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Keane Group, Inc. (NYSE:FRAC)
Q4 2018 Earnings Conference Call
Feb. 26, 2019 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the Keane Group fourth-quarter and full-year 2018 conference call. As a reminder, today's call is being recorded. [Operator instructions] For opening remarks and introductions, I would like to turn the call over to Kevin McDonald, executive vice president and general counsel of Keane Group.

Kevin McDonald -- Executive Vice President and General Counsel

Thank you, operator, and good morning, everyone. Joining me today are Robert Drummond, chief executive officer; and Greg Powell, president and chief financial officer. As a reminder, some of our comments today will include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995, reflecting Keane's views about future events. These matters involve risks and uncertainties that could cause our actual results to materially differ from our forward-looking statements.

The company's actual results could differ materially due to several important factors, including those risks and uncertainties described in the company's Form 10-K for the year ended December 31, 2017, recent current reports on Form 8-K and others Securities and Exchange Commission filings, many of which are beyond the company's control. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Additionally, we may refer to non-GAAP measures, including adjusted EBITDA and adjusted gross profit, during the call. Please refer to our public filings and disclosures, including our earnings press release, for definitions of our non-GAAP measures and the reconciliation of these measures to the directly comparable GAAP measures.

With that, I will turn the call over to Robert.

Robert Drummond -- Chief Executive Officer

Thank you, Kevin, and thank you, everyone, for joining us on this call this morning. Keane finished off an excellent 2018, a year where we grew revenue by 40% and adjusted EBITDA by more than 80%, with another solid quarter of financial results which exceeded our outlook. These results were achieved despite growing headwinds that emerged in the third quarter and accelerated into year end. We did what we do best: Stay focused on execution and helping our customers win while managing all aspects of our cost structure.

This is the approach that Keane consistently employed throughout 2018 and will continue to utilize as we forge ahead. With that in mind, I want to reflect on some of our team's 2018 accomplishments. First, we developed and expanded our relationships with high-quality customers that align with our partnership model. We believe the caliber of our dedicated portfolio is second to none.

Our customers share our values and our unyielding commitment to safety and efficiency. I am very pleased to report that in 2018, Keane and our customers delivered our best safety results ever, with a total recordable incident rate less than half the industry average for our sector. These results are delivered by motivated employees that are focused on execution. Second, we continue to invest in efficiency improvements and innovation across our completions offering.

We realize synergies for our customers based on the combination of frac and wireline in a truly integrated service delivery model. Our relentless focus on completion efficiency delivered an increase in pumping hours per crew of 15%. We believe efficiency will be the main service differentiator and leading source of returns going forward, and we will continue to innovate through technology and techniques to drive continuous improvements. On the surface technology side, we are excited to announce our plans to enter the DJ Basin in the second quarter of this year with a newly developed Whisper Fleet, reducing the sound of fracturing locations to well below Colorado noise standards.

We are in active discussions with multiple E&Ps in the market, and the receptivity of having a new entry of Keane's caliber has been met with enthusiasm. On the subsurface side, our Engineering & Technology Center is working closely with our clients and our field operations to drive both frac effectiveness and production enhancements with products like AirRide, an innovative bouyant sand solution that lowers material volume and horsepower requirements, enabling jobs to be right-sized between parent and child wells with more consistent sand distribution. Third, we generated more than $350 million of operating cash flow for the year, enabling us to return capital to shareholders in the form of stock buybacks, grow our fleet responsibly through newbuilds, internally fund accretive M&A and make strategic investments to keep a portion of our idle fleet market ready. Fourth, we extended our track record of completing and integrating strategic M&A, including the bolt-on acquisition of RSI in July, which bolstered our existing asset base at attractive value.

And finally, we maintained and improved our balance sheet position, including entering into a new credit facility, which provided greater financial flexibility while extending the facility's maturity, securing favorable rate and further improving our liquidity. Our strong balance sheet allows us to allocate capital resources to fund initiatives and investments that maximize value and returns for our shareholders. Heading into year-end, we remain committed to providing our shareholders with a current assessment of the market. In our view, in addition to normal weather and seasonality, Q4 was going to be choppy with customer budget exhaustion, early achievement of production targets, a challenging commodity take and persistent pricing differentials, all of which were baked into the forecast we provided.

Despite these headwinds and a tough market environment, our team did an excellent job in delivering on our efficiency targets while maintaining focus on cost control across our entire business with contributions from price deflation on sand. On our last earnings call in late October, WTI stood at approximately $65 per barrel. At that time, we had shared our expectation for a robust commodity price backdrop and alleviating transitory headwinds, leading to a bottoming in completions activity sometime late in Q4 or early 2019. Shortly following our call, oil prices experienced a rapid decline.

The pace and magnitude of the decline was surprising, causing disruption to the normal cadence of our industry. This reduction and volatility in oil prices also coincided with the annual budgeting process for E&P companies, causing some to delay budgeting cycles and reduce their sense of urgency as they await better visibility in the commodity outlook. While this dynamic is not prevalent within our customer portfolio, it has caused a transitory softness in activity with impacts to frac supply and demand. This dynamic was a factor during the quarter as we reached normal price reopener periods on the vast majority of our dedicated agreements.

