Atlas Energy Solutions Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 6, 2024

There are 11 speakers on the call.

Operator

Greetings. Welcome to Atlas Energy Solutions Incorporated First Quarter 2024 Financial and Operational Results Conference Call. Please note this conference is being recorded. I will now turn the conference over to Kyle Turlington, Vice President, Investor Relations. Thank you.

Operator

You may begin.

Speaker 1

Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the Q1 of 2024. With us today are Bud Brigham, Executive Chairman and John Turner, CEO, President and Chief Financial Officer. Bud and John will be sharing their comments on the company's operational and financial performance for the Q1 of 2024, after which we will open the call for Q and A. Before we begin our prepared remarks, I would like to remind everyone that the 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 outcome and results could differ materially. You can learn more about these risks in the annual report on Form 10 ks we filed with the SEC on February 27, 2024, 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 the morning'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 Q1 conference call. In addition to reviewing our Q1 results, we'll spend some time this morning providing an update on the great progress we are making integrating Hi Crush and Atlas since the closing of that acquisition in early March. Additionally, we also need to discuss the recent fire at the Kermit facility and perhaps more importantly, the impressive response from our team to maintain both safety on-site and reliable supply of sand to our customers throughout the disruptive event. I will go ahead and state that no other proppant producer could have possibly continued delivering proppant to their customers the way Atlas has. Our differentiated scale recently enhanced our acquisition of Hi Crush and their great people, our associated production redundancies and our geographically distributed production assets uniquely position Atlas to continue reliably serving our customers even through rare unexpected disruptions.

Speaker 2

And whether it's a fire, severe weather or traffic accidents, disruptions do occur. Atlas makes the Permian supply chain more reliable and sustainable. Briefly reviewing the events. Around noon on Sunday, April 14, a fire broke out at our Atlas Kermit facility, damaging equipment involved in our feed system, which takes sand from the separation and drying process to our silos. Due to the quick actions of our employees and quick response from the West Odessa, Kermit, Monahan's and Andrews Fire Departments, the rest of the plant, including all production centers was unscathed.

Speaker 2

This incident was limited to affecting our ability to load trucks at Kermit and did not impact our ability to produce sand. Thankfully and most importantly, we quickly ascertain that all of our employees and vendors were safe and accounted for. I want to again thank the first responders and our team of wonderful employees here at Atlas for keeping everyone safe and limiting the damage to the plant. Within hours of the incident, our sales and supply chain teams began notifying our customers of the event and also began taking the steps to ensure their supply needs would continue to be met, resulting in uninterrupted service and 0 sand related non productive time at customer well sites through the incident. Again, I think it's obvious that no other company could have accomplished under 48 hours, mobile loadout equipment and mobile silos began showing up at our Kermit plant to lay the groundwork for a temporary loadout solution while we began conducting repairs.

Speaker 2

Within 11 days from the fire, we reopened the Kermit facility and began loading trucks with sand. Today, the Kermit facility is loading close to 6,000 tons of sand, which is about a third of our throughput prior to the incident. By the end of this month, we expect to receive all of the necessary equipment to completely rebuild the damaged feed system and we expect the damaged portion of the Kermit plant to be fully restored by the end of June. This quick turnaround is another clear demonstration of Atlas's unique culture. Our exceptional team collaborated across our entire platform of distributed assets almost instantaneously.

Speaker 2

Shocking. To think that we reopened the Kermit facility within just 11 days of the fire still seems unbelievable. But knowing the quality of our people, I know at this point that I shouldn't be surprised. When you partner with Atlas, you can count on quality and reliability even under extreme circumstances. Again, thanks to our great people, our innovative culture, our unmatched scale, our relationships and our diverse distributed assets that we are uniquely able to perform through these disruptions.

Speaker 2

I could not be prouder of how we have responded to this unexpected setback. With respect to the incident at Kermit, we wanted to provide more information about what happened and the improvements we are making to address the risk of a repeat event in the future. We see these events as opportunities to make Atlas better. 1st, now that we have completed a root cause analysis, there are a number of contributing factors that combined to result in the fire starting in the feed system between the plant and the silos. These factors included mechanical and process failures.

Speaker 2

We are responding by taking a number of actions to improve our systems and processes to protect us from the risk of reoccurrence. For example, in the near term, we have enhanced and increased inspections and preventative maintenance procedures. In addition, some of the technological enhancements in the design and construction of the Dune Xpress, specifically the multilayered belt detection system and more advanced auto lubricating systems will be installed in our feed systems at the plants. This is important to spend a moment on. The 5 years of design and the significant investments in technology we've made in planning the Dune Express, particularly in automation around preventative maintenance events, addresses the risk of an incident like this occurring on the Dune Express.

