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Keane Group, Inc. (NYSE:FRAC)
Q2 2019 Earnings Call
July 30, 2019, 9:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. Welcome to the Keane Group's Second Quarter 2019 Conference Call. As a reminder, today's call is being recorded. At this time, all participants are in a listen-only mode and a brief question and answer session will follow the presentation. 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 10K for the year ended December 31st, 2018, recent current reports on Form 8K and other Securities and Exchange Commission filings.

Many of these risks are beyond the company's control. We undertake no obligation to revise or update publicly any forward-looking statements for any reason. Additionally, our comments today include non-GAAP financial measures, including adjusted EBITDA and adjusted gross profit. Please refer to our public filings and disclosure, 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 thanks to everyone for joining us on this call this morning. Keane delivered excellent results during the second quarter. I'll start by highlighting several of the key accomplishments that contributed to this performance. From a topline perspective, revenue grew to nearly $428 million, an increase of approximately 1.5% and above the high-end of our guidance. This was achieved despite the declining average US rig count that occurred during the second quarter and since the end of 2018, which is down 5% and 10%, respectively.

Our results reflect the strength of our model and our team's ability to execute during a challenging market environment. Adjusted EBITDA also came in above the upper end of our guidance, improving nearly 30% sequentially to $82.4 million. Gross profit per fleet continues to increase, reaching the upper end of our guidance at $18.6 million.

Keane achieved record pump times during the second quarter driven by execution, deployment of technology, and improvements in the frack calendar. This level of efficiency is a tremendous accomplishment in today's dynamic market environment and remains a key differentiator and is why customers choose to partner with Keane. During the quarter and in line with our strategy, we converted one spot fleet to a dedicated agreement with a major customer in the Permian Basin. We are excited about this new award and proud of our team's ability to further expand our portfolio of blue-chip customers under dedicated agreements.

Finally, our second-quarter performance resulted in attractive free cash flow generation of $36 million, keeping us on pace to generate more than $100 million of free cash flow in 2019 while continuing to invest in technology and maintaining the quality and readiness of our fleets. We pride ourselves on delivering on our commitments and have a strong track record across a range of environments. Keane's operating principles have been consistent since its inception and we believe our position today is a direct function of our unwavering execution in the following five key areas.

First, it starts with the customer and our strategy of partnering with highly efficient operators under dedicated agreements. This model provides consistency on a through-cycle basis, as evidenced by our financial performance across a range of market environments. These partnerships are based on a mutual commitment to deliver leading safety, efficiency, and continuous improvement.

Second, we have a proven ability and willingness to flex our operations in the most responsible manner, whether that's proactively expanding active capacity or idling operations. We've demonstrated that our ability to remain nimble and responsive to the market while focusing on leading profitability.

Third is our established approach to capital allocation. This includes our unwavering commitment to maintaining the quality of our fleet while investing in technology to advance service delivery. It also includes our success in returning capital to investors, with more than $100 million of stock repurchases completed in 2018.

Fourth is our focus on maintaining a strong and flexible balance sheet, which allows us to be both offensive and defensive in our decisions. It also supports our investment in new technology to drive the next leg of safety and efficiency across our operations, which we continue to see in our results.

Finally is our track record of M&A. Most recently, this includes our consolidation announcement with C&J, which will create an industry-leading, diversified oil field services company with a broader scope of completions and production services.

Summarizing, our proven recipe of generating leading returns in completion services is based on three key tenets: partnering with high-efficient customers with shared values, an insatiable appetite for safe operations with continuous improvement, and a robust balance sheet enabling multi-faceted capital allocation.

So now, turning to the market, completions activity and commodity prices remain dynamic, with many operators focused on capital discipline and living within their cash flow. In this new paradigm, it's critical that we remain vigilant in identifying opportunities to create value and deliver returns. We currently have an expanding pipeline of opportunities that are based on our established and growing reputation of service, execution, and value creation.

Looking ahead at our own activity, we have good visibility into continue strength in the third quarter and are carrying momentum into the back-half of the year. As of today, we have 23 fleets deployed with most of them committed through at least 2019, providing us with visibility and a strong baseload of cash flow.

We also retained significant upside potential from an inventory of idle market-ready completion fleets, providing us the ability to quickly capitalize on the growing pipeline of opportunities mentioned earlier without any additional investment. We also have additional upside potential associated with improving efficiency via operating cost reductions and further improvements in pump times.

As evidenced last year, market dynamics can be quick to develop, particularly during the latter part of the year, including budget exhaustion and other seasonal factors. We will continue to stay close to our customers and will remain nimble and responsive, but as of today, have not received indication of any planned slowdown in activity.

As we have done in the past, we will manage within our control to drive performance in our business. As mentioned earlier, we're advancing on our journey of driving efficiency and enhancing safety through our multipronged approach to surface, digital, and down-low technologies. In close collaboration with our customers and industry partners, Keane has been investing in the development and deployment of a range of new technologies across integrated completions. Our relentless focus on innovation is contributing to tangible results, as evidenced by increased pumping hours per fleet, reduction in non-productive time, and cost savings.

These technologies are driving value creation across our integrated completions offering, which includes frack and wireline. Within frack, we have deployed several key innovations, including well swap systems that eliminate NPT and reduce transition times, remote diagnostic sensor packages providing actionable data on vibration and pulsation, extended life, fluid-end components including valve seats and packing, and a fuel additive reducing consumption while improving emissions.