However, most of our customers remain committed to the long-term nature of our partnership. And as a result, we were able to navigate these discussions with extended terms, additional scope and some price concessions with some of our most efficient customers. However, in three cases, we did idle and warm stacked a fleet at the end of the contract term after being unable to reach an agreement at our threshold pricing. Near-term choppiness aside, we remain bullish on the long-term strength and growth of the U.S.

completions market, our customers and the great work we are doing in the field to drive efficiency. As we sit here today, we have 22 fleets deployed with most of them committed for full utilization through at least 2019 or the end of 2019. We believe that our dedicated agreements are unique, serve as the foundation for our mutual success with our customer partners and provide a solid baseload to build upon as we pursue other like-minded partners or expand with our existing base. We also believe that these dedicated agreements give us a very good visibility on future cash flows.

You'll recall that last quarter, I shared my early observations since joining Keane, including how impressed I've been with our people, customer relationships and execution. It's all part of Keane's long-held formula for success and through-cycle performance, which includes four primary components. First, generating leading returns. We do this in several ways, but it all starts with the customer.

Our approach is to partner with like-minded customers under dedicated agreement who share our relentless focus on safety, efficiency, continuous improvement and innovation. Beyond this shared approach, our target customers are well-capitalized, deliver efficiency on their side of the ledger, have long-term plans and value our partnership. We are proud of our current portfolio of customers and dedicated agreements that embody these attributes and are evaluating opportunities to grow with existing customers while seeking additional partners for our remaining idle fleets. Second is our relentless focus on efficiency.

While we believe Keane does generate a premium value by delivering superior service, efficiency will remain the key differentiator. A focus on efficiency is built into the fabric of our culture and how we run the business and is a very clear win-win for us and our customers. It requires three ingredients, including working for the right customers, delivering a high level of execution and driving innovation. We've talked about the steady improvements we've made, but we're also working on some step change improvements in surface technologies, downhole products and digital capabilities.

By capturing the next leg of efficiency improvement, we believe we can deliver differentiation and leading returns throughout the cycles. Third, delivering shareholder value. This component of our strategy includes our approach to capital allocation. We have a track record as a public company of returning capital to shareholders, having completed $105 million of stock repurchases in 2018.

Our board remains committed to our shareholders and demonstrated their confidence in our management team's ability to navigate these transitory headwinds by recently reloading our stock repurchase program to $100 million and extending the program's maturity until the end of 2019. Our success here is supported by our high-quality, flexible balance sheet, but it's also about cash flow. We generated $350 million of operating cash flow in 2018. And after deducting maintenance CAPEX of approximately $120 million, we generated 31% return on capital.

And finally, pursuing and leading consolidation. Scale matters in this industry, and it helps pull through and amplify the strategies that I've just discussed. It also allows for bigger investments to be made on technology and digital. We'll remain aggressive in pursuing additional strategic consolidation while maintaining a disciplined approach on value, fit and maintaining the strength of our balance sheet, as clearly demonstrated in Keane's successful track record of M&A.

Keane is well-positioned to generate significant free cash flow through the cycles we experienced in our business. You will continue to see us innovate and focus on helping our customers win. With that, I'd now like to turn the call over to Greg to discuss the financials.

Greg Powell -- President and Chief Financial Officer

Thanks, Robert. Turning to our financial performance for the quarter. Total revenue totaled $486.5 million, a decrease of approximately 13% compared to the third-quarter result of $558.9 million. Revenue for our Completion Services segment totaled $475.2 million, a sequential decrease of 13%.

For the fourth quarter, we operated 25 total fleets. However, when factoring in white space, we had the equivalent of 22 fully utilized fleets. On a fully utilized per fleet basis, annualized adjusted gross profit was $20.9 million compared to $20.5 million in the third quarter. Revenues for our Other Services segment, which includes our cementing operations, totaled $11.4 million for the fourth quarter of 2018, representing a sequential increase of approximately 9%.

Our cementing business continued to realize a modest gross loss, driven by insufficient loadings for the current infrastructure. The company adjusted EBITDA in the fourth quarter was $88.4 million, approximately 12% below prior quarter's total of $100.9 million. I'd remind you that quarterly results for the fourth quarter included approximately $15 million of investment in labor and maintenance costs associated with keeping several fleets market ready. Adjusted gross profit totaled $113.9 million for the fourth quarter compared to $122.3 million in the prior quarter.

Adjusted EBITDA for the fourth quarter excludes approximately $5.2 million of noncash stock compensation expense. Selling, general and administrative expenses totaled $28.5 million for the fourth quarter compared to $27.8 million in the prior quarter. Excluding one-time items, SG&A totaled $23.3 million compared to $19.9 million in the third quarter of 2018, driven by investments in technology. Onetime SG&A items for the fourth quarter of approximately $5.2 million was driven by noncash stock compensation expense.

For the full year, we generated revenue of $2.1 billion, up from $1.5 billion in 2017. Adjusted EBITDA in 2018 totaled $392 million, up 82% compared to $215 million in the year prior, reflecting a very successful year for Keane. Turning to the balance sheet, we remain committed to maintaining a high-quality balance sheet and liquidity profile, enabling us to be defensive through the cycle and opportunistic to support investment in key initiatives. We exited the fourth quarter with cash and cash equivalents of $80.2 million compared to $82.8 million at the end of the third quarter.