Speaker 2

For example, in addition to the smart idlers we've been discussing previously, we will have dual monitors on the pulley bearings for 2 separate systems, one for preventative maintenance and the other for real time monitoring and prevention of catastrophic failures, as well as dual monitors for belt detection and slippage with interlocks to stop the conveyor if the belt is loose or slipping. The system will be hardwired to shut down the conveyor if a fault is detected. Further, all pulley bearings will be auto lubricated, which will mitigate the risk of incidents. Lastly, on the Dune Xpress, monitors, sensors and cameras will provide real time data and security along the 42 mile conveyor route. I believe that Dune Express is likely the most technologically advanced bulk material conveyor ever built.

Speaker 2

Wrapping up my section, subsequent to the closing of the Hi Crush acquisition, the Board of Directors named John Turner as Chief Executive Officer effective March 6, 2024. As Executive Chairman, I will remain very active in the company's operations, continuing to provide leadership, ideas and vision to company's management team. And I will continue to focus on identifying innovative strategic opportunities. John and I were founders of Atlas back in 2017. And as a proven oil and gas entrepreneur, John has been and will continue to lead our outstanding management team to successfully manage day to day operations, while building Atlas into the premier proppant and logistics company in our highly competitive industry.

Speaker 2

Atlas has a big future and I believe John's leadership and executive experience working with the rest of our outstanding management team will result in continued innovation and growth to continue creating shareholder value. In addition to the much deserved promotion of John Turner, effective May 13, Atlas is pleased to announce the appointment of Blake McCarthy as Chief Financial Officer of Atlas. Blake most recently served as President of NOV Grant Pratico. We welcome Blake aboard and are excited to have his leadership and expertise to help guide Atlas into the future. With that, I will now pass the call over to John.

Speaker 3

Thank you, Bud, for those kind words and I echo your comments regarding the addition of Blake. I look forward to working side by side with Blake as we navigate the road ahead for Atlas. Blake's expertise in integration and acquisitions along with his deep understanding of financial markets and the oil service industry will be a welcome addition as we have just started our journey as a public company. The Q1 was an exciting period for Atlas with the closure of the Hi Crush acquisition, the completion of the Kermit expansion and commissioning of the first of 2 new state of the art dredges. The acquisition of Hi Crush is already off to a great start.

Speaker 3

In March, Hi Crush set a monthly volume record for their Kermit plants. And Pronghorn along with Atlas' Last Mile set a monthly record for total loads. We successfully floated our 1st new dredge in February and recently floated our 2nd in late April. We expect the commissioning process for both dredges to be completed by the end of June. And we are well on our way to a Q4 2024 commercial end service date for the Duke Express.

Speaker 3

Atlas continues to evolve into a more integrated provider of diverse solutions for our customers as emphasized by our addition of Pronghorns logistics footprint, which amplifies Atlas' offerings of the Dune Express and expanded payload capacity logistics assets. It has been a remarkable 1st year as a public company. Our team has a lot to be proud of, and I'm sure proud of them. Regarding the Hypris acquisition, we are off to the races with our integration, and it is exciting to think about what the combination of these very talented and innovative workforces will be able to accomplish as we share resources and best practices. We are working through the identification of additional potential synergies beyond the $20,000,000 that we initially announced at the time of the acquisition, the tie in of Hi Crush's Kermit operation to the New Express, the potential for dredge mining to be brought to Hi Crush Kermit and the combination of our utilities infrastructure and procurement programs are among some of the potentially impactful initiatives that we are currently working through.

Speaker 3

We have received positive feedback from our customers on the acquisition and look forward to better serving our customers through the combined offering of the Dune Express, the Encore Mines and the Last Mile solutions. The addition of Hi Crush truly provides Atlas with an unparalleled portfolio of profit and logistics assets. Regarding logistics, Atlas remains the market leader in last mile with 28 crews of which 24 are in the Permian. We now deliver over 50% of our total sand volumes using our last mile crews. Not only is Atlas leading with fully integrated solutions, we are also leading with technology.

Speaker 3

Building on our digital platforms capability to monitor proppant inventory at our customers' well sites, we released our automatic ordering feature, a seamless technology assisted sand offering feature based on live inventory and operational data feeds. Our off the order feature provides the foresight to keep our sand production optimized, while also giving our customers confidence in meeting their operational targets. On the heels of OptiOrder, we also released Gen 1 of our Opti Dispatch feature, a first of its kind digital functionality to autonomously schedule, optimize and dispatch sand delivery without human intervention. Combined Opti Ordering and Opti Dispatch set the Atlas' digital platform well ahead of the competition. Our automation, efficiency, scale and innovation continue to drive market differentiation, while advancing the digital transformation of the Permian Basin.

Speaker 3

Operation of Encore 8 is currently underway and we expect that unit to commence sales later this month under a long term contract with an existing customer in the Midland Basin. This is the 3rd Encore unit deployed with this customer, further validating the value proposition the Encore solution delivers to operators and the leadership position the Oncor team has established within the infield mobile mining market. Of note, number 8 is a larger unit with the production capacity roughly double that of our 7 other units that are currently deployed in the Permian. Regarding future Encore deployments beyond 8, we have placed orders with our vendors for the equipment that will compromise Unit 9. We expect to take delivery of this equipment in the Q3 and have multiple mine sites secured under option agreements.