Within our wireline business, most of which is integrated with our frack operations, we have also deployed several key technologies, including modular gun systems, currently deployed on 50% of our fleets, which improves safety, efficiency, and enables optimization of personnel, greaseless cable deployed on 80% of our fleets, more than 9,000 runs year-to-date, and successful completions of wells with lateral lengths greater than 3 miles, quick-latch systems on 80% of our fleets, which improves both safety and transition times.

Given our approach to integrated operations, benefits achieved in wireline business have a leveraging effect on frack efficiency. In addition, our experience clearly demonstrates a step-function improvement in efficiency when Keane frack crews are integrated with Keane wireline crews. As US unconventional well completions continue to mature, we are excited about our progress and future pipeline for innovation. Supported by this strong technical platform, Keane is very well-positioned to continue delivering differentiated value to our customers. Technology also includes next-generation frack fleets, which we define as newly developed solutions to take advantage of lower-cost natural gas, which in combination with reductions in repair and maintenance will lower the total cost of ownership.

We are laser-focused on ensuring that there is a return profile that is attractive for both Keane and our customers. We are currently exploring a number of potential opportunities and when we identify the best-fit solution that addresses our customer needs and provides a mutually beneficial return profile, then we'll execute.

Keane's long-term commitment to investing in impactful technology is a key part of our DNA. These investments improve throughput and reduce costs of operations, improving economics for both Keane and our customers. Further, our investments are responsive to the communities where we work by prioritizing health, safety, and environmental stewardship. Our technology initiatives and company culture of finding a better way will continue to drive our efficiencies and returns on a through-cycle basis.

Part of our surface technology includes the development of our whisper fleet. We are pleased to announce that we recently entered into a short-term agreement to deploy this whisper fleet to support customer activity in a noise-sensitive area of the Marcellus-Utica. This deployment will allow us to generate additional cash flow while we continue to pursue the right long-term partner in the DJ Basin. Interest remains high and we are in active discussions with several customers regarding opportunities to deploy our whisper fleet under a dedicated agreement in that region.

Before turning it over to Greg, I'd like to make a few comments on the exciting consolidation announcement that we made in June. We announced plans to merge with C&J Energy Services in a transaction that will create one of the largest US well completion service companies. Since we announced this transaction, I've spoken with many of our employees and customers and the feedback has been overwhelmingly positive. We remain on track to complete the merger during the fourth quarter of 2019. Integration planning is progressing well and we look forward to implementing our plan following transaction closing. We continue to expect annualized run-rate cost synergies of approximately $100 million within one year of closing and we're excited about the value we'll create by merging our two companies to establish an industry-leading, diversified, oil field services company.

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. Revenue during the second quarter totaled $427.7 million, up from $421.7 million in the first quarter and above the high end of our guidance, driven primarily by further improvements in efficiencies, as well as a reduction in white space in our frack calendar. Within our completion services segment, revenue totaled $420.4 million, reflecting a sequential increase of approximately $8 million, driven by the factors I just discussed. For the second quarter, we operated a total of 23 fleets and when factoring in white space, we had the equivalent of 22 fully utilized fleets. This improvement in utilization was driven by better execution between us and our customers, resulting in record pump times, as Robert mentioned earlier.

On a fully utilized per fleet basis, annualized adjusted gross profit was $18.6 million, almost 15% improvement compared to $16.2 million in the first quarter and toward the high end of our guidance, which was between $17 and $19 million. We believe this performance continues to position us at the top-end of the competitive stack and remains a key differentiator for Keane.

Revenues for our other services segment, which includes our cementing operations, totaled $7.4 million for the second quarter of 2019 compared to $9.7 million in the first quarter of '19 and slightly above our guidance of between $6 and $7 million. Gross profit improved to $1.1 million, up $2.4 million sequentially and representing 15% margin, above our guidance of approximately 10%. The improved profitability in our cementing business was driven by strong execution, in addition to our decision to idle activity in one of our operating regions. We remain committed to right-sizing our operations to maximize returns.

Adjusted gross profit totaled $103.2 million for the second quarter of 2019, compared to $84 million in the first quarter. Total company adjusted EBITDA in the second quarter was $82.4 million, above the high end of our $70 to $80 million guidance and compared to $64.1 million in the prior quarter. Adjusted EBITDA for the second quarter includes management adjustments of approximately $11.4 million, accounted for in SGNA, driven by $6.1 million of transaction costs related to a recent merger announcement with C&J and $5.6 million of non-cash stock compensation expense.

Selling, general, and administrative expenses totaled $32.6 million for the second quarter compared to $27.9 million in the prior quarter. Excluding the management adjustments, SGNA totaled $21.2 million compared to $19.8 million in the first quarter of 2019.

Turning to the balance sheet, we remain committed to maintaining a high-quality balance sheet and liquidity profile. We exited the second quarter with cash and cash equivalents of $117.1 million, reflecting growth of $33 million to our cash balance compared to $83.7 million at the end of the first quarter. We generated approximately $84 million of operating cash flow for the second quarter. For the second quarter capital expenditures, net of asset sales totaled approximately $48 million, driven by maintenance CapEx and investments in technology, resulting in second-quarter free cash flow of $36 million.

Total debt at the end of the second quarter was approximately $339 million, net of unamortized deferred charges and excluding capital lease obligations, effectively unchanged versus the first quarter. Net debt at the end of the second quarter was approximately $222 million, resulting in a leverage ratio of less than 0.7 times on a trailing 12-month basis. We exited the second quarter with total available liquidity of approximately $290.6 million, which includes cash and availability under asset-based credit facility.

From a capital return perspective and under the terms of our merger agreement with C&J, our stock repurchase program has been temporarily suspended. Upon closing, the combined companies will determine a capital return approach.

