization rates diluting our costs per unit.

Speaker 8

Right, right. And then just maybe, Matt, your perspective, one of the recent things that we have seen as we've seen, call it, 5 natural gas companies, Cokera, Chesapeake Comstock, EQT and CNX now pulling back on CapEx. Could you talk about some of your just natural gas exposure today and just maybe potential impacts to the frac and proppant side of the businesses?

Speaker 1

Yes. We've got about a third of our business exposed to gas markets. And we don't have a crystal ball. We don't know when the gas market is going to come back. We don't know how deep or wide this gap is going to be, but we're committed to these basins and are big believers in the demand drivers that are coming later this decade.

Speaker 1

So we're staying committed to our customer base there, staying committed to these basins and welcome a huge increase to DUC inventory and hope for improving commodity.

Operator

Thank you. Our next question comes from the line of Dan Kutz with Morgan Stanley. Please proceed with your question.

Speaker 9

Hey, thanks. Good morning. Maybe just another one on the proppant business. You guys have kind of touched on some of these points already, but just wondering if you can expand at all on some of the drivers that are contemplated in utilization upside that you guys flagged in terms of will it be internal or external, any particular basins where you see a lot of potential customer types, any tailwinds from more proppant per well. From a well design perspective, just wondering if you could give us any more color on the drivers of that, I think it's 65% to 75% utilization target about later this year?

Speaker 9

Thanks.

Speaker 4

Yes. We continue to see improved demand on our Permian assets specifically and increasing utilization there. And it's a combination of 3rd party and internal. The focus right now is making sure that all of our The

Speaker 1

focus right now is making sure that all of our customers

Speaker 4

are provided great service and great product and we're continuing to focus on those areas and South Texas and the Permian are the greatest utilization drivers for increase.

Speaker 3

Great.

Speaker 9

Thanks. Appreciate that color. And then apologies if I missed this, but wondering if you could give us an update on e frac, kind of what your nameplate capacity is now, how many of those fleets are working, what plans are for some of the new builds that were maybe paused last year? And also more broadly, what plans are for dual fuel upgrades maybe in your 2024 budget? Thank you.

Speaker 1

Yes. Fuel efficiency continuing to be a major theme in this industry and it's become a really strong demand driver for us. We're not at full utilization on our eFleet, but expect to be this year. Again, this goes into how much operators spend on diesel and being able to eliminate as much of that cost as possible and grow margins alongside it so that everybody wins. On the eFleet front, we expect to be fully utilized this year.

Speaker 1

Working with operators, they're very interested in a turnkey solution that's everything from gas, power gen along with your eFleet. And so, we've begun to find a high degree of success in bundling that as a turnkey solution and expect that to get us to full utilization this year.

Speaker 9

Great. All makes sense and appreciate the color. Thanks a lot. I'll turn it back.

Speaker 1

Thank you.

Operator

Thank you. Our next question comes from the line of John Daniel with Daniel Energy. Please proceed with your question.

Speaker 10

Hey, guys. Thanks for having me. Matt, in the press release when you noted the big step up in the pumping hours in January February, is that a function of just less white space on the calendar? Or is there something from a job design, which is letting you get more hours per day or both? It's more associated with calendar efficiency.

Speaker 10

I

Speaker 1

mean, our crews are amazing. We get out regardless of customer type, we're usually pumping 20 plus hours every single day that they have available to pump. But the question is, is that 18 days per month or is it 28 days per month? Right. And so going in, working with customers on their program, making sure that we're aligning our interests with the right customers.

Speaker 1

And when you look at our revenue per pump hour, we recognize that we have to be a little bit more competitive with customers that can give us 28 or 30 days a month pumping. But what we see from getting more pump hours per month and the dilutive effect on our cost structure, it's more than worth it for us to come in and provide some top line

Speaker 10

concession. Okay. So I'm trying to translate here. It sounds like you would think you've got a better customer mix today than maybe 4 to 5 months ago. Is that a fair statement?

Speaker 1

Well, we love all of our customers, but as far as customers that can give us a high percentage of pumping days per fleet, Yes. It's the highest it's ever been. This is the highest calendar efficiency that we've ever seen from our customer base.

Speaker 10

Okay. I got another one here and this is not meant to be a gotcha question. But when you talk about full utilization later this year, are you assuming the U. S. Working frac crew count for the whole industry is growing or is this more of increased market share?

Speaker 1

So when you look at the industry, I think we suffered from our own failures in 2023. And we come in we've come into 2024 with a deficit of our own that when we overcome that deficit, we'll outperform our peer class just from stabilizing the business to where it should have been the whole time. And this we expect this to happen regardless of what the total market does. Okay. All right.

