Atlas Energy Solutions Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 6, 2024

There are 14 speakers on the call.

Operator

Greetings, and welcome to the Atlas Energy Second Quarter 20 24 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, VP, Investor Relations.

Operator

Thank you. You may begin.

Speaker 1

Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the Q2 of 2024. With us today are Bud Burgum, Executive Chairman John Turner, CEO and Blake McCarthy, CFO. Bud, John and Blake will be sharing their comments on the company's operational and financial performance on the Q2 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 this call will include forward looking statements as defined under the U. S.

Speaker 1

Securities laws. Such statements are based on 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 annual reports 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 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 press release we issued yesterday afternoon. With that said, I will now turn the

Speaker 2

call over to Bob Brigham.

Speaker 3

Thank you, Kyle, and thanks to everyone for joining us today for our Q2 conference call. Before we jump into many of the exciting developments at Atlas, I first want to thank everyone involved with the response to the fire at our Kermit plant on April 14. The combined efforts of our employees and first responders transformed this event into a strong testament to the unique culture of Atlas. It also served as a demonstration of our unmatched advantages, particularly our distributed mining and logistical assets, and thus the associated redundancies, which uniquely enable us to reliably serve our customers even in the most extreme and challenging circumstances. While the fire and the ensuing operational challenges negatively impacted our 2nd quarter results, our team worked around the clock to ensure that every single one of our customers had all of their supply needs met during the quarter and that they didn't miss a beat in their critical development plans.

Speaker 3

Our customers have options when it comes to proppant suppliers. But in Atlas, they can be confident given that they have the partner with superior distributed mining and logistics assets, a partner who is constantly looking for new ways to improve safety and reliability. We will always move heaven and earth to fulfill our obligation to them. We will always put our customers first. Thanks to the effort from our operations and construction teams, the rebuild of the Kermit facility feed system was completed by the end of June and has since returned to full loadout operations after a brief ramp up period in July.

Speaker 3

Given that preventing a repeat incident is of the utmost importance, the rebuilt feed system now incorporates significantly enhanced safety equipment, including rip detection technology, misalignment switches, enhanced belt tracking rollers and both fixed and mobile fire suppression equipment. Most of these concepts were developed for the Dune Express and we now plan on adding them to the feed system at our Monahance facility in the near future. While events like the fire are never welcome, adversity makes good organizations better. I truly believe that Atlas is a better company than it was just a few months ago. And for that, all of the credit goes to our employees.

Speaker 3

To all of you listening today, thank you for all your effort, creativity and Can Do's spirit. I could not be prouder to be on your team. Wrapping up my section, these are very exciting times at Atlas. Our initiatives to make the Permian a more efficient factory on the ground are advancing at a very exciting pace. John will cover these in some detail, but importantly, the construction of the Dune Express, our 42 mile overland conveyor system continues on pace and on budget.

Speaker 3

We are now just months away from commissioning, and I believe it will be a major step change advancement for proppant logistics in the Permian Basin with even more to come. With that, I will turn it over to John.

Speaker 4

Thanks, Bud. And you're right. These are exciting times for Atlas and the Permian Basin as a whole. Before I get into my prepared remarks, I would like to congratulate Chris Sciola on his promotion to COO for Atlas. Since joining Atlas in 2017, Chris has proven to be an effective and creative leader.

Speaker 4

In 2019, Chris led our entry into the oilfield logistics market. With this promotion, Chris will lead all of our operations. Congratulations, Chris. You deserve it. With the Dune Express now just months away from commissioning, we are in sight of our goal of running commercial sand down the conveyor by the end of this year.

Speaker 4

39 out of the 42 miles of conveyor modules have now been installed and we remain both on time and on budget with our original construction plan. Our crews began installing the belt in July with installation expected to wrap up by the end of September. The flood zone crossings were completed in June along with 3 of the 6 major road crossings. Additionally, more than 90% of the 76 pipeline and lease road crossings are in place as are most of the wildlife and cattle crossings. Delivery of the electrical houses is expected in September.

Speaker 4

With power concerns growing in the more regulated New Mexico market, it is worth reminding everyone that Atlas already has an electricity service agreement in place. As we approach the end of construction, the initial commercial phase of the project now becomes critical. Today, we have more than 9,000,000 tons of sand contracted for delivery into the Delaware Basin next year and a line of sight on incremental volumes to add to that total. In addition to the continued progress on the Dune Express, we continue to push forward in our other initiatives aimed at revolutionizing profit logistics. On July 23, Atlas entered into an agreement with Kodiak Robotics, whereby Kodiak will outfit a select number of high capacity trucks with its cutting edge autonomous driving technology.