Turning now to our third-quarter guidance. For the third quarter, our assets will be comprised of 29 fleets, of which we expect 24 to be deployed. Of these 24 deployed fleets, we expect to achieve utilization of approximately 96%, resulting in the equivalent of 23 fully utilized fleets for the quarter. On this basis, total revenue for the third quarter is expected to range between $430 and $450 million, while annualized adjusted gross profit is forecasted to range between $18 and $20 million on a fully utilized per fleet basis.

For our other services segment, which is made up of our cementing business, we expect third-quarter revenue to be in the range of $7 to $8 million on gross margins of approximately 15%. Layering in approximately $20 million of GNA, this would imply adjusted EBITDA between approximately $85 and $95 million.

In summary, Keane delivered another strong performance during the second quarter, beating our guidance on nearly all metrics and achieving record efficiencies. We have clear visibility for the third quarter, where we are forecasting continued improvement in performance and cash flow. I would now like to hand the call back over to Robert for some final remarks.

Robert Drummond -- Chief Executive Officer

Thanks, Greg. I'm proud of the track record that Keane's achieved by continuously delivering on our commitments, and I'm confident we will continue to take the right actions to be successful in this market. Before we open up the lines for Q&A, I want to reiterate a few key points. First, it was a great quarter for Keane. We delivered on our commitments, achieved company record efficiencies, delivered value for our customers, maintained leading safety performance, and added a new dedicated agreement with a major Permian operator.

Second, our business is carrying momentum and due to the nature of our partnerships and quality of our customers, we have good visibility into continued strength during the second half of 2019, including 24 deploys late into the third quarter. Additionally, we retained attractive earnings upside, should market conditions warrant with five market-ready idle fleets deployable with no additional investment.

Third, we're committed to generating leading returns, maintaining a strong balance sheet, and allocating capital in a manner that balances growth opportunities with free cash flow. As such, we continue to expect greater than $100 million of free cash flow generation in 2019, reflecting a free cash flow yield of 19% or greater on yesterday's closing share price. And finally, we're committed to investing in additional technology that will drive further improvement in safety and efficiency for us and our customers. With that, we'd like to open up the lines for Q&A. Operator?

Questions and Answers:

Operator

Thank you. If you'd like to ask a question at this time, please press *1 on your telephone keypad. The confirmation tone will indicate that your line is in the question queue and you may press *2 if you'd like to remove your question queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing * keys. Again, it is *1 to ask a question at this time.

Our first question comes from the line of Tommy Maul with Stevens.

Tommy Maul -- Stevens -- Analyst

Morning, and thanks for taking the question. I want to start on the deficiency lift that you had in the second quarter and maybe you're seeing continue into the third quarter. What can you give us in terms of the drivers behind that, in terms of maybe something specific to some customers or a region? Anything to help us understand that positive progression. Thanks.

Robert Drummond -- Chief Executive Officer

Thanks for the question, Tommy. Look, as we mentioned in the prepared remarks, we've been in the process of deploying a lot of new technology, both on the wireline side and on the frack side that are focused around doing just that, improving efficiency -- well switching times to reducing NPT by being able to deploy, for example, greaseless wireline cables on nearly 80% of our fleet, where we then extend the range of operating parameters that give you the ability to reduce the NPT overtime. All those things have a positive impact, as well as we guided last quarter that we had significant white space in the calendar in Q1 that we were able to work with our customers out of the schedule in Q2 and that gives us the same visibility of the same reasons that we're guiding the way we are for Q3. But Q2 for us was very solid from an efficiency quarter-over-quarter perspective.

Operator

Okay, our next questions are from the line of Sean Meakim with J.P. Morgan.

Sean Meakim -- J.P. Morgan -- Analyst

Thank you, good morning. Could you, maybe, just walk us through the bridge from your Q2 results to your 3Q guidance? It sounds like, basically, utilization should be pretty flat, but there could be some upside to revenue if you're driving more volume with those fleets. Sound like we're, maybe, looking for flattish pricing? And then these further -- in fact, shipping away more to cost savings that you had such success within the second quarter, if that, kind of, gets you to where you guided for 3Q. Does that sum it up? Anything I'm missing there as we think through those moving pieces?

Greg Powell -- President and Chief Financial Officer

No, I think that's right, Sean. It's a little bit of volume. We've got one more fleet, so we're going from 23 to 24 deployed. Price, I'd say is flat. And we're just laser-focused on driving these efficiencies. So the same benefits we're seeing from the technology, which is allowing us to both do more with the same assets in a day as well as reduce cost. The benefits of the integrated frack and wireline and the technologies we're injecting are allowing us to optimize the personnel and share personnel across tasks. So it's just a combination of those factors in a stable price environment that are allowing us to help the customers be more efficient, lower their spread costs, and get to the next pad faster, and improve the efficiencies on our end. That's the win-win value proposition we're really selling to the customers.

Sean Meakim -- J.P. Morgan -- Analyst

Got it. Thank you for that. I appreciate the clarity. And then you indicated that you don't have any firm visibility into shortfalls and volumes in the fourth quarter. White space was a bit of a challenge in the first quarter, and of course, ending year-end was a challenge for the whole industry last year. Could you just give us a sense of what you learned and how customer exchanges have evolved over the past year? Give you relative comfort in terms of how things could shape up this year compared to the fourth quarter of '18?

Robert Drummond -- Chief Executive Officer

We spend a lot of time with our customers, recently, not only thinking about the future for activity, but also in discussions around our merger with C&J, so we have got a lot of time with them, lately. And I would just say that when they did their planning for 2019 activity, the oil prices they planned around, most of our customers are around $55.00, I think, would be, kind of, a mid-point average. And we're north of that now, so I don't think there are many surprises for the guys that we typically are working for.