We generated approximately $100 million of operating cash flow for the fourth quarter, bringing the full year total to more than $350 million. Capital expenditures during the fourth quarter of 2018 totaled approximately $52 million, driven by maintenance CAPEX and investment in strategic projects to support efficiency and differentiation. Total debt at the end of the fourth quarter was approximately $341 million net of unamortized deferred charges and excluding capital lease obligations, unchanged versus the third quarter. Net debt at the end of the fourth quarter was approximately $261 million, resulting in a leverage ratio of approximately 0.7 times on a trailing 12-month basis.

We exited the year with a total available liquidity of approximately $264 million, which includes cash and availability under our asset-based credit facility. The more than $350 million of operating cash flow we generated in 2018 funded three newbuild fleets, more than $100 million of stock repurchases, our acquisition of RSI, the final payout on our acquisition of RockPile and our continued investment in labor and maintenance to keep a portion of our fleets market ready. With all this activity and investment, we still exited the year with $80 million in cash, just $16 million below our balance at the end of 2017, evidencing the strong cash flow and returns generated by our business. During the fourth quarter of 2018, we completed an additional $35.5 million of repurchases.

For the full year and since the program's effectiveness in April, we repurchased $105 million of our stock, retiring approximately 8.1 million shares or roughly 8% of outstanding shares prior to the program's implementation. We're proud of our ability to quickly execute on our capital return strategy while maintaining strong cash and liquidity. We exited the year with $88 million of availability on our buyback program. And as we announced yesterday, our board authorized an increase to the program's capacity back to $100 million and extended the program's expiration until the end of 2019.

This represents the third such reset since the program's implementation, reflecting our ongoing commitment to capital return. We remain committed to delivering the best through-cycle returns for shareholders and will continue to accomplish this through our multipronged approach to capital allocation, including maintaining a strong and flexible balance sheet, investing in growth and innovation and returning capital to shareholders in a disciplined manner. Turning now to 2019, regardless of the shape and cadence of recovery in 2019, we are positioned to generate attractive cash flow. Even if the business remains at current levels, we expect to generate greater than $100 million of free cash flow after debt service and capital expenditures, representing a yield of approximately 8.5% on yesterday's closing price of our shares.

A key driver of this cash flow performance is greater than 50% year-over-year reduction in CAPEX with forward investment focused on maintenance and efficiency. Turning now to our first quarter outlook, for the first quarter, our assets will be comprised of 29 fleets, of which we expect 22 to be deployed. Of these 22 deployed fleets, we expect to achieve utilization of approximately 90%, driven by white space in the frac calendar, resulting in the equivalent of 20 fully utilized fleets for the quarter. On this base, total revenue is expected to range between $400 million and $420 million.

The sequential decline compared to the fourth quarter includes approximately $20 million associated with increased direct sourcing of sand by certain customers, approximately $30 million driven by disruptions from abnormal weather and delays in pad availability and approximately $25 million from reduction in net pricing. We expect annualized adjusted gross profit for the first quarter to range between $15 million and $17 million on a fully utilized per fleet basis. Layering in approximately $20 million of G&A, this would imply adjusted EBITDA between $55 million and $65 million. Included in these numbers is approximately $10 million of labor and maintenance costs associated with keeping several of our fleets market ready, allowing us to react quickly to a pickup in the market.

We are working on some imminent opportunities for the deployment of these fleets under dedicated agreements. But if these opportunities do not materialize in the near term, we will remove these costs and right-size to our forward opportunity set. Additionally, by end of the first quarter, we expect the abnormal weather and pad availability issues to abate, resulting in approximately $10 million of EBITDA recovery as we head into the second quarter of 2019. I'd now like to hand the call back over to Robert for some final remarks.

Robert Drummond -- Chief Executive Officer

Thanks, Greg. Before we open up the lines for Q&A, I'd like to leave you with this. We are proud of the team's performance and results in a challenging fourth quarter. Our first quarter outlook, when normalized for $10 million of labor and maintenance carry costs and $10 million of activity disruption, reflects an incremental $20 million of EBITDA tailwind as we exit the first quarter.

In addition to price leverage, we have approximately one-third of our fleet available and ready to deploy for future growth without any additional investment. We're committed to managing our capital allocation in the most appropriate manner to maximize shareholder value and expect to generate more than $100 million of free cash flow in 2019. With that, we'd like to open up the lines to Q&A. Operator?

Questions and Answers:

Operator

[Operator instructions] Our first question comes from Tommy Moll, Stephens.

Tommy Moll -- Stephens -- Analyst

So good to hear the outlook on the year, $100-plus million in free cash. A couple of moving pieces underneath that I was hoping you could give us a little more detail on. For CAPEX, it sounds like the cut year on year is significant, over 50%. If you could give us any more detail around that, what a range of dollars might look like, and then also what the buckets underneath that are.

And I think I heard you say it's almost all maintenance, but any more detail there? And then also on EBITDA, is there a range that you have in mind underpinning the free cash guide? Or maybe if you can't be that specific, can you just give us your general outlook on the cadence of recovery in terms of price, utilization, number of fleets deployed, etc.?