Speaker 4

In May, Atlas in partnership with Kodiak made the first ever driverless commercial delivery of Sand to a well site. Using the Permian Basin's expansive private lease road network, a driverless truck travels more than 21 miles from our drop depot just off Frying Pan Road to a customer's well site with no personnel inside the cab. Once at the well site, an on-site employee opt into the cab and unloaded the sand. The vast swaths of private leach roads We believe this has the potential to offer a safer, more reliable, last mile delivery solution to our customers in the Permian Basin and could represent a step change in oilfield logistics. Atlas has ordered the first two trucks equipped with the Kodiak Driver, which is Kodiak's industry leading autonomous system and we plan to launch commercial operations with those trucks in early 2025.

Speaker 4

While we do not expect this partnership to have a material impact to our 2024 financial results, we are excited about this partnership's long term potential impact to our logistics operations and results. Moving to the broader market, 2024 has proven to be a much more challenging year for the oilfield. Despite a relatively strong crude take, the combination of continued operator consolidation and weak natural gas prices has led to a decline in drilling and completion activities this year. The Permian rig count is down approximately 10% over the past 12 months and is expected to remain relatively stagnant through the back half of this year. The decline in activity levels combined with the majority of service demand emanating from a shrinking pool of operators has led to falling utilization rates for most service lines and a commensurate loosening in pricing behavior.

Speaker 4

The Permian profit market remains one of the few, if not only, relative bright spots in terms of year over year demand growth, driven by longer laterals and continued growth in completion efficiencies. The continued adoption of both Simul and Trimul fracs, which are now estimated to comprise approximately 25% of the market, the accelerating deployment of efficient electric track fleets and the higher profit intensity of new well designs are all combining to support the Permian profit market. Despite a double digit decline in rig activity, profit demand is still expected to be up slightly year over year. To provide some quantitative backing to this, the average amount of sand pumped by a frac crew is an increase from approximately 40,000 tons per month just a few years ago to more than 65,000 tons today with many of the leading edge crews now pumping more than 100,000 tons. Nevertheless, with the recent industry supply additions over the past 12 months, the supply demand balance in the Permian profit market is notably looser now than it was this time last year.

Speaker 4

While several of our larger customers are using the recent pricing relief to lock up volume with term at attractive prices in the mid-20s, we have seen spot prices at levels we believe to be near breakeven gross margin levels for our less advantaged competition and well into the negative fully loaded cash flow territory for several of them. It's in market conditions such as these that Atlas' advantaged reserves operations really shine as we are still able to generate healthy margins and returns of pricing levels that cause some of our competition to struggle. While it's certainly a lot more fun to be riding away for frothy pricing, markets like today's are ultimately healthy for the industry as they typically drive subpar operators out, incentivize continued consolidation and ultimately lead to much healthier markets in the future. Relatedly, I wanted to briefly touch on the U. S.

Speaker 4

Fish and Wildlife Services' June 20th decision to lift the Dunes Ageless Lizards on the endangered species list. As many of you are aware, Atlas has been a member of the 2020 Candidate Conservation Agreement with Assurances or the CCAA. The 2020 CCAA was developed to provide a conservation strategy framework for companies operating in the Permian Basin by establishing certain guidelines such as limiting annual service to services to 60 acres among other requirements. In addition, the CCAA instituted an annual habitat conservation fee and permits companies to set aside acreage or take other conservation actions to offset the fee. As a member of the CCAA, we do not expect to see any disruptions in our operations due to the listing of the new sagebrush lizard.

Speaker 4

However, we do believe that the listing will have both short term and long term impacts on overall industry supply over the coming years as it will likely become increasingly more difficult for mines with smaller acreage position to remain in good standing and with conservation measures while maintaining current production levels. A quick update on our Encore operations. During the quarter, we launched Encore 8 the Midland Basin. Encore 8 is a larger mobile mine than our prior deployments with a production capacity just north of 1,000,000 tons annually. Additionally, we are currently in the early stages of deploying an additional Encore unit in Loving County near the New Mexico, Texas state line.

Speaker 4

Atlas' commitment to innovation continued to be on display throughout our organization as exhibited by our partnership with Kodiak that we will look to pair with the Dude Xpress, mobile mining and high capacity multi trailer operations. We strive to make the Permian a more efficient, safer and more reliable basin for our employees, customers and the communities in which we operate. I will now turn the call over to Blake to discuss our 2nd quarter results and outlook. Thanks, John.