However, we always see the seasonal activity impacts that relate to the holidays and even a little bit of weather to back into 4. So I wouldn't be surprised to see a little bit of that as you compare it to, say, Q2 or Q3. But no signaling from our customer base. On the macro market, I think it would be very much related to what oil price does the rest of the year and how that impacts each customer's cash flow because I do believe the market, without a doubt, in general, are going to operate within their cash flow guidance. And if that major budget is getting exhausted, that may affect a large part of the market. But just our customer base, we just don't see that much of it at this point.

Sean Meakim -- J.P. Morgan -- Analyst

Would you characterize that as being different from a year ago?

Robert Drummond -- Chief Executive Officer

Not really. I think it depends on, not only what the oil price actually is, but what the outlook for 2020 is at the time they're doing their fourth-quarter planning, but it's very similar.

Greg Powell -- President and Chief Financial Officer

Yeah, our fourth quarter last year, Sean, was less disruptive. It had the normal factors that Robert discussed, but our customer base we work for is a little bit less budget exhausted, sensitive, I think than the general pull out there. So our fourth quarter last year hung in there in relation to third quarter.

Sean Meakim -- J.P. Morgan -- Analyst

Right, right. That's fair. Great, thank you.

Robert Drummond -- Chief Executive Officer

Thanks for the question.

Operator

Our next question is from the line of Brad Handler with Jefferies.

Brad Handler -- Jefferies -- Analyst

Thanks, good morning, guys. Robert, thank you for leading a little bit with your next generation. It's an interesting topical question, I guess, for all of us. So maybe I could ask you to just delve a little deeper in your thinking around that. So maybe if I could ask you to calibrate. How far along do you think the technology is today that makes you that much more interested, and how far along do you think customers are in their own interest and comfort level, both of which may be suggesting that we could start thinking about when you might move forward with some next-generation fleets?

Robert Drummond -- Chief Executive Officer

Thanks for the question, Brad. Look, I would say that we've been thinking about this for a couple years and working on things internally and also working closely with our long-term vendor partners externally. When we hear EPRAT, we want to say next-generation because whatever develops technically is going to be developed to take advantage of the fuel arbitrage between diesel and fuel gas, as well as, perhaps, new pump designs that lower the cost of operations, repair and maintenance-related.

So where we're at, technically, I would just say is that there are a number of different options out there in the market today that are under different degrees of development to do that. And I feel that we feel and I think many of the customer base feels that, maybe, we're a little bit early on these bets on technology and that it may behoove us to take a look at it and, certainly, plan to evolve in that direction. But in the meantime, there are a lot of things that we can do to bridge to that that begin to take advantage of the field gas arbitrage and working toward the lower cost of repair and maintenance related to the conditional fleet and referring, maybe, there to dual-fuel optionality. We see the demand for dual-fuel increasing and I think that the evolution to whether or not the customers are ready has a lot to do with the field gas network availability on a routine basis to everywhere that they plan to be operating. Because certainly, that arbitrage does provide a means for a return on investment.

So we've been, I would say the last six months, or so, working closely with our current customers to help us mutually get to the best technical solution, while also investigating the best economic model to provide mutual return on investment for both parties. If you ask me, is the rate of interest on the increase, I would say yes. The market's got a lot of buzz about it, of course, and probably rightfully so. And the interest level of our customers, I would say they're investigating it cautiously.

So we're right there in the front with them. I think that a solution that takes advantage of the field gas, ultimately, does not necessarily include electric, but it probably does include, no question about it, the burning of field natural gas. So a lot of evolution going on there. We're right in the middle of it. We're even field testing one of these tier-4 dual-fuel systems that you've been hearing a little bit about in the market. We got one plugged into one of our fleets today. And we like to be thought of as being on the technical edge of this, providing a number of options for our customers, as we determine which one, technically, is ultima. [Audio cuts out].

Brad Handler -- Jefferies -- Analyst

It does. Thank you, I appreciate the thoughtful answer. I guess, just to make sure I've heard you, obviously, you're actively engaging with this, I'm sure, but your customers, it sounds like in your conversations, they're being realistic around understanding if they're right, the capital components here and so that's going to wind up figuring into the commercial side. Or do you sense that the market is being set in a way that might disadvantage you in that respect, right? Because others may be incorporating higher capital costs into a commercial model that resembles current technology.

Greg Powell -- President and Chief Financial Officer

Yeah, Brad. It's Greg. I would characterize it as we're aggressively working to have a portfolio of technical options for the customers from bridge technologies to full-blown solutions that are out there today. But we pace the deployment of that technology based on the customer's roadmap and what they want to do and we're fortunate to have an existing set of customers that are going to help us define that. And then the final piece that you're asking about is making sure we can find an arrangement, a contract structure that provides a mutual win-win, both on R&M savings and on fuel savings, that both of us get an adequate return profile and that's, kind of, the glue that connects the technology to the customer base and what pace they want to move at. So those are the active dialogues we're in. And when that phalanges up, like we said in the prepared remarks, then we'll move forward.

Robert Drummond -- Chief Executive Officer

And our discussions with the customers have been very reasonable to this point.

Brad Handler -- Jefferies -- Analyst

Got you. Okay, thanks for the color. I appreciate it. I'll turn it back.

Robert Drummond -- Chief Executive Officer

Thanks, Brad.

Operator

Our next questions are from the line of Chris Floyd with Wells Fargo.