Speaker 3

We are in advanced discussions with a number of potential customers about the deployment of this unit. The construction of the Dune Express remains on time and on budget and was not impacted by the events last month at our Kermit facility. We have more than 200 personnel on the ground daily working on construction and we continue to make great strides and remain confident on our Q4 delivery timeline. Notable construction milestones include As of the end of April, we have substantially completed both of our major highway crossings, 16 of our 20 leased road crossings and 9 of our 19 cattle and wildlife crossings. The installation of the sand feed system for the Dune Express, which we have described as the pant leg design, commenced in April and will run through June.

Speaker 3

The installation of the concrete sleepers will be completed by the end of this month. At the end of April, more than 60% of the conveyor modules were completed and we expect to be 95% complete by the end of this month. And as of today, 95% of the belt has been flaked and is ready for installation. Thanks to our strong first quarter results, the heavily contracted and low cost nature of our business and the quick turnaround at the Kermit facility, we're going to increase our dividend 5% to $0.22 per share, up $0.01 when compared to our dividend last quarter. Based on this dividend and our closing price on May 3, we now have a current annualized dividend yield of 4%.

Speaker 3

Pro form a maintenance CapEx beyond 2024 is expected to be around $60,000,000 annually, providing Atlas with multiple avenues to further increase shareholder returns once the remaining growth CapEx associated with the Dune Express subsides. The overall sand market remains steady. Recent improvements in oil prices have not led to a pickup in activity yet, but it has changed the conversation from how low the rig count can go, which was the dialogue in the fall, to today's topic of when will the recovery occur. Frac efficiency remains a nice tailwind for Atlas and our peers. One of the main benefits of consolidation in the Permian is the increased mix of simul and trimel fracs, which today represents more than 20% of the Permian's completions market.

Speaker 3

Furthermore, we see continued year over year growth in drilling and completion efficiencies, which amplifies the effect of fleet additions, resulting in increased levels of proppant consumption. Atlas remains highly contracted for 2024, de risking much of the sand price volatility for this year. For the Q1 of 2024, which includes a 27 day contribution from Hi Crush, we reported total sales of $193,000,000 Our revenue from profit sales was $113,000,000 on volumes of 3,900,000 tons. As expected, we saw the Q1 get off to a slow start in January from an activity standpoint, but return to a more normal cadence for February March. Our average sales price for the Q1 was approximately $29 per ton.

Speaker 3

Moving to service sales, which is revenue generated by our logistics operation, we reported $79,000,000 in revenues for the quarter. In total, cost of sales excluding DD and A for the quarter was $107,000,000 which consists of plant operating cost of $40,000,000 and logistics operating cost of $67,000,000 For the Q1, our per ton plant operating costs were $10.88 which was negatively impacted by less dredge feed as we were commissioning the new dredge in March and thus we were more dependent on traditional mining throughout the quarter. We expect the commencement of both of our new dredges to provide incremental improvements in operational performance and further reductions in our mining costs once the rebuild of the Kermit facility is complete. Royalty expense for the quarter was $3,000,000 SG and A expense for the quarter was $29,000,000 which includes $11,000,000 of non recurring transaction costs and $4,000,000 of non cash stock based compensation. Cash interest expense for the quarter was $6,000,000 which was offset by $2,000,000 of interest income generated during the period.

Speaker 3

We expect our interest income to decline in future quarters we draw on our cash reserves to fund our growth projects. DD and A for the quarter was $17,000,000 and we generated net income of $27,000,000 representing a net income margin of 14% and an earnings per share of $0.26 Net cash provided by operating activities was $42,000,000 Adjusted EBITDA for the period was $76,000,000 representing an adjusted EBITDA margin of 39%. We expect our adjusted EBITDA margins to decline in subsequent quarters as we ramp up revenue from our lower margin logistics segment and incorporate the lower margin profile from the Hi Crush acquisition. Adjusted EBITDA margin should improve in 2025 with the commencement of the Dune Express. Adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx for the quarter was $71,000,000 yielding an adjusted free cash flow margin of 37%.

Speaker 3

Lastly, we spent a total of $88,000,000 on growth projects in the Q1, $75,000,000 of this spend was for the Dune Express with the majority of the remaining $13,000,000 going towards the completion of the Kermit plant expansion in our new Encore facilities. Cash and equivalents at the end of the quarter stood at $187,000,000 with total debt of 481,000,000 dollars For the Q2, we expect a $20,000,000 to $40,000,000 EBITDA impact from the fire that occurred on April 14th in subsequent 11 day plant closure, which implies our 2nd quarter financial results will be in line with the results of our Q1. The EBITDA impact is from having to source meaningful amounts of lower margin third party volumes, the loss of some spot sand sales and higher OpEx costs associated with a more manual less efficient temporary loadout implementation which will be in place until the FEED system is rebuilt, which is expected to occur in late June. As mentioned earlier, the fire had no impact on the plant's production centers and once the rebuild of the feed system is complete, we expect the plant to resume normal operations in the Q3 after a normal ramp up. We expect the rebuild costs to be fully covered by our insurance policies minus a $250,000 deductible.