Speaker 2

For the Q2 of 2024, Atlas reported revenues of $288,000,000 up 49% sequentially from Q1 levels due primarily to a full quarter impact from our acquisition of Hi Crush. Adjusted EBITDA was down slightly to $72,000,000 or 25 percent of revenue. Net income was $14,800,000 or 5 percent of revenue. As I will detail shortly, the impact from the fire damage at 1 of our Kermit facilities proved to be more significant than we had initially expected at the time of our Q1 call. However, the vast majority of this incremental impact was offset by superb performance from both our other plant operations and our logistics business, allowing us to generate adjusted EBITDA that was roughly in line with that of the Q1 results.

Speaker 2

Revenues from product sales were approximately $128,000,000 on volumes of 4,900,000 tons, yielding an average sales price of approximately $26.07 per ton for the Q2. These figures do not include sand tonnage purchased from third parties in the open market to fulfill customer obligations due to the fire. Service revenues were approximately $159,000,000 during the 2nd quarter, approximately double the levels of the Q1 due to a full quarter impact from the Hi Crush acquisition and continued growth in our legacy business. Our logistics team set a quarterly record for loads delivered during the quarter, delivering more than 50% of our sand volumes utilizing our own last mile crews. We had roughly 26 crews running during the quarter and believe that number will continue to grow modestly in the second half of the year as we approach the commercial in service date of the Dune Express.

Speaker 2

The logistics business was running on all cylinders during the quarter. And while we do expect some normalization in results during the second half, the Atlas Logistics team continues to cement itself as a leader in the industry. Cost of sales excluding DD and A were approximately $202,000,000 Plant operating expenses excluding DD and A were approximately $68,000,000 or $13.84 per ton, significantly above our normalized levels. The increase in our plant operating expenses was largely due to costs associated with the temporary load out at our Kermit facility, lower throughput and a delay in the commissioning process of 1 of the dredges. The total financial impact from the fallout of the fire incident came out around the top end of the $20,000,000 to $40,000,000 range that we gave on our Q1 call.

Speaker 2

Our team on the ground has performed exceptionally throughout the rebuild process with the construction process finishing by the June 30 target. The facility was ramping back up to normal operations over the course of July and has now returned to normal lowdown operations. However, due to the ramp up period, we do not expect our Q3 average OpEx per ton metrics to fully normalize, but do expect them to return to normal levels by the end of the year. While the Kermit rebuild garnered the most attention during the quarter, I would be remiss if I did not mention the exceptional performance achieved by our other plant operations. Our Monahans and other Kermit facilities were quite simply humming, overachieving on both the production and efficiency targets.

Speaker 2

Additionally, Encore volumes were the 2nd highest in company history despite 2 units being offline for relocation during the quarter. Our Q2 SG and A was approximately $27,000,000 a figure that was inflated by approximately $6,000,000 of acquisition related costs and approximately $5,000,000 of stock based compensation. Moving forward, we expect to realize incremental corporate synergies in the Q3 and expect SG and A to return to a more normal level in the $15,000,000 range. Royalty expense was approximately $4,000,000 cash interest expense was approximately $11,000,000 offset by approximately $2,000,000 of interest income. We expect our net interest expense to rise slightly in coming quarters as we draw on our cash reserves to fund our key growth projects.

Speaker 2

Operating cash flow for the Q2 was $61,000,000 and adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx was $67,000,000 dollars yielding adjusted free cash flow margin of 23%. Capital expenditures during the quarter totaled approximately $259,000,000 towards growth and the rest of maintenance. Our growth CapEx consisted of $77,000,000 spent on the construction of the Dune Express, $31,000,000 for the additional Encore deployments and $19,000,000 of spend associated with the rebuild of the feed system at Kermit. We've already been reimbursed for $10,000,000 of the Kermit spend and excluding a small deductible, expect to be fully reimbursed by insurance for the remainder. Maintenance

Speaker 4

CapEx for

Speaker 2

the quarter was approximately 5 dollars Cash and equivalents stood at $105,000,000 against total debt of $480,000,000 Looking ahead to the 3rd quarter, we expect production at our Kermit facility to steadily increase over the quarter after the ramp up period in July, yielding an approximate 20% sequential improvement in total Atlas volumes. Combined with the continued strong execution from our other plants and our logistics business, we estimate Q3 EBITDA to be in the range of $90,000,000 to $100,000,000 with the company exiting the quarter at a higher run rate. Due to the strong cash profile of our business, we are increasing our dividend to $0.23 per share, which represents a 5% increase over the prior period or $0.01 per share. We have elected to move away from the base plus variable dividend structure to a standalone ordinary dividend. Based on our closing share price of August 2, our annualized dividend yield is 4.9%.