Chris Floyd -- Wells Fargo -- Analyst

Good morning, guys. In the context of these new technologies that you're deploying and potentially e-frack related technologies, I'm wondering if you could give an update on what you expect in terms of any maintenance CapEx per fleet this year and next year and any other special project budget that you might have or incorporate just so we can think about 2020 CapEx levels?

Greg Powell -- President and Chief Financial Officer

Sure, let me give an update. There are a few points on CapEx. Look, our CapEx was always planning to be front-end loaded this year, as we communicated earlier. The maintenance CapEx is hanging in there at $4.5 million. That's in light of the increased pump hours, so there are more pressure on the fleet and they're putting more hours on the equipment. But like we said, we're unwavering on keeping those fleets fresh. So the technology, we're starting to see tangible benefits in our numbers, and we've decided to accelerate some of that spending into 2019 because we're seeing a nice return profile on it.

In addition, we're also working very hard on digital, and Robert mentioned dual-fuel, given the demand we're seeing on that. So as a result, we will see a slight increase in our previously guided CapEx. We guided 140. We're now likely to see 150, or 150 to 160, is the new range with some additions of technology into 2019. Including this slight increase in CapEx, we're still confident in delivering over $100 million in cash flow that we've been communicating since the beginning of the year.

As it relates to 2020, I think some of these projects we're doing are going to start to chip away at that CapEx per fleet and get some productivity. So we're hoping the 4.5 goes down by projects we're investing in to extend the useful life of the components. So it's early days on that, but we're trying to drive productivity into the 4/5 and then use that productivity to fund -- this technical revolution we're on is going to be a couple-year venture. Some of it's low-hanging fruit and some of it's harder to get at and will take continued investment. But the nice thing is, we think it has a nice payback profile inefficiency.

So I still think in the zip code of 150 is a good marker now to use for 2020 and as we firm up the technology pipeline and what we're going to execute on, we'll communicate accordingly.

Chris Floyd -- Wells Fargo -- Analyst

That's helpful, thank you. For my follow-up, I think there's a perception that, and probably rightfully so, that you guys had to stick to your pricing and your dedicated agreement given how well it's been performing, and as we get into the back-half of the year, in discussions with customers and essentially since the end of 2Q, it feels like there's been a little bit of more aggressive bidding in some cases. Do you feel like you'll be able to maintain current pricing levels in your dedicated agreements in 2020?

Robert Drummond -- Chief Executive Officer

Thanks for the question. Look, I think our current customer base, they have a long-term activity outlook and they understand that the balance between overall frack value is associated with efficiency and price. And we've been able to consistently, year after year, sequentially show them better frack economics. I think they will continue to expect that and that the balance of that efficiency side being continuously improved via the technology deployments we've been mentioning helped them to achieve better frack economics.

So I think it's a customer-by-customer process. Our dedicated agreements have, in general, staggered terms and we will address those when it's mutually acceptable for both of us. But I don't think that the spot market pricing -- it may have an impact on our overall strategy about how we bring additional fleets into the marketplace. The recent example we just gave this quarter is a case where we roll a fleet into the market, the customer gets a taste of the activity, looks at our efficiency closely, and decides whether or not moving to a dedicated agreement makes sense. So our strategy won't change that way.

I hope I addressed your question, there, overall. We don't see a lot of difference as we roll into 2020 compared to when we rolled into 2019, last year.

Chris Floyd -- Wells Fargo -- Analyst

Okay, great. Thanks a lot.

Operator

Our next questions are from the line of Vez Feshun. I'm sorry, hold on one moment, please. Okay, I'm sorry. We had someone move out of the queue. Our next questions are from the line of Stephen Gengaro with Stifel.

Stephen Gengaro -- Stifel Financial Corp. -- Managing Director

Thank you. Good morning, gentlemen. I just wanted to follow-up quickly. I'm not sure how much you can comment on this. As you've done more homework, as far as the acquisition is concerned, but have you thought about your EBITDA for fleet performance, your gross profit per fleet performance is, obviously, very strong at the higher end of the competitive list. Have you made any progress or any comments on how you think you can bolster what you're merging with, going forward?

Robert Drummond -- Chief Executive Officer

Thank you very much for the question. Obviously, we're very excited about being able to create one of the largest US well completion services companies going forward. We are still in the point where, right now, we can't really get involved in each other's business very much, other than planning for post-close. But I would say that the integration process is going very well and that we're working together as a team to get the plant set up so that we can hit the ground running on Day 1. You may have noticed that we followed our S4 registration on July the 16th and that things are going well there. We got good news on our HSR process. On July the 18th, we got notification of early termination of the waiting period. So I would just say that the transaction is progressing as we had anticipated, but we really can't talk much about what the new code looks like because we're just not there, yet.

Greg Powell -- President and Chief Financial Officer

Yeah, Steven, I would just tell you we got $100 million of synergies that we've communicated that are primarily cost-driven and opportunity to share best practices on performance between product lines will absolutely be laser-focused on when we close the deal and are able to address the types of issues or opportunities you mentioned.

Stephen Gengaro -- Stifel Financial Corp. -- Managing Director

Thank you. And if you don't mind commenting, you mentioned, the move -- I think you're deploying 50% of your per systems, the modular systems, now. When you're doing that, is that cost-benefit accruing to you and are you making those decisions? Are you getting that from the EP? And do you think you will continue to advance that path?