Speaker 3

Once again, we do not expect the event to have any impact on the timing of the construction of the Union Express or cause any NPT for our customers. Although a modest financial impact, I could not be more proud of the quick collaboration, teamwork and resourcefulness of our employees to limit the impact and quickly reopen our facility so we can reliably serve our great customers. To the extent the fire has any additional lingering impact to our financials, we will update guidance when appropriate. That concludes our prepared remarks and we will now let the operator open the line for questions. Thank you all for joining in on our Q1 call.

Operator

Thank Our first question is from Shawn Mitchell with Daniel Energy Partners. Please proceed.

Speaker 4

Hey, good morning, guys. John, Budd, congrats on the hire. I think you are very lucky to have Blake McCarthy join the team and it's a great hire. But moving on to kind of business, you guys were able to reopen the plant pretty quickly after the fire, which was quite impressive. Can you walk us through the steps taken in the collaboration you talked about required to kind of reopen so quickly?

Speaker 3

Yes, sure. I'm going to I'll just start and I'll let Chris kind of walk into the details. But obviously very, very, very proud of the team and the way they performed there. I mean, it was a collaboration that came across with both Atlas and High Crush employees coming together. Chris Schola has led those efforts out there and obviously to get the operation back up, but I'll let him let him Doug go through what exactly we did.

Speaker 3

Yes. Thanks, John. So first, we really had to take

Speaker 5

a step back to understand our post event process capabilities at the plant. So after that evaluation, we saw, look, our wet plants, dryers, screening tower and load out equipment were essentially unaffected. So we can produce sand, but the challenge was finding a creative way to load sand into the trucks. We were able to modify the conveyors under our screening tower to enable a redundant flow of sand to our new temporary loadout stations. These conveyors are bidirectional, one direction feeding haul trucks that transport sand to our temporary loadout and the other direction feeding a ground level zipper conveyor that transports sand to the loadout.

Speaker 5

In the last week, our zipper conveyor has proven capability to handle the main feed with the haul trucks becoming a pure bleed backup solution. It was incredible to watch all the different teams come together across our newly combined organizations. This was an absolute combined effort involving leadership and functions from both companies, including manufacturing, last mile, loadout, encore, construction and safety functions. Look, no formal integration process was required here. It just occurred organically.

Speaker 5

Our teams and leadership naturally came together to develop a creative solution to get our current facility back online and serving our customers. The fact that within 2 weeks our Kermit facility was loading trucks was an accomplishment, nothing short of incredible and hats off to the entire team. I think this highlights our combined company's strength, scale and adaptability as well as our deep relationships across the industry that will continue to differentiate Alice in the future.

Speaker 2

Hey, Sean. And just last thing on that, as I mentioned on the call, I think this validates our our view on scale and the culture that High Pressure obviously had and we had of innovation and collaboration makes us more reliable. No other company could have done could work the way Atlas has through this disruption and it makes us it's making the Permian better.

Speaker 4

Got it. Thanks, guys.

Speaker 1

That's a great response. Appreciate it.

Operator

Our next question is from Jim Rallison with Raymond James. Please proceed.

Speaker 4

Hey, good morning everyone and obviously again great job on running the fire drill of what you guys had to do. John, maybe for you, just a couple of questions around the dredges. Everything seems to be on time from commissioning. Maybe A, just a reminder of the cost impact on OpEx, once those things are fully set up and running starting in the Q3. And I noticed in the slides you mentioned the trial of using one of the older dredges up at the High Crushes Kermit facility.

Speaker 4

Just how are you guys as you've had time to look at that, maybe how are you thinking about that opportunity and odds of success up there?

Speaker 3

Yes, as far as the dredges go, we're looking at obviously once we get these 2 dredges commissioned up and running, working together, we're looking at potentially at probably around a $3 decrease in cost per ton out there on a mining basis. That would just be at Kermit. So back in 2021 when we were feeding all of our mining feed through our dredges, we were running it, I think around 6.50 a ton on OpEx basis. But obviously, we have you probably won't see that in that entire number hit our entire OpEx base because obviously, we have a lot more assets in the system now as it relates to you got Monahan's and you've also got all the Alarm Farm mines as well. As far as what's going to happen with the Kermit dredge, yes, we're going to decommission a dredge or take a dredge out.

Speaker 3

We're going to run that dredge over to high crest. They have a pond over there that we're going to go out and we're going to put this rental dredge out there and see if it works. That's probably not going to happen until later this year. We just want to make sure that we want the team focused on getting these 2 new dredges up and running and commission and running together. The likely I don't really know what the likelihood of success is.