Speaker 2

That concludes our prepared remarks. We will now let the operator open the line for questions.

Operator

Thank you. We will now conduct a question and answer Our first question comes from Jim Rallison with Raymond James. Please proceed.

Speaker 5

Good morning, gents, and congrats on getting Kermit back up and running in a timely fashion. Maybe Bud or John, there's been some press here over the last quarter on kind of trucking rates being depressed in the Permian and kind of curious how you view that as far as impacting your logistics business and how that might play into your margin outlook for as Dune Express ramps up into next year?

Speaker 2

Hey, Jim. Good morning. It's Blake here. I think this is a really good question for our newly minted COO, Chris Sola, who's joining us here to answer. So he's the one with the most day to day real time exposure to this phenomenon.

Speaker 2

So we'll pass over to Chris.

Speaker 6

Yes. Thanks for the question, Jim. So look, while trucking rates in the Permian, they have fallen throughout 2024, Our structural advantages really starting to shine through as you see in the numbers. Let's think about this from a macro level to start. So while the sand demand, it does continue to grow out there, innovations such as our Mobile Mini Mines and Dune Express reduced the wellsite haul distances by over 50%.

Speaker 6

So the shorter haul distances and higher associated truck turns that ultimately decreases the number of trucks that are required to service the Permian. With trucking rates already at breakeven pricing, we don't anticipate a further decline in pricing, but we do anticipate inefficient trucking companies continuing to exit the Permian Basin. For us, it was never about just starting a trucking company, right? It was about executing a long term strategy to be the lowest cost to operate and most efficient logistics provider in the Permian. I mean, let's just walk through and look at the steps we've taken to get there.

Speaker 6

We vertically integrated into trucking. We've launched our own digital payload. We've delivered sand to a well site without a driver. And lastly, we've become the closest to the well site in the Midland by acquiring the Mobile Minis. And look, our margins will only be further enhanced with the launch of the Dune Express in Q4.

Speaker 6

While trucking prices have fallen in an order of magnitude, it's really only marginal compared to our structural cost differences advantages. We are revolutionizing sand delivery in the industry and excited and really excited that we are just getting started.

Speaker 2

Yes. And Jim, adding on to Chris there, we get a lot of questions about trucking pricing impact on potential Dune margin contribution. I think it's important to remember that when Atlas Management underwrote the decision to build the Dune Express, it was stress tested every which way. And our base case assumptions are actually very much in line with today's market conditions, not with the frothy things that we were seeing 18, 24 months ago. So needless to say, we remain very confident in the financial impact of the Dune Express status moving forward into 2025.

Speaker 5

Appreciate all the detail and look forward to that. And maybe following up, Blake, you talked about 3rd quarter volumes kind of ramping 20% sequentially. And you guys also earlier in the call just talked about the rig count and some of the offsets that have actually kept Permian sand demand flat to up marginally this year despite that. Maybe just color as you're ramping into Kermit being back up and running and Encore number 8 and soon Encore number 9, Just kind of how you're seeing customer demand on your end? Are you guys relatively sold out?

Speaker 5

Just trying to think about how we should look at volumes even beyond just the Q3 as you see it today?

Speaker 2

Well, I think that our sales team has been making great progress on the contracting front recently. As I mentioned in the prepared remarks, we've already have more than 9,000,000 tons secured for next year in the Delaware. And we think we've got a long a strong line of sight on some incremental contracts in the coming weeks. So all in all, we're feeling pretty good about how we're positioned for next year based on where we are in the calendar right now. Obviously, we're watching the market.

Speaker 2

We'd love to see this slow trickle of rig count decline find its footing. But sand is going to continue to be a critical component of all the well activity out there. And so the positive trends are still secular trends are still there.

Speaker 4

Got it. Appreciate that.

Operator

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

Speaker 7

Thank you. Maybe just expanding on the logistics outlook in the near term, very strong 2Q. Just any color on 3Q end to the back half of the year? Certainly appreciate that. It sounds like it'd come off a little bit from last quarter's results.

Speaker 6

Yes. When we were thinking about

Speaker 2

I mean, really when you think about Q2 logistics results, I mean, they were like really hitting on all cylinders. And it was one of like they threw a perfect game. And while I think that we have the absolute best team in the business, betting on somebody continuing to throw a perfect game every quarter seems like fool's errand. So there's some perhaps some natural conservatism built into our guidance there just because it's a complicated business. There's a lot of moving parts.

