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NexTier Oilfield Solutions (NYSE:NEX)
Q2 2020 Earnings Call
Aug 4, 2020, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, and welcome to the NexTier Oilfield Solutions Second Quarter 2020 Conference Call. [Operator Instructions]

For opening remarks and introductions, I'd like to turn the call over to Kevin McDonald, Chief Administrative Officer & General Counsel for NexTier. Please go ahead, sir.

Kevin McDonald -- Executive Vice President, Chief Administrative Officer and General Counsel

Thank you, operator. Good morning, everyone, and welcome to the NexTier Oilfield Solutions earnings conference call to discuss our second quarter 2020 results. With me today are Robert Drummond, President and Chief Executive Officer; and Kenny Pucheu, Chief Financial Officer.

Before we get started, I would like to direct your attention to the forward-looking statements disclaimer contained in the news release that we issued yesterday afternoon, which is currently posted in the Investor Relations section of the Company's website. Our call this morning includes statements that speak to the Company's expectations, outlook or predictions of the future, which are considered forward-looking statements. These forward-looking statements are subject to risks and uncertainties, many of which are beyond the Company's control that could cause our actual results to differ materially from those expressed in or implied by these statements.

We undertake no obligation to revise or update publicly any forward-looking statements for any reason. We refer you to NexTier's disclosures regarding risk factors and forward-looking statements in our annual report on Form 10-K, subsequently filed quarterly reports on Form 10-Q, and other Securities and Exchange Commission filings. Additionally, our comments today also include non-GAAP financial measures, additional details and a reconciliation to the most directly comparable GAAP financial measures are included in our press release that is posted on our website.

With that, I will turn the call over to Robert Drummond, Chief Executive Officer of NexTier.

Robert Drummond -- President and Chief Executive Officer

Well thank you, Kevin, and thanks everyone for joining on the call this morning. I would like to start the call by taking it back to our foundation. We acted last year to address the need for consolidation in our industry when we announced a merger of equals establishing NexTier, a leader in U.S. well completion services. NexTier has clearly demonstrated its ability to complete and integrate transformational transactions and I am extremely proud that all aspects of the transactions strategic rationale have been realized.

We exceeded our targeted synergies and completed a very efficient integration process. We achieved these results more than six months ahead of schedule, with our run rate synergies been full realized in April. The integration and the enhancement of our ERP system was successfully completed during the second quarter as well. We significantly improved our financial position and balance sheet and further improved upon the strength with the divestiture of our well supported services business in March, in a transaction that accelerated approximately five years of free cash flow into our balance sheet by simplifying our operations.

Our ability to respond to completion opportunities all over the U.S. and even in Saudi is evident in our safety performance, service quality and ultimately, our market share. Lastly, integrating two equal size companies provided a platform to foster best practices, assets and the people from both companies. Our operating capabilities are now stronger than ever and we remain intensely committed to delivering long-term stakeholder value for our shareholders, customers and employees.

As I'll get into more in a moment, we pivoted late in the first quarter and throughout the second quarter on restructuring the organization to be even more lean and nimble, while also preserving the balance sheet. This is the most challenging oil field services market environment that I have experienced in my long career. Against this backdrop, we remain committed to preserving our balance sheet while positioning our sales to harvest strategic opportunities from medium and long-term value creation as the market rebounds.

In some, we are extremely focused on responsibly managing our business through these unprecedented market headwinds and we will never lose sight of our objective to continue building the company for the long haul.

Returning our discussion back to the second quarter results. During the quarter, we extended our track record of meeting customer commitments despite a very tough environment. Activity declined in line with our expectations as the E&P operators shut-in production and temporary halted a significant majority of the drilling and completion activity in response to the COVID-19 economic shutdowns. And with that in mind, I'd like to share several highlights from the quarter.