Speaker 3

We do know they have a pond that they can float that dredge in. I think the part of that is, I don't think that they were willing to bring up to sign a long term contract to bring a judge down to see if it would work. But given that we still have one on lease, we're going to run over there and see how this works out. And if it doesn't work out, is there any other ways that we could utilize that dredge feed at the other Kermit mines if we're not able to dredge mine over there? I still think there's an opportunity to utilize dredge mining across the entire Kermit facility up there, which would be both the Hi Crush and the Atlas mine.

Speaker 3

So we're still in the early stages of figuring that out, Jim.

Speaker 4

Got it. That's helpful. And maybe one for Bud. Bud, you had one of your largest competitors recently get taken out by private equity. Just kind of curious your view on that from both a valuation and strategic perspective and how you think that might impact the market?

Speaker 2

Yes. Thank you. Obviously, it's good to see a very sophisticated investor like Apollo recognize that U. S. Silica was trying to get a really depressed value and pay a premium for a good business with excellent free cash flow.

Speaker 2

And so I mean, I would encourage investors to look at Slide 17 in our deck. It just that's obviously a very objective confirmation of what's shown on that slide, but this company Atlas is really special in terms of our margins and our cash generation and our growth profile. And those attributes certainly merit a much higher multiple than what we're seeing, probably more in line with the midstream or production and field services type enterprise. And so there's a lot of opportunity here for to see our multiple expand, particularly as our distribution expand with the growing cash flows in the Dune Express in 2025.

Speaker 3

Thanks for that. Thanks guys.

Speaker 2

Thank you.

Operator

Our next question is from Scott Gruber with Citigroup. Please proceed.

Speaker 3

Yes. Good morning. Good morning.

Speaker 6

Congrats to you, John, on the motion and to Blake, I'm sure he's listening. I want to come back to the OpEx question. You guys have long discussed the benefits of these dredges. Just curious, just in terms of putting it all together with the new high crush assets as well, As you get these dredges up and running and kind of move into 2025, should we still be thinking around a $9 per ton OpEx figure for next year? Is that the

Speaker 3

bogey? Yes, I think a $9 that's what we're kind of shooting for. Obviously hoping that we get some additional benefits from the integration and from some synergies in there, but I think $9 range is probably a good number to look at. Okay.

Speaker 6

Great. I appreciate it. And then coming back to the Dune Express, just wanted to get some updated color on contracting the associated loads. I mean, we're just now 6 months out for or so from start up. So what are you hearing from customers around the system and any additional color you can provide on especially longer term contracts associated with the system?

Speaker 3

Yeah, we don't necessarily have Dune Express contracts, but what we do have are contracts that will be taken sand off the Dune Express. There's basically sand and logistics contracts with a number of operators that are operating in the Delaware Basin. A lot of our customers that are going to be taking sand off the Nuna Express are very excited about it because they're obviously wanting to take trucks off the road and make it safer. They also see the efficiencies that are going to come up with the Den Express. They see the well site efficiencies, the ability to utilize pure assets to deliver more sand to the well site.

Speaker 3

So look, I feel very good about where our contracting sits as it relates to the sand supply and logistics contracts for Delaware Basin customers. And we're also right now currently working with some customers getting them signed up, some folks that we don't currently work with getting them signed up with contracts, to take sand off the Nuna Express. And then one of the thing is right now is we are running 13 Delaware Basin crews right now. And Chris, you may want to talk about that. I mean that's something that we've been working hard on to increase our exposure there.

Speaker 3

But go ahead.

Speaker 5

Yes. From a we know that Dune Express is coming on and continuing that build to be able to seamlessly integrate those customers in Dune Express. I think years ago, we approached this as going after pure Dune Express type of contracts. And I think what we've seen through that transition work the Running those 13 crews and having them naturally come in and take all the mileage off the public roads, see the efficiency of the Dune Express and the multi trailer operations. We expect our current customers in the Delaware that customer set continue to grow with current customers flowing seamlessly right into the Dune Express upon commissioning.

Operator

Our next question is from Derek Podhacer with Barclays. Please proceed.

Speaker 7

Hey, good morning guys. I was wondering if you could provide us an update on how you're looking at pricing moving through this year. I know it's come down quite a bit. So pricing, volumes obviously had an impact the Kermit mine, the volumes are on the sideline. And then just the amount of your volumes that are contract, just an update around those three items would be helpful for the rest of the year.

Speaker 3

Yes. So first off is I'll talk about pricing and some contracting that we are recently been we're still signing contract. We're signing contracts probably somewhere in the mid-20s. And those are obviously a lot of that also includes logistics, which is different. So that's just the price of sand.

Speaker 3

Right now, we have around 80% of our contract, our volumes for this year contracted. We are still there are still a number of contracts that we're currently working on. The contracting season really runs from probably let's say the Q4 all the way into the probably middle to end of Q3. I mean probably say August timeframe. That's kind of the time that we are contracted at.