Speaker 2

But we don't see any real degradation in market conditions versus in the Q3 versus what we saw in the Q2.

Speaker 7

Okay. And then maybe hopping over to the proppant side, maybe just a little more color on the supply and demand. Are there any indications that competitors might be taking some supply off the market? And then just from a demand standpoint or maybe more specifically a pricing standpoint, are there any cost price adjustments we need to be thinking about going forward?

Speaker 4

This is John. Coming into this year, we expected the sand supply demand balance to be looser than we witnessed due to the I guess because of the rig count and the decline in the rig count we are witnessing in that count has continued like Blake said, continued to slowly trickle down throughout 2024 in that sand pricing faces headwinds. There are some things though, a few important things to remember when you think about sand pricing for Atlas as we move forward. First, we do believe spot price, spot sand volume pricing is currently at prices where mines at the high end of the cost curve are faced the question of selling sand to breakeven or negative margins, or even if they should even shutter. We're hearing many so we are hearing more and more of anecdotes of ship cuts and potential mines.

Speaker 4

While this is painful for the industry and our competitors, this is obviously positive for pricing dynamics in the long run. And obviously sand prices sand plants are complicated operations. You just don't flip the switch and turn them right back on. So we're starting those plants requires quite a bit of time. So that's the first thing is, we are hearing that plants are shut that plants are starting to shut down, cut shifts.

Speaker 4

So I think you are going to see an impact there. Second, with the distressed state of some of our competition, we are seeing some bifurcation in the sand market based on reliability. We completely understand our customers procurement teams are looking to grab as much price as they can, but they also understand reliability of supply will always be paramount over securing the cheapest ton of sand. It's a lot more expensive for a frac crew to be sitting around waiting for sand than it is to pay a couple more dollars per ton. So Atlas' reputation for being a true service partner who's been make sure you'll get the we'll be able to deliver the sand and have it on the well site.

Speaker 4

So when it's it'll always be there very reliably. This is a reputation that we are something that we've earned really with going all the way back to the pandemic when most of our competition was shutting down a mine or 2, we stayed open. We continue to supply sanding. We generated positive EBITDA through that period. So I think from our competition standpoint, I think we are getting close to you're starting to see where companies that our competition, they don't perform and they're not going to perform financially because of where their cost structure is.

Speaker 4

And then finally, Atlas was designed, when we put the company together to be the lowest cost producer of sand, it was designed to flourish in markets like today. Our assets are at the far end of the low end of the cost curve and combined with our market leading logistics business and allows us to generate returns well beyond our cost of capital at these current prices and gain the incremental market share. This position will be strengthened further as we bring on the Jet Express early next year.

Speaker 3

I might just add, I mean, a couple of related trends that are really important is our cost structure is trending down as well over the subsequent quarters. And together in addition to that, of course, our CapEx is also ramping down very substantially. So it's a really exciting time, particularly as you look forward into 2025 for us.

Speaker 7

Sounds encouraging. Thank you.

Operator

The next question comes from Derek Podhazier with Barclays. Please proceed.

Speaker 3

Hey, good morning. I want to

Speaker 8

ask a question on state of the market in the Delaware Basin where the Dune Express is going to be servicing. You maybe just talk about some of the customers out there, some of the frac equipment out there, really the overall demand of the Delaware? Do you expect to have any competition for mobile minis market share from the Duke Express, simul and trimo concentration? Just your overall view of the Delaware just to help quantify us the actual demand pull and how much the Dune Express will be servicing? And then lastly, will the Kermit mine legacy Atlas be able to handle all the volumes going out there or will you be pulling from legacy high crush Kermit?

Speaker 3

Yes, this is Budd. I'll start, but some of these guys may want to add to my comments. There's the two basins, the Delaware versus Midland, are very different, both in terms of the customers, but also in terms of the sand supply. We purchased high crush because of the Encore mines in the Midland Basin were very attractive logistically to Midland operators and that's brought a very complementary customer base to us. The Delaware is very different.

Speaker 3

There's not the smaller sand deposits out there and there's not the many mobile many mines out there that provide the supply. We are very much advantaged in the Delaware with our high capacity trucking and with the Dune Express coming online. And so there's nothing that can match the Dune Express in terms of the cost structure, the reliability, dependability, and of course, the environmental impacts as well, so benefits that it provides. So we see a substantial majority of substantial portion of our sand sales in the Delaware will be provided by the Dune Express. You guys may want to add that?

Speaker 4

Yes, I mean, if you look at it, if you just sand demand is roughly 70 something 1000000 tons, roughly half of that is in the Delaware Basin. You've got so that means that we're going to be able to push 12,000,000 tons down the Dune Express. I mean, obviously, there's a significant amount of supply that's not supplied

Speaker 2

off the Dana Express.