We achieved U.S market share at the upper end of our forecasted range which we believe placed us with the second most hydraulic fraction and fleet working in the U.S. Our speed to assess in response to the activity declines are evident in our reduced cost structure and continued risk management and service quality. The resulting strong adjusted EBITDA decremental performance was mainly ahead of our outlook. We accelerated synergy capture and exceeded our full integration synergy run rate commitment in early April. We acted quickly and decisively to significantly reduce our cost structure in both operations and support, including a 35% sequential decrease in adjusted SG&A and remain on pace to achieve further reductions by year-end.

We successfully deployed a second completion fleet in Saudi under our collaboration with NESR as we continue to grow through this differentiated international outlet. We continue to move forward with our innovation program, including the deployment of NexHub, providing 24/7 remote monitoring and management capabilities across all of our deployed U.S. fleet and further enhancing the value added by our digital initiatives. We achieved an internal free month in June with no recordable incidences. This an incredible achievement in any environment but I am particularly proud of our team for not losing focus in the time of crisis.

We increased our cash position by $23 million, driven by working capital release and the liquidation of excess assets, not satisfying our long-term return criteria. We fully repaid our $175 million of revolver borrowings, exiting the quarter with $337 million in cash and a net debt position of zero.

And finally, we've read the market, took responsive actions early and executed our plan effectively. We did not resize the organization to best suit the trough of market activity, instead, we've been very thoughtful around managing the company in a way that ensures we remain good stewards of our resources, while positioning ourselves to be ready own demand to drive our business forward as the market rebounds. While I am very proud of how our team has performed and delivered, seeing so many of our former colleagues and everyone across the industry by this market downturn has not bee easy. We unfortunately had to reduce a significant portion of our operations in response to where we saw the market headed. I am especially proud of how our team stayed focused as activity round down, delivering some of our best safety and operational performance while continuing to uphold our commitments to our customers. I am thankful for all of our employees to continue to make so many sacrifices while navigating a challenging environment at work and at home. Our focus remains on taking all appropriate actions and precautions to help protect the health and well-being of our employees, partners and the communities in which we operate.

Turning to how we saw activity in the second quarter play out. The dual demand and supply shaft that emerged in March had immediate negative impacts on commodity prices and market sentiment, which translated into significant reductions and completion activity. April activity remained relatively resilient and we averaged 17 fully utilized deployed hydraulic fracturing fleet versus the first quarter average of 27 fleets. As producers work through their immediate plans and programs, mini hit pause, resulting in a precipitous decline in drilling and completion activity, we estimate the market drop to 50 or less fully utilized completion crews in late May or early June.

In response, we were quick to first execute on our defensive measures. Our actions protected our liquidity position and adopted a cost structure that helped us navigate these unprecedented activity declines, while at the same time, preserving the ability to fund the working capital necessary to thrive when the market rebounds.

Our decisive actions centered around four key focus areas, customer alignment, balance sheet optimization, strategic staffing and managing the one-stacking and preservation of our assets. We have now positioned NexTier to differentiate our service quality, value proposition and overall financial position in the current environment and more importantly, into the future recovery, benefiting our customers, employees and shareholders. The already benefits to these actions are evidence in our financials and the well managed decrementals, financial strength and sustainability remain critical factors in customer decisions once using service providers to partner with, making our responsive actions essential to our success in navigating current headwinds and best positioning us to win during the recovery. All these actions demonstrate our commitment to managing what we can control. Nevertheless, our results are very impacted by government shutdowns across the global economy and the overall macroeconomic impact on oil and gas supply demand.

Returning now to what we see going on today. There is no doubt that conditions have shown signs of improvement, albeit on a much smaller base. Churn in production has been brought back online while producers contemplate drilling and completion plans for the second half of the year and beyond. Commodity prices have improved, but they remain below threshold levels necessary for driving significant rig activity growth.