Speaker 3

That's when we're really The spot volumes, we had we let those go. The spot volumes we let those go. Obviously, we think those volumes would be coming back. And then there's also taking additional volumes, we've got some spare capacity in that mine that's coming on out there. So taking additional volumes, we've got some spare capacity in that mine that's coming on out there.

Speaker 3

So look, I think that going through the year, I mean, there's still a number of contracts out there to be had. And obviously, we're looking at both sand and logistics contracts here, not just sand contracts. So I don't know if you can anybody, Christian, if you

Speaker 2

want to comment? I want to talk a little bit about the efficiencies. I mean, we certainly have a tailwind with the continued improvement in efficiencies for the frac crews out there with more SomaFlex and Trifracs, etcetera. So that's a tailwind for us. And we'll see I personally am optimistic about the fundamentals of oil prices.

Speaker 2

And the sense is nobody knows, but the sense is that the private operators are probably going to pick it up a little bit in the second half of the year and that should be constructive.

Speaker 3

And I think we're internally, I mean, I think we're seeing sand demand up probably 10% to 15% year over year. I mean, that's there are some other forecasts that we've seen out there that are higher than that. But obviously, I think the frac efficiency, even though you hadn't seen a significant increase in the number of crews running, but you are seeing with the simulafracts and trauma fracture starting to see more sand pumps per say per well, I mean, I think it's a per crew plan for monthly.

Speaker 1

And Derek, one more thing to add real quick. The increased adoption of electric fleets is certainly helpful for that rise in completion efficiency. So those are a lot more efficient than dual fuel where you have a diesel fleet. So that's certainly helping drive that demand.

Speaker 7

Right. That's all very helpful. I appreciate the color. I just wanted to think about 2025 CapEx. I know you mentioned in the opening comments about $60,000,000 being towards that maintenance book.

Speaker 7

Could you help us with what potential growth projects that you'll see in 'twenty five, obviously small versus 'twenty four, but thinking about additional Encore units or additional logistics pronghorn units, Obviously, we're going to have a big step down in CapEx, free cash flow increases, you're raising the dividend. I'm sure you will have a more structured capital allocation return program in 'twenty five. Just to help us think about 2025 CapEx, any other moving pieces aside from that $60,000,000 of maintenance would be helpful.

Speaker 3

We haven't laid that out. I mean, obviously, there's going to be some run over from the DIN Express. I mean, the DIN Express will be commissioned by the end of the Q4, but there's still going to be some CapEx next year probably. I don't know how much that's going to be, but we can but there's other things we'll be looking at as we are looking at potentially deploying some additional Encore units. The autonomous trucking obviously is we'll be hearing more about that here soon as we proceed down the path of delivering sand autonomously, there's going to be some probably some CapEx related with probably some mobile load outs and things like that off the Data Express.

Speaker 3

There's going to be but I don't we don't have any big projects, but I would say, and currently in our plans that could change. But

Speaker 2

Yes, in general, as you know, we've been through a period of very heavy CapEx when you look at the expansion that we had in the Dune Express and we're ramping down on that. And so it's pretty remarkable in my view the fact that we've been had these healthy distributions even through that high level of investment in CapEx, but it does it's ramping down here in the second half of the year and particularly as you point out in 2025. So we're going to be in a very, I think, a relatively luxurious position given our margins and our cash generation to be able to ramp up the distributions, but also to invest in some CapEx, some more high rate of return projects to drive efficiencies for the industry and drive up reliability. And of course, the Dune Express is a big part of that, the high capacity trucking and eventually autonomous delivery. So 2025 is looking really exciting in that regard.

Speaker 7

Great. Good stuff. Thank you, guys. I'll turn it back.

Speaker 2

Thanks, Andy.

Operator

Our next question is from Keith MacKay with RBC Capital Markets. Please proceed.

Speaker 8

Hi, good morning. First started, I wanted to ask about your appetite for acquisitions from here. I know you certainly just closed on a sizable one and there's lots of organic growth opportunities within the company. But also the experience you've added to your C suite today might suggest that inorganic opportunities are still a potential priority for you. Can you just sort of lay out how you think about acquisitions going forward?

Speaker 3

You want to go?

Speaker 2

No. Go ahead.

Speaker 3

Okay. Sorry. As far as acquisition go, obviously the Hycrest acquisition has a big one. The integration has really kicked off. And we're in full we're working on that integration.

Speaker 3

Obviously, things are going very well. They're bringing these 2 teams together. We don't have anything identified future as the future goes as far as acquisitions go, but I will tell you that that is something that we will continue to evaluate. We've got we kind of look at acquisitions from the same way as we look at any sort of project here, any sort of large project. We've got return goals.

Speaker 3

We've got what does it do that help us enhance our story with our cash flow return story. So we're looking for high margin businesses. Does it meet our internal rate of return project hurdles? There's obviously a number of things that we look at when we're making these investments. But we do like I said, as we just like I said, we just took this High Crest acquisition down, but we're going to get that integrated.