Greg Powell -- President and Chief Financial Officer

Yes. Thanks, Tommy. On the capital side, the CAPEX is around $140 million projected for 2019. The bulk of that is maintenance CAPEX, and then there's a chunk of strategic investments around efficiency and differentiation.

To make the math work on more than $100 million of cash flow for the year, you take the $140 million of CAPEX, $30 million of debt service. That gives you $170 million. So you need an EBITDA number of around $270 million. We'll get a little bit of help from working capital.

So somewhere in that $270 million range. We're guiding $60 million for the first quarter, and then we talked about the $20 million of tailwind that we feel good about exiting the quarter. So it gets you kind of -- on the first half, that gets you $60 million plus $80 million, close to $140 million of that $270 million that we feel very good about with our current portfolio. And I don't think, on top of that, we need a lot of -- we're not banking on a lot of market improvement.

We think there's catalysts out there in the form of the Permian takeaway is getting better, there's a significant DUC inventory and the commodity price has been more favorable the last kind of four to six weeks. So we think there's some catalysts for some tailwind. But for our performance in that cash flow generation, we're not banking on that macro uplift.

Robert Drummond -- Chief Executive Officer

I'm just going to say this is the kind of environment where the dedicated agreements really, really pays dividend when you have a lot of visibility, we think, all the way through 2019 with the core of our 22 fleets.

Tommy Moll -- Stephens -- Analyst

Got it. And then shifting gears for a follow-up. I wanted to dig down on consolidation, which is a theme you've discussed before, discussed again today. It's one that's been discussed a lot across the industry in recent quarters, but opportunities, at least that we're aware, have been limited to actually transact.

So given what we went through at the end of last year in some of the stock price action and where we are in the cycle now, is there anything you're seeing that might increase the flow, so to speak, in terms of transactions here? And then for team specifically, do you lean one way or another on transformative versus tuck-in, on sticking to the pure-play model versus are there some ancillary or complementary service offerings that might interest you in adding?

Robert Drummond -- Chief Executive Officer

Thanks for the question, Tommy. Look, well, we've been pretty bullish about the fact that we think scale matters in this industry and had been on all the transactions that occurred so far. But certainly, the reason scale matters, I believe, for a number of reasons. If we were to be able to put ourselves together with a company of a similar size, for example, we would have the ability to take a lot bigger swings at our technology portfolio.

The synergy benefits there are obvious and certainly would be beneficial. As far as transformative versus tuck-in, I would say that for us, being a completions company focused in U.S. land, we really like being in that spot. Greg mentioned some of the macro drivers for the upside being oil prices beginning to move a bit, midstream infrastructure being built out and DUC inventory all very supportive.

So for us, a merger of equals would be very attractive to us. But it doesn't mean that bolt-on technology applications or technology companies that would fit that completion profile wouldn't also work for us. But that's the way I put it.

Operator

Our next question comes from Jud Bailey, Wells Fargo.

Jud Bailey -- Wells Fargo Securities -- Analyst

And also, I appreciate all the color you guys give us from an all-in perspective. That's much appreciated. My question, if I could, is, now we're two-thirds of the way through the first quarter out. You mentioned some customer opportunities that you're evaluating, and if you don't get those opportunities, you'll kind of cut those costs.

I was wondering if you could give us a little more color on how you're seeing the market today as you're heading into the second quarter. By that comment, it doesn't sound like you're seeing a lot of inbound inquiries, and it's a lot more maybe tactical and selective. Maybe if you could talk just a little bit about kind of what you're seeing from your customer base and opportunities as they develop as we get further into the year.

Robert Drummond -- Chief Executive Officer

Thank you for the question, Jud. Look, I would say we've talked a lot about our customer base and how we like working with partners. And a vast majority of our fleets are assigned with dedicated agreements that carry us with visibility through 2019. We've also said that we have seven fleets of our 29 that are currently not deployed, and I would say we've had numerous opportunities over the last few months to deploy those in a spot market that's been extremely challenged from a price perspective.

So I would say nice to have the base to build upon. But going forward, we really don't anticipate participating too much in a spot market where we're just wearing our equipment out and not generating positive cash flow. On the other hand, there are a number of customers out there who are like minded that we currently do not work for that we are currently in discussions with or in the process of selling to the benefits of the efficiency model that we bring and the safety profile that we bring. So I would say for us, it's always going to be for deploying the rest of our fleets, it's going to be a discussion around price and efficiency along with the strategic aspects of the scope of a contract, how long it might be able to run and how that lines up with our own core values around driving frac efficiency.

The market itself is still challenged. And the spot, I would say, is a bit oversupplied. But we're out there looking for that ideal strategic fit for ourselves. And we feel good about the ones we have today.

We were proactive, I would say, in December and January dealing with the reopeners that we have in our contract base, as well as perhaps being proactive before the reopeners to make arrangements with our customers to give us the ability to trade scope and terms for some price. And I think we've called out a bit of that. In Q1, I'd say the impact on price for our -- cost of our portfolio was about $25 million. And we had about $5 million in Q4.