Robert Drummond -- Chief Executive Officer

So look, any deployment into a customer's wells, it's a mutual arrangement, of course. They would vet anything that we're moving, technically, toward. But when you're talking about deploying wireline technology -- and this is one of the strengths of our offering and the reason we're focused on having completion crews where we have wireline and frack merged together is that deploying a technology like that one takes some risk out of the system so that you would expect to have more runs per miss-run, less nonproductive time and so forth. And that accrues to the frack efficiency. You can see that in our numbers in Q2, as well. So I would just say that not only does it improve the profitability of the wireline business through better efficiency and lower operating costs, ultimately, because you can deploy with less field personnel, but it also accretes to the frack performance. So that's the reason we like it so much and we put so much focus on that technology, along with greaseless cable deployment and these quick-back systems, all for the same reason.

Greg Powell -- President and Chief Financial Officer

And I would just add that on any of these decisions, and this is part of what makes our relationships sticky, is we try to find a way to share the cost and the benefits such that it's a mutual investment decision and we both benefit from it. The more technology we can interject to lower the customer's dollar-per-barrel, that's the end game.

Robert Drummond -- Chief Executive Officer

And obviously, they've measured that result.

Stephen Gengaro -- Stifel Financial Corp. -- Managing Director

Great, thank you. I appreciate the color.

Operator

Our next questions are from the line of John Daniel with Simmons.

John Daniel -- Simmons -- Analyst

Hey, guys. Nice quarter. Robert, first question for me is I know you mentioned earlier that your customers have a long-term outlook, but they also are concerned with well costs and we keep hearing about frack price concessions. So I'm just curious if this is a reasonable scenario which would apply to you, which is you've provided them price breaks, but you're making up for that with more stages per day, such that it's a win-win for both of you?

Robert Drummond -- Chief Executive Officer

John, yes. That's what I was trying to say. In 2019 and I think even previous, that's exactly the situation.

John Daniel -- Simmons -- Analyst

Just want to make sure. Okay. You referenced testing the CAT Tier 4 DGB engine. I'm curious how the results have been and when would you make that decision to order enough that you could fully retrofit entire fleets?

Greg Powell -- President and Chief Financial Officer

Yeah, thanks, John. So we're seeing results, I think, consistent with what you've seen externally in the 75, sometimes 80% substitution rate, which is 20 basis points above what we see on the Tier 2s. The Tier 4 does not offer a kit option, so you do have to replace the engine, so it's a little bit more expensive proposition. But on the investment side for Keane, this is all going to be dictated by the customer. So we're going to present a portfolio of options to the customer, and where are they in the roadmap, and then what is the joint economics look like? So there's a return profile for both parties, but there are only three of these units being tested. We've had one out running on natural gas in the field, so we're collecting good data on it and partnering with CAT. And as soon as we get the demand signal from a customer that that's an option they want to move forward with, we will. I don't think you'll see us do it on a speculative basis.

Robert Drummond -- Chief Executive Officer

We do have multiple solutions for the customer's particular situation.

John Daniel -- Simmons -- Analyst

Let me ask you this, though, kind of, a marketing question. But if you are always replacing engines just because of the useful life, you guys run this stuff hard, it's well-utilized. When engines fail going forward, are you going to replace a Tier 2 with a Tier 2 or would you take that opportunity to upgrade? Because if nothing else, it does give you a marketing advantage versus competition.

Greg Powell -- President and Chief Financial Officer

Yeah, I think it comes down to the cost-benefit. It's just going to be a math equation, other than the fact if you're talking dual-fuel. But if you're just talking straight Tier 4 versus Tier 2, that's a math decision. If you're talking taking off an engine and putting on a Tier 4 dual-fuel, that's a different decision. But when you look at the math, there's definitely the maintenance CapEx savings that helps to offset the initial investment for making those upgrades, for sure.

John Daniel -- Simmons -- Analyst

Thank you. It's nice to see stocks going up today.

Greg Powell -- President and Chief Financial Officer

Thanks, John.

Operator

Our next questions are from the line of Vez Feshun with Howard Weil.

Vez Feshun -- Howard Weil -- Analyst

Hey, thank you for getting me back in. Again, a very good quarter. Congratulations. You guys talked about record pump time. Can you help us think about how much improvement was there, either in terms of percentage or hours?

Greg Powell -- President and Chief Financial Officer

Yeah, we had 9% sequentially, quarter-over-quarter. And then previously, we said year-over-year 18 to 17. We had 15%. So we're continuing to move the needle. A lot of it in the past has been brute force, just tracking the minutes and being zealots at focusing on it at all levels of the organization and the next leg is coming through technology.

Vez Feshun -- Howard Weil -- Analyst

Okay, thanks. That's helpful. There have been many questions around what's going on in the Marcellus Basin. Can you say what you guys are looking at in Marcellus Basin, how the conversations with customers are progressing?

Robert Drummond -- Chief Executive Officer

On a macro, I would just say it's a bit early, perhaps, for 2020 planning for most of the market, I'd say. Although we do have a long-term relationship with a number our customers and our little microcosm of the thing that we look at, I would say, is that these guys have been on a multiyear plan anyway, most of them. And I would say activity is more flattish as you look into 2020. I might even say, if I had to say up or down, slightly, I'd say slightly, perhaps, up because they've been guiding that way for not just a few quarters, but maybe more than a year.

So for us, I guess, you'd say we're going to be planning around 2020, obviously, subject to core price having a huge swing one way or the other, relatively flat '19 versus '20 in the oil markets. In the Marcellus, it depends. Same story around the commodity, around what gas prices do. But again, even there, we're partnered with the market-leaders there that have a long-term view. And we've been able to continuously show them improved economics, year to year, and we'll continue to do that. So we feel pretty good about looking into 2020, frankly.