Speaker 4

We think we're going to be fully utilized off the Dana Express once it's up and running. You also a large part of the Delaware basins in New Mexico. And so you do have and that's what that's really the area that the Dune Express is serving. So I mean, the competition out there for San Dimas is key there because of the regulatory environment in New Mexico. So So obviously I think we do serve our Kermit mines, do serve most of the most serve mostly the Delaware Basin and the Kermit mines that we currently have like the Atlas mines will be the ones that will be serving on the Dana Express.

Speaker 4

We don't necessarily expect to pull anything off of the high crush mines.

Speaker 3

I might add one thing, and I think you all everybody on this call appreciates this fact, but the Delaware Basin, the Northern Delaware Basin is the best producing province in the entire country. It's got the deepest inventory and the highest rate of return drilling in the United States. So we're very well positioned to serve that market.

Speaker 8

That's really helpful. And then maybe just on the type of frac equipment that's out there. Do you see a lot of silos and trios concentrated in the Delaware versus the Midland or e fleets, just looking at it from that level?

Speaker 6

Yes, I think from my perspective, we continue to see adoption of Simuls and Trimuls, e fleets across the board, not only in the Delaware, but also in the Midland. We don't see any major trend differences between the two, but really operators looking to get more efficient. And as it gets more efficient, right, that's really where our value proposition comes to play is removing that sand bottleneck of logistics sand on the well site, so that our operators and customers can continue working down that road of efficiency.

Speaker 8

Okay, great. All very helpful. I'll turn it back.

Operator

The next question comes from Sean Mitchell with Daniel Energy Partners. Please proceed.

Speaker 9

Good morning, guys. Thanks for taking my question. Maybe to kind of follow-up on Doug's question around simulfrac and frac design. If you think about the evolution of kind of frac designs, you went from zipper fracs to simul fracs. It took a while for guys that were doing zippers to kind of adopt simul fracs.

Speaker 9

They wanted to see kind of the results, I guess, of other guys doing it. It feels like more people are picking up Trimel fracs. Are you seeing that in particular I'm thinking trimal frac to trimal frac. Are you seeing that more today than you were a quarter ago because it seems in the calls we're seeing more people at least testing it?

Speaker 6

Yes, we're definitely seeing increases. I mean it's a joke around here around we're going to get to the Octo frac soon, right? But all in all, it's we're going to continue to see that trend move upward.

Speaker 4

And the pace of evolution of the industry has I mean, it's certainly come

Speaker 2

a long way over the last half decade, where like I said, zipper fracs took a number of years to really saturate the market. It seems like the next new innovation takes a matter of weeks, not months at this point.

Speaker 3

Yes. And this is Budd, I mean, that trend should continue. When you look at operators, it relates to the reason operators are consolidating. They need more scale. They need stronger balance sheets.

Speaker 3

The throughput on capital and sand is up into the right. And so Atlas is the one profit and logistics provider that can match up and provide that throughput that these operators need for those operations.

Speaker 9

And then Bud, maybe one more for me. Just you mentioned cost structure moving lower. Can you provide any more color around that, particularly for 'twenty five or Blake?

Speaker 2

Yes. I think well, first of all, through the back half of the year, that's just getting back to normal operations. We've always had the lowest structure. It was elevated certainly, not just with the rebuild process, but also with the amount of yellow iron and rental equipment we had on-site this past quarter. Throughout July, we were moving a lot of that off.

Speaker 2

So that gives you a large chunk of the mobilization there as we go through Q3. Towards next steps, I think we're continuing to explore more Norway's just in everyday operations to lower whether it's through automation, whether it's through electric dredging. I think that we had a I thought a pretty exciting press release a couple of weeks ago with the terms of the autonomous trucking partnership with Kodiak. These are all we're continuing to look at ways every day where we're just iterating over and over again to continue to drive our cost structure lower. It's Atlas never sleeps when it comes to getting our costs down.

Speaker 9

All right. Thanks guys. Congrats on getting back after the fire.

Speaker 4

Thanks, John.

Operator

The next call comes from Don Chris with Johnson Rice. Please proceed.

Speaker 10

Good morning, guys. I wanted to ask, since you bought Hi Crush, you kind of jiggered the numbers around a little bit. But looking towards next year, how should we be thinking about maintenance CapEx? And what should that number be going forward? And obviously, your growth CapEx is going to fall significantly once you finish doing Express out.