Speaker 3

But yes, we are going to continue looking at opportunities to grow our and then create value for our investors through acquisition.

Speaker 2

Yes. And I'll just add just a general comment. Obviously, given the rate of return on our projects such as the Dune Express and the high capacity trucking and our margins and our cash generation, it is a high bar. But as you can see from the Hycrus acquisition, that was an extremely accretive acquisition. And I am optimistic that we will have more acquisitions in the future.

Speaker 2

It's just we don't have anything we can point to right now.

Speaker 8

Okay. Appreciate that. And maybe if we just think about it a little bit from the customer standpoint, lots of customer consolidation happening in the Permian right now. Can you just talk about what that means for oilfield services in general and your position within the market as well?

Speaker 2

Yes. Thank you. I'll start and these guys may want to add to it. Scale matters and as a former operator, we've appreciated that and recognized that and you're seeing that execution by operators to grow their scale that enables them to drive down costs and drive up their margins. And there's a lot of leverage associated with that.

Speaker 2

And there's the same thing is true on the oilfield service side. And particularly for Atlas, it's the largest proppant producer, the largest logistic provider, we saw it through this recent disruption that our scale and our culture, our innovative collaborative culture and our great people enable us despite disruptions to be able to perform and deliver for our customers. So I think we're benefiting from that and it's important that we continue to operate as efficiently as we can to reliably service our customers. So I think Atlas is in a unique position. Nobody could have performed the way that we have through that disruption and we're going to continue to perform that way.

Speaker 2

I don't know if you want to add to that.

Speaker 3

I mean, yes, I mean, I think it's a lot of customers are looking for Obviously, with the large Obviously, with the large logistics offering, I mean, there's no other company out there that can provide that. And we're going to continue to build on that to be to continue to serve our great customers.

Speaker 2

Yes, we're done. Nobody can announce that.

Speaker 3

Perfect. Thanks very much. That's it for me.

Speaker 2

Thank you.

Operator

Our next question is from David Smith with Pickering Energy Partners. Please proceed.

Speaker 5

Hey, good morning and thank you. Good morning. I want to reiterate that congratulations on the incredible response to the buyer as well as the hiring of Blake McCarthy.

Speaker 3

I thought it was really

Speaker 5

impressive that over half of your Q1 volumes were delivered with your own logistics. And sorry if I missed this detail, have you talked about what you're seeing for your average delivery volumes in the areas to be served by Gen Xpress? And if you're seeing a greater mix of double and triple trailer deliveries, but really how do average volumes per delivery compare to where you would expect them to be once Dune Express is fully online? Yes, I think from a total volumes perspective, the Dune Express capacity with current average monthly volumes per crew today, we'll need to be up around that 20 to 21 crews is what we're looking at. As you've seen us, right, our business looking at the last mile side of things, 7 crews 7, 8 crews out there, we see as highly probable as we continue down that pathway.

Speaker 5

Yes, absolutely appreciate it. And maybe I asked the question the wrong way. But when thinking about you've got the 120 trucks, right? And total delivery capability is really going be a function of turns per day and average volumes per trip to the well site. So I was more thinking about that average volumes per trip to the wellsite if customers are taking real advantage of the ability to deliver 2 or 3 trailers at a time.

Speaker 5

So I guess you're asking the multi trailer success?

Speaker 3

Yes.

Speaker 5

So from a multi trailer side of this, we've recently opened up our an additional depot up in Polygon 6, which will be the end or the end of the Dune Express lies, opening up pretty significant volume for us there. We've now run double and triple trailers with 5 customers out there. And we continue to see our average payloads go up. I believe with our first triple trailer starting out April 5 last year to where we are today with now 2 depots, looking to open a third one here shortly. I think our customers that are utilizing them, we've even had customers look and modify their completions program to optimize the use of double and triple trailers.

Speaker 5

So while 2 years ago people thought this was a very creative but would never happen idea, it was the same thing with the Dune Express, right? And once our customers see the efficiencies that they gain on location, minimizing the trucks and also getting those trucks off the public road, We've had nothing but success in there and also in recent conversations with folks to even optimize the pad layout and sizings around double trailers. So I think those type of actions and conversations for our customers really show where this is heading with the multi trailer operations. Great color. Thank you for the update.

Operator

Our next question is from Neil Mehta with Goldman Sachs. Please proceed.

Speaker 9

Yes. Thanks for this. And Budd, thanks for your comments. John, congrats on your promotion and Blake, you as well. My first question is just around the Dune Express.

Speaker 9

As we think about construction, we are getting really close to come into service. So what are the last kind of gating items? And can you give us a sense of your confidence interval around executing some of the last bottlenecks that might exist?