And we did mention that we added a fleet this quarter, even though the market rig count was down. I hadn't plugged this in a while, but we only started really selling at Keane in the first of this year. I would just say that many parts of the market didn't know much about it, to the company. And we're doing a little bit better now of getting to become known from our perspective of service delivery. So I think the opportunity base for us is not just purely linked to what's going on in the macro. I'm really excited about that. That's what I'd say as we roll into 2020.

Vez Feshun -- Howard Weil -- Analyst

Okay, that's helpful. Just a clarification, and I don't know if you guys already covered that. So one more fleet in 2Q and one more fleet in 3Q. I know you guys talked about converting one spot into dedicated in Permian and you also spoke about Vesper. So is the Vesper fleet started in 2Q or that's more the third quarter number that you're talking about?

Greg Powell -- President and Chief Financial Officer

Yeah, so the reconciliation is we go up one fleet second quarter to third quarter. It's a combination of one fleet starting late in the second quarter and then the whisper fleet's going to do a short-term job starting mid-August. So when you add the math on the partials, you get to 24 active fleets in the third quarter with 23 fully utilized

Vez Feshun -- Howard Weil -- Analyst

That's helpful. And one last question, if I may. There have been lots of discussion on antiquated perforating guns on the manufacturer's costs. You also mentioned modular consistence. Can you talk about what's your view on integrated guns or other new technologies on the perforated systems?

Greg Powell -- President and Chief Financial Officer

Yeah, look, there's been a lot of innovation. There are multiple vendors coming up with solutions that allows you to deliver loaded guns to the well site. They're safer. They're more reliable. It gives us an efficiency on the personnel of staffing our gun shops in the yards and transporting them back and forth to the well site. It's an evolving area. We're working with multiple vendors out there and we're excited about the innovation and the improvements we're seeing in performance of the well site.

Robert Drummond -- Chief Executive Officer

It's a competitive arena for sure and we like to have an optionality as the technology continues to evolve.

Vez Feshun -- Howard Weil -- Analyst

I guess where I was going with, given the competitive dynamics, are you actually seeing some pricing help on the integrated guns?

Robert Drummond -- Chief Executive Officer

That's something I would prefer not to comment on, competitively. Obviously, supply and demand have impacted them as well, and they want to be long-term partners with us and for us, we do try to treat our vendor community just like we have, the relationship we have with our customers. It's long-term minded and it's focused on getting to the best overall long-term value proposition. So yes, we get good cooperation from our vendors.

Vez Feshun -- Howard Weil -- Analyst

Thank you for taking my questions, and again, congratulations on a good quarter.

Operator

Our next questions are from the line of Facar Said with Alticor Corporation.

Facar Said -- Alticor Corporation -- Analyst

Thanks for taking my question and once again, congrats on an excellent quarter and the deferential performance. My question relates to the upcoming merger with CJ. What steps are you taking upfront to make it an efficient merger with respect to people management and systems integration? Because those are the areas where, typically, mergers have initial problems.

Greg Powell -- President and Chief Financial Officer

Yeah, I know I appreciate that and I think we all have got some scar tissue over the years and lessons learned on these things. Look, we're cognizant that the integration and the integration planning on mergers this size is what makes them successful. So we've got some top-tier third party support helping us on the integration planning. We've allocated resources from both sides and we're putting a very robust planning process in place where we're all spending a good chunk of time on it now to make sure we got good Day 1 plans and that we move. A lot of our experience says the longer you wait on these things, the more they come back to bite you. So systems integration and org structures, that's all the planning we're doing now so when we hit Day 1 there's clear communications in the organization on what the strategy is, how we're going to operate. And then the plumbing, if you will, all gets integrated.

So we're in the planning phase. That's all we can do at this point, but we're excited with the progress and we're very cognizant of the point you're making that effective planning is critical to make these things successful.

Robert Drummond -- Chief Executive Officer

And I'd also add that, maybe, there's a little bit less risk in this one than many others simply because we have minimal overlap. Minimal overall around our customer base, as well as in some of the geography and some of the business lines. So we're definitely switched onto that.

Facar Said -- Alticor Corporation -- Analyst

And secondly, as your customer base expands from the merger, do you think that would be dilutive to overall efficiency, your frack efficiency, or you think that you'll be able to maintain that? Because with a bigger, larger-sized fleet, your choices may become more limited in terms of the quality of the customer base or customers that are willing to share the same efficiency views.

Greg Powell -- President and Chief Financial Officer

Look, you know the story. Keane started with one fleet in 2011 and we're up to almost 30. So we've dealt with that same challenge of maintaining the core principles as you grow. We'll approach the same way partnering with C&J, and try to get the best practices out of both companies to maximize returns in the business. Whenever you grow, what you mentioned is a challenge, but we think there are more customers with the push for returns that are moving into this camp so there should be a bigger pull to address.

Facar Said -- Alticor Corporation -- Analyst

Great. Thank you very much. That's all I have.

Operator

Thank you and as a reminder, you may press *1 to ask a question at this time. Our next questions are from the line of Harry Pollans with Bank of America.

Harry Pollans -- Bank of America -- Analyst

Hey, guys. Thanks for squeezing me in. Piggy-backing on a couple of the first questions earlier, I know you highlighted in the CJ presentation vertical manufacturing on the wireline side, this tangential synergy, would you ever consider building your own preassembled perf gun via that?

Greg Powell -- President and Chief Financial Officer

Yeah, I would say everything is on the table. C&J does some of that today and that'll be part of the integration planning on what's the best solution for New Co.

Harry Pollans -- Bank of America -- Analyst

Got it. That makes sense. And then when you talked about the accelerated spending this year on some new technologies, are you able to identify which technologies those are and if we're going to see the return on those hit the bottom line this year?