Speaker 10

But how should we look at those two numbers as a complete kind of CapEx number for next year?

Speaker 2

Hey, Don. It's a little too early for us to talk hard numbers around 2025 CapEx. Obviously, with the Dune Express coming online at the end of the year, 2025 CapEx is going to be down pretty hard year over year. We do have some exciting growth opportunities in front of us that will justify some incremental capital. But there's certainly nothing compared to the size and scope of the Dune Express or the Kermit plant expansion that we had recently.

Speaker 10

Okay. And Bud maybe or John one for you. Obviously spot prices are pretty low right now. How are you thinking about contracting for next year? And how is that kind of push pull dynamic going amongst your customers?

Speaker 10

I'm assuming they want to lock up super low pricing and you don't want to. Is that the right way to think about it?

Speaker 4

I mean, they want to lock up super low pricing. I mean, I guess one thing to remember is that Atlas is our cost structure. I mean, we do have a much lower cost structure than our competition. We can really generate, like we said earlier, at this time our cost of capital at these prices that we're seeing today, we're still generating a great return. We are in the middle of about to go into RFP season here.

Speaker 4

So we're going to start contracting. I mean, I think a lot of our customers are looking for reliability as well. And then also a lot of them are looking to pull off the DIN Express. So I think it's a little too early to talk about how what we're going to be doing on contracting next year, because we're just getting into those conversations.

Speaker 10

But is it safe to say that you're bundling both logistics and sand price in those contracts?

Speaker 4

For sure. Yes, that's a change. I mean, we made that change about used to 2 years ago, we were just a pure sand contracting company. We started changing that strategy to be in a more of a sand we're delivering it's more of a delivered price to the well side.

Speaker 3

I mean, in fact, it's a compounding of our low cost structure, both on the production side and on the logistics side that is unique for Atlas.

Speaker 4

Yes. And locating our mines are locating our mines closer to the well site like Blake mentioned earlier. I mean, and Chris mentioned earlier talking about the Mini Mobile has been also talking about the Dune Express. I mean that's just going to as you can put our combined closer to the wellsite that lowers our cost to get the delivery cost to the wellsite.

Speaker 10

I appreciate the color. I'll turn it back. Thanks, guys. Thank you.

Operator

The next question comes from Neil Mehta with Goldman Sachs. Please proceed.

Speaker 11

Yes. Good morning, team. And first question is around return of capital and you made the decision to bump the dividend and have a more fixed dividend structure versus more of a variable. And Bud and team, I just love your perspective on why you think that's the optimal way to return capital to shareholders and your perspective on the dividend growth from here?

Speaker 2

Hey, Neil. Good to hear from you, Eddie. It's a good question. So the decision to move from the base plus variable model to a straight ordinary dividend was a little bit one of messaging. In our view, we want our investors to know that the dividend is something that we stress test severely, feel very confident about paying out through all kinds of market conditions.

Speaker 2

With Q2 representing the peak of our CapEx spending around the Dune Express, we felt it was fitting to convert the dividend completely over. Looking ahead, once the dividend the Dune Express is complete and operational, our cash flow profile changes considerably to the positive. At that time, management and the Board will discuss how we optimally want to return incremental capital to shareholders. And I think we all are very excited about sharing that with The Street in the coming quarters.

Speaker 3

Yes. And I think, I mean, shareholders come first with us and we're really excited about entering 2025 and the opportunity we have to return capital to our investors. So it's going to be a very exciting year in that regard.

Speaker 11

Yes. Thank you, Buzz. I think it's a good signaling mechanism for sure. So we appreciate that. And then the follow-up is, the video is awesome as always.

Speaker 11

It does look like it's coming pretty close together. So just can you guess on the ground, what are the gaining eye to getting this into completion and any critical path areas that you're focused on?

Speaker 4

The real critical path, I mean everything's been ordered, all the equipments arriving, everything has been coming in over the period we expected to. I mean, it's just execution right now. No real hurdles. Like we said, we've been we've made most of the major road crossings. We've got most of the across most of the lease roads, pipeline crossings and then the with the cattle crossings or the wildlife crossing.

Speaker 4

So right now, it's just execution. The next I guess the next big thing is the electrical houses are going to start to arrive and that's really the last step before they start just wiring everything in. So we're still looking good at the or going having sand going down the Dune Express commercially at the end of this year. From a management team perspective, we're focused more on the launch than construction. We still have to execute, but we're as we spend a majority of the capital on this thing already.

Speaker 4

So we're getting down to the close to the goal line on this thing to get the same bunch of thing across.

Speaker 11

Thanks, John.