Speaker 10

And then one final one for me is probably more for Matt on the sand side, but can you speak to any RFPs, inquiries in terms of not looking for price point here, but just the level of inquiries for sand maybe back half of the year out of the Haynesville mines. Are they starting to talk about that? Or is it too early?

Speaker 4

No, we're constantly talking to our customers about their timing. Don't know that there's necessarily an RFP season for that region, so to speak, but we are closely aligned with all the major operators in that basin and we're talking to them regularly about their upcoming programs and where they think their activity may shift based on gas pricing.

Speaker 10

Okay. Fair enough. I'll leave it at that. Thanks for including me.

Speaker 5

Thank you.

Speaker 1

I'm sorry. Thank you.

Operator

And our next question comes from the line of Tom Curran with Seaport Research Partners. Please proceed with your question.

Speaker 11

Good morning. Madsen, thank you for joining the call. Great to get to know you a little bit better. Opening question for you. Could you share some color on the nature of where the CapEx spend will be going for Alpine this year when it comes to your own budget?

Speaker 4

We evaluate all our CapEx based on improving utilization or lowering cost structure. So improving reliability or lowering the cost of manufacturing. So that's our key focus is where our demand is and where we can lower costs or improve reliability. So the places that we have growth opportunity are where we're going to have the most bang for our buck.

Speaker 11

Got it. And then when it comes to utilization, could you tell us, 1, where you exited the quarter at utilization wise? And then 2, from there to, let's say, north of 70%, what do you expect the split to be between internal feeding that pro frac expected active fleet ramp and then third party sales? Again, in the ramp from where you exit utilization wise to climbing north of 70% like you're targeting?

Speaker 4

Approximately 2 thirds of the ramp is external customers and a third of the ramp is internal, just rough numbers. We continue to see strong demand based on our footprint in the Permian with large operators that have drilling programs, completion programs that spread across the basin. And we continue to see strong demand as we've reached out to those customers about their operations.

Speaker 11

And at this point, Matt, would you say you've got all that demand in hand in whatever different forms it might exist, contracts, dedicated acreage, area mutual interest, whatever the nature of how you've secured that demand, you have it and it's just a question of executing from here on the 3rd party side?

Speaker 4

Yes, we have line of sight and we're currently negotiating supply agreements as we speak. An assumption on a certain percentage of those being executed goes into that number. And then we'll execute like we have for years years.

Speaker 11

Got it. Okay. Thanks for taking my questions, Matt.

Operator

Thank you. Our next question comes from the line of Don Crist with Johnson Rice. Please proceed with your question.

Speaker 12

Good morning, gentlemen. Just one question for me. I remember from past conversations that the utilization of the sand plants was somewhere in the 50 ish percent before you acquired Performance. Is that a pretty good kind of bogey to start with and kind of where do we think it's going to go year over year as we kind of ramp towards that 65% to 75%?

Speaker 4

Yes. Our historical utilization of our mines has been around that 50%. And we as we've become more focused on 3rd party agreements, that's where the ramp comes from.

Speaker 12

Right. So we should expect somewhere in the 50% year over year kind of bogey

Speaker 1

for modeling purposes?

Speaker 8

Correct.

Speaker 12

Okay. I appreciate it. Everything else has been answered. Thank you.

Operator

Thank you. And this concludes our question and answer session. I would like to turn the floor back over to management for closing comments.

Speaker 1

Thank you, operator. The takeaway today is that we are aggressively focused on growing value for all stakeholders and we have a plan to get it done. We look forward to sharing our successes in the coming quarters as increase utilization and drive improved results. We look forward to speaking with you again on our next call.

Operator

Ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.

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Key Takeaways

  • Pro Frac generated $293 million of free cash flow in 2023, a 173% increase year-over-year, underscoring the resiliency of its vertically integrated model.
  • The company completed strategic acquisitions—REV Energy, Producer Services, and Performance Proppant—adding 6 fleets, entering the Rockies and Bakken, becoming North America’s largest sand provider, and filed an S-1 for its proppant segment.
  • In the back half of 2023, management’s decision to hold pricing flat amid a softened market led to missed efficiency gains and lost market share, a mistake they aim to correct in 2024.
  • For 2024, Pro Frac is focused on delivering tailored customer solutions, boosting fleet utilization by at least 30% with 41–42 active fleets, and maintaining industry-low operating costs through strict cost control.
  • Alpine Silica secured a mix of take-or-pay and percent-of-demand sand contracts, weather and gas prices dampened Q1 volumes, but utilization is expected to rise to 65–75% by Q2, driving segment growth.
AI Generated. May Contain Errors.
Earnings Conference Call
ProFrac Q4 2023
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