Greg Powell -- President and Chief Financial Officer

Yeah, we shared a basket of them in the prepared remarks, some in frack, some in wireline. There are probably about 10 more behind that in each product line. We're not going to get into the specific technologies, but there's a really good pipeline. And then the other one we're really excited about that takes a little more time is the digital. So we're revamping our digital infrastructure to get better, faster data and better decision making and some of the AI tools and automated control systems in the field. It's a little bit longer lead-time, but I think, as we've said before, this is a two-year journey to really change the game on the cost structure. And we're excited about the second-quarter results and we're starting to chip away at it and we expect to see continued progress.

Robert Drummond -- Chief Executive Officer

And I would reiterate, too, that dual-fuel is one of those areas that we just want to keep up with the demand associated with that.

Harry Pollans -- Bank of America -- Analyst

Awesome. That makes sense. Thanks so much, guys. Appreciate it.

Operator

Our next questions are from the line of Daniel Boyd with BMO Capital.

Daniel Boyd -- BMO Capital -- Analyst

Thanks, guys. You guys just continue to blow it out on the execution front, proving the skeptics wrong. You mentioned the free cash flow yield earlier on the call and I think there is still some skepticism there in terms of the sustainability of this free cash flow. So just wanted to see if you can speak a bit to how much flex there is in your CapEx plan, if the outlook takes a turn for the worst, or how do we think about the long-term free cash flow generation to your business?

Greg Powell -- President and Chief Financial Officer

Hey, look, I appreciate your positive comments. I'm not convinced we've moved a lot of the skeptics based on the stock price. But look, all we can do is put our heads down and execute and be consistent on the playbook, which we've been for nine years, now, so we'll continue to do so. When it comes to flex, I think we've shown the ability to be incredibly nimble in the business. So we've generated $44 million of free cash flow year-to-date second quarter. If you look at the third quarter guide, that's going to be another $50 million. So you're almost at $95 million coming out of third quarter, if we hit what we guided here, the mid-point of that guidance range.

So look, can we flex CapEx? Of course. The maintenance CapEx is variable. That's very easy to flex based on activity if we were to see a slowdown. And then on the strategic projects, they have a nice return profile, but by definition, being strategic, they're discretionary. So we maintain a very close handle on the business and the levers and should we see a change in the macro-environment we'll absolutely adjust capital spend and the cost structure accordingly, like we've done in the past.

Daniel Boyd -- BMO Capital -- Analyst

Great, that's what I thought. Thanks, guys.

Operator

Our next questions are from the line of Tommy Maul with Stevens.

Tommy Maul -- Stevens -- Analyst

All right, thanks for allowing me back in. I wanted to finish with a higher-level question where you guys have shown some momentum for a couple quarters now. In 2Q, you mentioned you've added a new customer with a dedicated agreement, your profitability per fleet ticked higher, and should again in Q3, and you're leaning into some of the tech-related CapEx spend that should drive efficiency. You said that against the commentary and posture from some of the larger players in the market, where they're idling more capacity, cutting more CapEx this year and maybe beyond. And so I just wonder from your competitive standpoint, is that an opportunity to advance the frontline and take some territory? Or how should we reconcile the recent trend that you guys have put up versus, as I said, some of the larger players in the market? How does that play out?

Robert Drummond -- Chief Executive Officer

Good question, Tommy. Look, I would say our strategy will remain the same almost no matter what happens in the market. When I go back and say that, I've been here almost a year, now. And I don't think Keane was well-known across the entire market. So the ones you refer to, they've been out there a long time and they have a huge base of operations. We got continued upside. Will it be at someone's expense? I mean, I guess if the rig count's not going up, perhaps that's the case. But I do think that as customers get a chance to get a view of our safety and efficiency, they want some of it and they're interested. And we're going to continue to try to grow into that simply by demonstrating what we do, get a toe-hold, prove it and then try to expand upon it.

I think, historically, we've been successful. Once we get the first fleet, it gives us an opportunity to get another one, and another one, and we got a number of cases where that's been the case. That playbook has worked for us and we're going to continue to use it. I think that if you're participating in the bigger part of the market, or perhaps a different part of the market with different type of customers, your playbook may look a little different. So that's just all I'd say.

Tommy Maul -- Stevens -- Analyst

Thank you. That's all from me.

Robert Drummond -- Chief Executive Officer

Thanks, good question.

Operator

As we have reached the end of our question and answer session, I'd like to turn the floor back to Robert Drummond for closing comments.

Robert Drummond -- Chief Executive Officer

Well, thank you very much and we appreciate your interest in Keane. Thanks again for joining the call this morning. In closing, I always want to thank all the hard-working Keane employees for their dedication day-in and day-out in helping our customers be successful. Thanks and hope you have a great day.

Operator

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.

Duration: 63 minutes

Call participants:

Kevin McDonald -- Executive Vice President and General Counsel

Robert Drummond -- Chief Executive Officer

Greg Powell -- President and Chief Financial Officer

Tommy Maul -- Stevens -- Analyst

Sean Meakim -- J.P. Morgan -- Analyst

Brad Handler -- Jefferies -- Analyst

Chris Floyd -- Wells Fargo -- Analyst

Stephen Gengaro -- Stifel Financial Corp. -- Managing Director

John Daniel -- Simmons -- Analyst

Vez Feshun -- Howard Weil -- Analyst

Facar Said -- Alticor Corporation -- Analyst

Harry Pollans -- Bank of America -- Analyst

Daniel Boyd -- BMO Capital -- Analyst

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