Operator

Next question comes from Michael Skalley with Stephens. Please proceed.

Speaker 12

Hi, good morning. You mentioned the Kermit damage was more than expected or at least it impacted the 2nd quarter more than you originally thought. Can you provide a little more detail there on what issues might have surprised you?

Speaker 4

Yes. I'll let I think it was more well, I'll let Chris Chris has been overseeing that. I'll let Chris comment.

Speaker 6

That. Yes. Look, as we got into the production, right, just dealing with some of the space limitations that we have out there, we couldn't use our silos, if you will, and we started a temporary mobile load out. The cycle times that we had anticipated on trucks running through the facility on those mobile load outs versus where they actually were. They were a little bit slower than expected and really impacted our throughput there.

Speaker 6

We did divert them over to the legacy Hi Crush facilities to help out. And as Blake mentioned, they were able to produce greatly for us there.

Speaker 12

So I guess not as much on the plant itself being repaired as just the ability to expand

Speaker 13

some It

Speaker 2

was really a combination of throughput limitations and then incremental like rental equipment expense. But the amount of yellow iron that we had to have on-site during the quarter, it was just a ton of congestion and then that equipment isn't free.

Speaker 4

I mean we went from a process that had very little human interaction to having one that was very put what I'd say is that very intensive from the standpoint of human interaction. So you had there was just a lot more folks on location.

Speaker 12

Got it. And I guess just some high level thoughts on M and A. Hi Crush has obviously worked nicely for you. You already have 30% market share in the Permian sand market. Would you consider acquiring more assets in that market or are you looking for more diversification at this point?

Speaker 2

Good question. When we look at the current landscape of proppant providers in the Permian and elsewhere, the market is still too fragmented and it's in need of further consolidation. However, I don't think that necessarily means Atlas needs to be the consolidator. Our assets put us at the low end of the cost curve and we just acquired a competitor that was the most adjacent

Speaker 4

to us on the curve.

Speaker 2

Thus, if we do any further consolidation, we have to be really picky about exactly what assets we're going to acquire as we absolutely do not want to dilute our current position. That being said, there's price for everything. It's a very unique situation in the oilfield as there's a lot of sellers and not a whole lot of buyers and there's a complete dearth of capital. So it's a pretty attractive setting for companies that actually have currency. However, we're in the position where we don't need to do anything.

Speaker 2

So we're going to be really picky on both asset quality and valuation. Any deal that we do do will enhance our line of sight on growing our cash flow to shareholders both near and long term.

Speaker 3

Appreciate that. Thanks guys.

Speaker 1

And we're going to take one more question. We've got a market that's a fairly jittery market and we've got other earnings calls today. So we'll limit this to one more question.

Operator

The next question comes from Jeff Lebon with TPH. Please proceed.

Speaker 13

Good morning and thanks for taking my question. For the question I wanted to ask is, could you give any more color on how we should be thinking about ramping volumes for last mile deliveries ahead of the Dayton Express? Are there any constraints that we should be aware of? On the one hand, your investment material pointed towards adding 2 incremental crews in Q3, but on the other hand, you mentioned that drop depot deployments seem to be facing some headwinds and you're evaluating additional locations? Thank you.

Speaker 2

Sorry, you're breaking up there on me. Can you repeat the question?

Speaker 13

Sure. So for my question, I wanted to see if you could provide any more color on how we should be thinking about ramping volumes for last mile deliveries ahead of the DN Express. Are there any constraints that we need to be aware of? I know your investment material pointed towards adding 2 more incremental crews. But on the other hand, it seems like the drop depot deployment seem to be facing delays or headwinds, excuse me.

Speaker 6

Yes. So from a commercial yes,

Speaker 3

this is Chris Schuller.

Speaker 4

From a

Speaker 6

commercial approach, as we talked about, we've got line of sight to some additional crews. We continue to see customers come as the Dune Express has moved from this is a not something real to construction to oh my gosh, you can drive over it and very real impactful. We continue to have those customer conversations and really look to move our last mile contracts over from last mile to supplying that directly off the Dune Express. So we know our targets in the Delaware. We know the major players out there and folks that are in our heat zones.

Speaker 6

We continue to expand our partnership with those customers.

Speaker 13

Thank you. I'll hand the call back to the operator.

Speaker 2

Thank you.

Operator

At this time, I'd like to turn the call back to management for closing comments.

Speaker 4

Thank you everybody for joining us. We look forward to reporting our Q3 results next quarter. Thanks.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation and have a great day.

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Earnings Conference Call
Atlas Energy Solutions Q2 2024
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