And we see that as being, on the fleets that we now have deployed -- the vast majority of the fleets we now have deployed has been -- we don't go any lower than that. We feel like we've got us set for the year.

Jud Bailey -- Wells Fargo Securities -- Analyst

OK, all right. And my follow-up is, if you can maybe expand a little bit on -- you talked about your digital initiatives and some of the technology you're looking at and pursuing. Maybe just talk a little bit more about what you're working on today, how you see the market evolving and kind of how you're approaching the market in that regard.

Greg Powell -- President and Chief Financial Officer

Yes. So look, I think there's been a lot of discussion around proving up the shale as a sustainable return at different bound oil prices. I think we play a big role in that based on our share of wallet of the well cost in completions and frac. And there's three pieces to that strategy.

One is downhole products to reduce the amount of input materials and enhance production. So we've got a downhole portfolio of products we're working on. Surface technology, I mean, people have heard me talk about the fact that the equipment we're using isn't necessarily fit for purpose for the service intensity of what we're doing today. So we're doing a lot on the surface to find ways to go faster to lower cost and also develop more fit-for-purpose equipment.

That's wellhead connect systems, wireline technologies, fluid systems and next-generation pumping equipment. It's all of those things in the hopper. And then digital is a very exciting initiative, I think, to have a profound impact on all the ways we use data in the business and making our frac operations more consistent and more automated using data to make the equipment smarter and our supply chain, applying data analytics and data science to the supply chain. So it's kind of a three-pronged strategy, and we think the combination of all those can give us a step change in efficiency.

We've been doing a lot of it with brute force, and we increased pumping hours 15% last year. And there are still smaller -- declining opportunities with brute force, but with investing in these areas, that's how you get a 20%, 30% step change in efficiency. And it doesn't happen overnight, but that's what we think our role in, number one, differentiating the company; and then number two, helping our customers to get a better return profile with shale.

Robert Drummond -- Chief Executive Officer

And the fact that we're a U.S. land completion-focused company allows us to focus our entire technology efforts just in that arena.

Jud Bailey -- Wells Fargo Securities -- Analyst

What kind of time frame are you thinking about on getting kind of the bulk of this type of efficiency gain? I would assume this is not really a 2019 event but maybe over the next two to three years? Have you thought about kind of a timing on when you would expect to see the fruits of this kind of initiative that you're doing?

Greg Powell -- President and Chief Financial Officer

Yes, I don't think it'll be cliff. I think it'll be linear. We'll continue to chip away at it. But I hope to see meaningful improvements in kind of 18 to 24 months with the portfolio of initiatives we've got going on.

Operator

Our next question comes from Connor Lynagh, Morgan Stanley.

Connor Lynagh -- Morgan Stanley -- Analyst

In your prepared remarks, it kind of sounded like the timing of your renegotiations where your price reopeners were sort of coincided with a lot of volatility in the oil markets. Would you say that if you were to do those today, that you'd receive a different price? I mean, so any comments on where sentiment is now versus end of fourth quarter?

Robert Drummond -- Chief Executive Officer

No. That's a good question, Connor. I would say that no, I will not see a change in anything. In that time frame of latter part of Q4, early Q1, there were a number of, I would say, competitors out there being pretty aggressive in price, making unsolicited offers back and forth, things like that.

So I think that we thought it prudent to be proactive where necessary with our partners. And I think they appreciated that and we were able to get to a resolution, as I kind of stated earlier, at a cost of about $25 million in Q1 and kind of go forward there. So I don't think it would have changed anything if we did it right now.

Connor Lynagh -- Morgan Stanley -- Analyst

Got it. And it seems like you guys and most of your competition is expecting activity to improve somewhat into the middle of the year here. Do you think that's enough to balance the market? Like how do you see the relative disconnect in supply demand right now?

Robert Drummond -- Chief Executive Officer

Well, look, it's going to take a bit of a move in the overall market before the spot market starts to tighten up. But I think there's three different kind of customers out there. You got the big IOC, you got the big independents and then you got smaller independents. And I think our portfolio was nicely stacked up with a bit of a mix of the bigger guys, and they have been pretty steady state and have not reduced their budgets going forward that much.

So if you look at it from your own perspective, we're in pretty good shape there. But we do and are impacted by the spot market, and I would say that it's going to be driven by what happens with oil price. And as oil price moves up, the smaller independents will go back to work a lot quicker, and that will begin to consume some of the capacity on the market. I think if you guys think about what that means to what does the supply side of frac looked like, it's not only the equipment but will you have crude ready to go.

And we talked about we kept some equipment hot in Q4 because we do have a few opportunities on the plate even right now that we're looking at. But I would say a lot of people that maybe don't enjoy the same profitability per crew maybe don't have the assets hot. They have the assets warm by our definition, meaning equipment might be ready, but it's not crewed. As soon as the market starts to move and it needs crewed frac fleets, it gives you an opportunity to move price before you bring the crews back on.

So I think it takes oil price to move a bit. It's trending in the right direction right now. And last call, we were talking about seeing the second half of '19 looking like when that would begin to happen. I don't necessarily say we have that visibility right now, but I would say the trend is in that direction, it just slid to the right a little bit.

Operator

Our next question comes from Scott Gruber, Citi.