Speaker 3

Obviously, the Den Express construction has been moving along. We have 200 over 200 people out there working on the construction of that. The fire itself is not going to impact the Doon Express Construction at all. In fact, I think it's going to enable our crews to install the tie into the plant more quickly. As far as the next bottlenecks, I mean, I think the next milestones for us is going to be starting to commission this commission to start commissioning the commissioning process, which is supposed to start at the end of Q3, early Q4 and then we'll be obviously won't be selling any sand off the Express for a while, but the commissioning of that process is going to take another 3 up until the end of Q4

Speaker 2

to John about what that commissioning is that we'll be running

Speaker 3

Yes, I mean it's just with the commissioning process is just getting up to you're not really running these sand down the belts, but what you're doing is you're running those belts to make sure that they the belts tracking to make sure that they're working in order, making sure that you've got all the bugs worked out. But as far as the miles, I mean, as far as the kind of the gating items, we've ordered all the equipment. We've got all the folks out there working on the construction. We've already done our 2 major overhead road crossings, major overhead crossings. We still got some we still have some cattle and wildlife processing to go and some lease road processing to go.

Speaker 3

But everything is moving along as expected on the Danish press.

Speaker 9

Thanks, John. And then you alluded to this free cash flow inflection, which we see in 2025 as well, and the potential to return more capital to shareholders. Do you have a preference in terms of doing it through the dividend versus buybacks? Or is it price dependent? Just talk about the framework of of how the Board is thinking about the return of capital.

Speaker 3

Right now, we're really focused on returning cash to our investors. We think that paying that dividend is obviously something that we're really focused on as an organization. I would say stock buybacks is not something that we've really discussed. That's something that we will likely be putting into a formal plan here in the next before we get to the end of this year. But right now, what we're focused is really at returning cash to our shareholders.

Operator

Thanks, Jeff. Our next question is from Subrah Pan with Bank of America. Please proceed.

Speaker 10

Hi, good morning, Budd and John. If I can just go back to the High Crush integration, I know there were a couple of questions early on. But if we come back to that and as you move through the integration process as you're going out and talking to the customers, looking at the assets, not just ComEd, but the Encore assets. Can you share some feedback you have heard from the customers, from the ops teams out there, both positive, negative, just that you have owned those assets for, I think, just around 2 months right now?

Speaker 2

Hey, maybe I'll just make a real quick general comment and then you guys may want to add to it. This is Bud. I mean, obviously, Atlas prior to the Hyattros acquisition, we had a really strong customer base in the Delaware Basin and our John Open Dunes and our high capacity trucking and our logistical business has been serving and the excitement over the Dune Express has attracted a really strong customer base for Atlas in the Delaware Basin as the largest producer in the basin even prior to high crush. And clearly, high crush did a great job with the Encore mine, so proximity of those mines to the operators in the Midland Basin, which gave them a very strong customer base in the Midland Basin. So it's obvious that the customers are really excited about that now we provide we're logistically advantaged to both the Midland and the Delaware Basin to make it the benefit of Atlas' scale and the liability and quality.

Speaker 2

And so it's been very positive. I don't know if you want to add to that. Yes.

Speaker 3

I mean, I think Budd just boiled it down. I mean, it's about locating our mines, our sand proximal to every well site out there. And a lot of concerns that customers had about going with a single sand provider. They couldn't if they were in the Delaware Basin, then they need to stand in the Midland Basin that we weren't going to be able to provide that. But today, we're delivering stands obviously to the back of the blender, to all of our customers across whether they're in the mid whether a Midland Basin player, Delaware Basin player or both, and just adding to that scale to be a better partner for our customers.

Speaker 10

Okay, awesome. Awesome. Just one more for me. Maybe just talk a little bit about your pricing strategy. I'm thinking pricing strategy more broadly from a Kermit versus Encore perspective, right?

Speaker 10

Because Encore is a very different kind of asset. I'm assuming you would continue to have slightly lower price, but longer duration contracts on those assets. But maybe you can talk to that a little bit and just maybe remind us that if the $26 to $28 per ton pricing guidance that you gave for the full year, is that still the right place to be?

Speaker 3

We're not really talking about what our pricing strategy is out there. Obviously, that's something that we've obviously internally work on here. What I will say is we have a low cost to produce sand and we're going to bring those costs down. So we are very competitive when it comes to obviously sand delivery. It's obviously both sand price and delivery costs.

Speaker 3

It's really it's about loans cost to the well site. And so that's really kind of where we focus there, Sean.

Speaker 10

Okay, perfect. Okay, John. Thanks for that. I'll turn it back.

Speaker 2

Thanks. Thank you.

Operator

We have reached the end of our question and answer session. I would like to turn the conference back over to management for closing remarks.

Speaker 3

All right. We'd like to thank everybody for joining us for our Q1 call, and we look forward to reporting our 2nd quarter results on our next call. Thank you very much.

Speaker 2

Thank you. Thank you everybody. Bye.

Operator

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.

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Earnings Conference Call
Atlas Energy Solutions Q1 2024
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