Scott Gruber -- Citi -- Analyst

Greg, just a question on the EBITDA headwinds that you're facing in 1Q. It sounds like they're going to fade here in the next few weeks. The $80 million of EBITDA potential in 2Q, is that just getting back to normal operating efficiency? Was that a high operating efficiency scenario? How should we think about that?

Greg Powell -- President and Chief Financial Officer

Yes. So Scott, look, there's two things in that $20 million. One is completely at our discretion, which is the $10 million in carry costs, which we're either going to put to work with imminent opportunities or take out. The other half were issues we had on kind of white space in the first quarter.

One was abnormal weather between the polar freeze and road closures and water freezing and different things that we expect to abate just based on the calendar. And the second thing is just pad availability issues we have with certain customers. We now have schedules for those customers into the second quarter that those issues abate and calendars load back up. So it's just getting back to a steady state.

It doesn't have incremental efficiency improvements in there beyond what we've done in the past.

Scott Gruber -- Citi -- Analyst

Got it. And the Whisper Fleet that's going to work in the DJ in 2Q, that would be incremental to what's working today?

Greg Powell -- President and Chief Financial Officer

Yes, that would be incremental. I mean, we're very excited about that. It's been a market we've had our eyes on for a period of time. We think the competitive dynamics are favorable.

We think technology is valued there, and we've been able to quickly develop and deploy this Whisper Fleet, which whisper is based on meeting the sound regulations that are required in Colorado. That would be 100% incremental to the run rates we're talking about.

Scott Gruber -- Citi -- Analyst

Gotcha. So we should expect, I mean, all else equal, the fleet count to tick higher in 2Q just based on that addition? There's nothing else we can expect to lose into 2Q?

Greg Powell -- President and Chief Financial Officer

Correct.

Scott Gruber -- Citi -- Analyst

Got it. And how do you think about the DJ opportunity in the quarters ahead working the basin count and go?

Greg Powell -- President and Chief Financial Officer

Yes, look, I mean, we'll get this -- we're working to get the first fleet deployed. When you're going to a new basin, our customers are justifiably risk adverse, and they want to make sure you can perform in their basin and get some experience. So we're working through that now. And then we hope that'll create momentum for incremental fleets.

We got a very nice, proprietary position on the technology to continue to develop fleets behind that. It's not necessarily a newbuild fleet. We have an option on the whisper technology to convert a legacy fleet. So we'll get the first one to work.

We won't be speculative. And then we have the opportunity to put additional fleets behind that when we get the platform going.

Scott Gruber -- Citi -- Analyst

Got it. And one final one. Can you just provide some color on the cementing build-out? That market's facing some challenges today. Just kind of where do you guys stand today? Kind of how you're thinking about the expansion in 2019.

Robert Drummond -- Chief Executive Officer

Well, we began rebuilding the cementing business in our Southern region back in January of 2018. And quarter over quarter, we were showing kind of nice growth. We had a pipeline that gave us the view that it was going to continue to grow at rates maybe even more than we currently delivered. And we were building the infrastructure and investment in people to take care of that business.

But I would say the recent drop kind of occurred in Q4 in the commodity price and the corresponding uncertainty around rig count there has led to a little bit of stagnation in that business and maybe, I'd call it, a hesitation on some of our customers' part to make a change. Our pipeline for growth was filled with customers that were adding rigs and we were going to get a portion of it, and a few that were going to make a vendor change. But due to that situation, I would say we kind of disappointed ourselves a little bit in Q4 with the amount of growth that's only 9%. And I would say this about us looking forward on this.

We're going to be reevaluating our growth plans. And we're going to be rightsizing this business to not to operate at a loss. And that's what we're in the processes of doing right now. So our previous guide on growth, we're going to be kind of dialing it back a little bit and taking care of the bottom line for this period until we get a little more visibility on perhaps the Permian market rig count beginning to change or the customers becoming more confident in what's going on to the point that they are willing to make some changes in their vendor profile.

Scott Gruber -- Citi -- Analyst

When do you think you can get into the black in the business?

Robert Drummond -- Chief Executive Officer

I would say in Q2, we'll make it happen.

Operator

Our next question comes from Chase Mulvehill, Bank of America Merrill Lynch.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

I guess first one, if we can maybe just kind of hit on 1Q again and just talk about the progression of January versus February. And then kind of how you see things kind of unfolding in March. And maybe if you're going to get full utilization on those 22 fleets in March.

Robert Drummond -- Chief Executive Officer

Look, I will just start out by saying that in the quarter, Greg mentioned it a time or two already, is that the pad access issue is very unpredictable. Call it well control, well issue-type things that's very uncharacteristic of our customer base and very temporary. So that occurred in January and the early part of February. And if you're asking if we're going to exit the quarter better than we entered it, I would say the answer to that is yes.

And we're getting more visibility as time goes on, not to mention that this is the coldest winter on record in Williston. We had some really challenging periods of time there during the last several weeks. So yes, I would just say the trajectory in Q1 is better, and we're evaluating a couple of opportunities right now that would perhaps impact the very end of the quarter as we go into Q2, we've already mentioned. So anything to add to that, Greg?

Greg Powell -- President and Chief Financial Officer

Yes, the only thing I'd add is as you think about revenue bridge from fourth quarter to first quarter, there's two things I'd like to point out. Number one is we had a $20 million revenue reduction quarter over quarter because of direct sourcing of sand. And then on top of that, the weather and the pad readiness issues, which we fully expect to abate, were worth about another $30 million of revenues. So together, those were $50 million in revenue quarter on quarter.

Other than that, the revenue reduction was 5%., and that was primarily driven by price. So those are kind of a couple of the pieces that caused the revenue to move more into our guidance range.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK, it's fair. And if we're trying to think a little bit about kind of gross profit per fleet as you kind of move forward, I mean, obviously, you highlighted the weather and the pad issues, and then you got the $10 million for the crews that are hot stacked, if we take just for the $10 million of hot-stacked crew, that kind of get you from a $15 million to $17 million of annualized gross profit per fleet to $17 million to $19 million. Should we kind of start layering in the $17 million to $19 million in 2Q? Or should we kind of think about that more of a back half of '19?

Greg Powell -- President and Chief Financial Officer

I think 2Q is fine on that.

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

OK, all right. And then last one, and I'll turn it back over. Have you seen any changes in kind of the pump rate trends or maybe the amount of sand pumped per lateral foot on kind of leading-edge jobs?

Greg Powell -- President and Chief Financial Officer

I think it's stabilized. I think it feels like we're hitting a point of diminishing returns on sand loading, and I think it's stabilized. It's stabilized at a very high level. And I think the lower cost of proppant is allowing people to sustain at those levels.

But I think we have seen the rate of increase kind of level off.

Operator

[Operator instructions] Our next question comes from Marc Bianchi, Cowen and Company.

Marc Bianchi -- Cowen and Company -- Analyst

Greg, you mentioned the CAPEX of $140 million is mostly maintenance. If I do the simple math on that, assuming there's like 22 fleets, it works out to a little over $6 million per fleet of maintenance CAPEX. And I think historically, you guys have kind of talked about $4 million per fleet. So wondering if you could discuss that a little more.

Is there -- maybe not all of it is maintenance. How much of it is maintenance? Or maybe there's an expectation for a higher fleet count or something else going on.

Greg Powell -- President and Chief Financial Officer

Yes, I'd say about $100 million of that is maintenance and then $40 million is around strategic and efficiency investments on wellhead and different technologies. The $4 million is probably in the neighborhood of $4.5 million now, and that's primarily driven by additional wireline technology that we're deploying, different systems around safety and efficiency on wireless, greaseless wireline. We're making a lot of investments in there that is taking that number probably from $4 million to $4.5 million. There's been a lot of discussion around maintenance CAPEX and efficiency.

I'd say for us, with pumping hours going up 15% last year, that's a headwind to maintaining those kinds of numbers. So there is some efficiency we're getting just to maintain $4 million, $4.5 million based on the fact that our equipment's pumping 15% more, these components get replaced on an hour basis. So we're definitely getting efficiency. For us to move that number significantly, it's going to take this next level of technology investment we're making to extend the useful life of the components which we're working on.

But the piece I would tell you, and this is consistent with Keane's history when we came out of the IPO and had a bunch of fleets to deploy, we do not cut dollars in any market on our maintenance CAPEX and keeping the fleets ready. So those seven fleets we have idle are ready to go without any incremental investment. And it's obviously tempting in this market, I think, for people to defer CAPEX to deliver near-term cash flow, but that's not in the DNA of how we operate.

Operator

Our next question comes from James West, Evercore.

James West -- Evercore ISI -- Analyst

If we could elevate the conversation just a bit from kind of quarter-to-quarter changes and things of that nature. Let's talk about industry change. And it goes back to kind of the hard -- one of the earlier questions on M&A. You guys have been serious and vocal about M&A for a long time.

I know you've seen what I've put out recently around the need for every pipeline to consolidate and for a return-focused strategy, which you guys already have, to be placed upon every part of the industry, but especially in the pressure pumping or the completions side of the business. What would you say are the biggest holdups to transactions at this point? Is it valuation? Is it social issues? Is it a lack of courage from other industry participants? Wwhen you guys enter into these conversations, where are you finding the most pushback? I'm first trying to figure out a way to get around it.

Robert Drummond -- Chief Executive Officer

Well, Jim, look -- thank you very much first for your push in that direction, your advocacy around the need for consolidation. I think, well, we believe it, same as you, and we do have a history of being able to pull that off. As to why, perhaps I've asked myself that question a lot. We've watched the offshore space do a little bit on the OFS side.

On the rig side, they've had some success trying to see what we might learn from that. But I would just say perhaps it's just because of the constant flux that we've been through up and down, most recently another kind of downturn a little bit in Q4. But I think that people are becoming a little more -- the visibility of maybe shorter cycles because of the CAPEX discipline in the operators' ranks gives OFS a little bit more visibility about what kind of returns we've had as a subsector of this sector versus the E&P side, and I think maybe people are coming around to it a bit. As far as social issues, I don't know that -- I don't really think that that's the biggest problem myself.

I know that many of the people I've spoken to have been flexible in that arena. Greg, what would you add to that?

Greg Powell -- President and Chief Financial Officer

Yes, I think this market we're in is only going to be a catalyst to kind of hopefully getting some transactions going. I think there's obviously a disparity in returns profiles on these companies, and if people believe one plus one can equal something more, I think it's better off for the investor base and the return profile of the companies long term. So now that people don't see something necessarily better around the corner from a major macro uplift, saving the day and improving their returns, I think consolidation becomes a more tangible avenue. So we're optimistic that this market will be a catalyst, but we'll have to see how it plays out.

James West -- Evercore ISI -- Analyst

OK, OK. Well, it's good to hear this is moving in that direction. And then I guess my follow-up is on the returns question. I think you guys have that focus.

And my sense is, while you do have like-minded peers around that category, there's others that don't seem to. But are you -- where do you draw the line in the sand, if you will, on pricing times efficiency equals x return? Do you -- is there a number which you say, you know what, we will -- our hot-stacked fleets, no no. No we're getting of the crews or we're not going to work with that. Is that at your cost of capital? Or is it at some premium? And then I guess please tell me it's not below your cost of capital.

Greg Powell -- President and Chief Financial Officer

No, that's right, OK. And I think the best way to tell you that is what we've done, right, by parking these fleets and staying disciplined. I mean, we look at a cash return basis. So we discussed gross profit per fleet.

Now what we have to cover after that is the G&A burden and the maintenance CAPEX. So when we do our underwriting, you think about $4 million maintenance CAPEX per fleet, $4 million G&A allocation. That's $8 million of GP just to get to cash breakeven, and none of us are interested in doing breakeven and tearing up our equipment just to tread water. So the breakeven is at $8 million, but the portfolio is at $16 million.

And what makes our decision between $8 million and $16 million is how strategic is the customer, how long term is their program, what's the opportunity to move pricing and efficiency over time and what's our entry point on price. And those are the key parameters we look at every day to decide if we're going to take the fleet off the fence.

Operator

Our next question comes from John Watson, Simmons Energy.

John Watson -- Simmons Energy -- Analyst

On the DJ fleet, can you speak to expected profitability per fleet there? I would assume it's higher than some of your other fleets because of pressure in the region, easier on your equipment, etc. Am I thinking about that correctly?

Robert Drummond -- Chief Executive Officer

Look, John. I would say thank you for the question. We are excited about being able to deploy that fleet into a market that we think has very good economics. There's not a lot of frac competition there as it compared to other regions in the U.S.

So yes, we do believe that the economics there are attractive. But decide they would be better than our average, I wouldn't necessarily say that. We're still in the process of entering that market. But the backdrop for doing so is very favorable.

John Watson -- Simmons Energy -- Analyst

OK, great. And then you mentioned customers sourcing sand on the call and also on the release. Can you give us an update on what percentage of your deployed fleets customers source sand for? And do you expect this to change over the course of 2019?

Greg Powell -- President and Chief Financial Officer

Yes. We went from a year and a half ago supplying 100% of the sand and now we're just below 50% of sand supplied by Keane. The majority of the direct sources happened in the Permian. As the local mines have come online, our customers have signed up for sand solutions that deliver to the blender.

I think in places where we still have a bigger logistics challenge of the rail and where to land and how to truck it, that's the bulk of the sand we've maintained. We've been able to manage our contracts on the back end to not get long and exposed. And in a lot of cases where our customers are supplying the sand, our efficiency is working out just fine. So we'll see how it plays out over time.

But at this point, we're at 50%, and we're making the equation work for us. It's obviously impacting the revenue line, but the margin has been able to hold up.

John Watson -- Simmons Energy -- Analyst

Great. Makes sense. Lastly, in your committed agreements, is there a specified threshold within those agreements for either stages per day or stages for a month or hours per day that your customer is required to allow your crews to reach?

Greg Powell -- President and Chief Financial Officer

Yes, I don't -- for competitive reasons, I don't want to get into too much detail. But I would say there's committed volumes. That's a key on both side. We're committed to delivering, they're committed to supply.

That's a key tenet of these relationships. And then the exciting part about these agreements is we're both mutually incentivized to improve efficiency, and that's a lot of what makes the relationship work and allows us to try to find a better way to do things every day.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session, and I would like to turn the call back to Mr. Robert Drummond for his closing remarks.

Robert Drummond -- Chief Executive Officer

Well, thank you very much and look, we appreciate your interest in our company, and thanks again for joining the call this morning. In closing, I just want to thank all the hardworking Keane employees for their dedication day in and day out and helping our customers be successful in the field, and also congratulate them on delivering our best safety performance in the history of the company. Thank you, guys, and have a great day.

Operator

[Operator signoff]

Duration: 60 minutes

Call Participants:

Kevin McDonald -- Executive Vice President and General Counsel

Robert Drummond -- Chief Executive Officer

Greg Powell -- President and Chief Financial Officer

Tommy Moll -- Stephens -- Analyst

Jud Bailey -- Wells Fargo Securities -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

Scott Gruber -- Citi -- Analyst

Chase Mulvehill -- Bank of America Merrill Lynch -- Analyst

Marc Bianchi -- Cowen and Company -- Analyst

James West -- Evercore ISI -- Analyst

John Watson -- Simmons Energy -- Analyst

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