Against this backdrop, right pricing remains highly competitive as excess capacity continues to pursue limited new opportunities. Based on these market influences and the associated pricing environment, we are intensely balancing two critical factors, first, our commitment to servicing customers and second, our foundational commitment of maintaining balance sheet stability, needed to ensure long-term success. Current U.S. land market conditions are not sustainable long-term, meaning activity and price improvements will be needed to meet future industry service requirements. But we have visibility on activity in the third quarter. The fourth quarter remains extremely uncertain, as the market grapples with the ongoing impact of virus-related disruption, old demand uncertainty, budget exhaustion dynamics, geopolitical pressures, and other seasonal factors. Regardless of the exact timing of a more fulsome recovery in activity, we believe several factors will be critical in optimizing our ability to capitalize on a rebound.

We consider the following key elements of our overall rebound readiness strategy. First, people. The NexTier integration process gave us access to a great pool of talent. We have an extraordinary team in place today. We have taken many steps to best position ourselves to reexpand our operational capabilities when the market begins to pick up again.

Second, lasting power. The protective measures to preserve our balance sheet helps us maintain financial flexibility to both play defense and offense. We have seen an increased emphasis by producers and assessing balance sheet strength for completion companies. This customer focus is very refreshing given our differentiated capital position and it reflects their priority on identifying the best long-term partner for supporting their completion programs.

Third, asset preservation. While we've only seen a slight recovery in activity thus far, the customer conversation has shifted to assessing market readiness as they inquire when and how quickly we could get back to work. While this has not yet translated to new activity on a large scale, it does reflect an improvement in overall conditions. In the midst of these market challenges and based on our assessment that a meaningful activity recovery is several quarters into the future, we implemented an asset readiness plan that centralizes, protects and sustains readiness for our broad asset base. This investment ensures that next year has a strong base of market ready equipment that can be deployed quickly and at a minimal cost once conditions improve.

And fourth, innovation. We continue to believe that innovation will drive the next leg of safety, efficiency and sustainability. Our fully deployed integrated digital program is already bearing fruit and we will continue to use these capabilities to drive change from the world sight to the boardroom. We continue to evolve our innovation platform and we believe, it will continue to serve us as a key differentiator.

With that in mind, I'd like to take a moment to expand on some of the advancements we're making with our innovation initiatives. In response to the downturn, we narrowed our innovation and technology investments to focus on projects with near-term returns. During the second quarter, we successfully completed deployment of NexHub on all operating U.S. fleet. NexHub is our remote, digitally enabled operations support function, which includes 24/7 engineering, equipment, health monitoring and intervention, as well as logistics and dispatching all centralized in one cost effective environment, working in unison to continuously and consistently support operational efficiency and performance.

That's better leveraging our field engineering support, this newly digital-enabled platform is driving the next phase of our continuous improvement in operating efficiency. An example of this is our real time equipment health monitoring, which predicts and prevents early major component failures and optimizes maintenance capex and opex cost. I cannot say enough about the positive impact that NexHub is having on our service efficiency, and I expect this operational evolution to create even more NexTier differentiation as we deploy more fleet.

Another example of our ongoing differentiation is the continued impact of our dual-fuel frac fleets to dramatically reduce greenhouse gas emissions and fuel cost through the consumption of natural gas as a primary fuel source. We continue to see long-term value in natural gas powered equipment as a path for lowering overall cost and emissions, and we will continue to assess additional investments and expanding capacity in this area.

So in summary, we're not waiting around for global market recovery, nor are we spending too much time forecasting commodity prices. It's a tough market, but we remain a company that can compete in any environment built on a proven base of people, equipment and customers and further enabled by digital capabilities that lower operating costs improve efficiencies.

Global oil demand will recover and we are preparing for an ultimate activity rebound, achieving the right balance of these, actions are setting the stage for our future performance. Further, our strong balance sheet provides us a differentiated position to when the time is right, invest further in next generation fracking techniques and equipment. We like our position.

Before I turn the call over to Kenny, I wanted to share an update regarding next year's leadership team. Kenny has been off to a great start since assuming the CFO role at the end of last year and over the last several quarters, has further established himself as an essential leadership partner and a member of our executive team. In recognition of his efforts and contributions, I'm proud to report that Kenny has been promoted from Senior Vice President to Executive Vice President, where he will continue to lead next year's Finance and IT efforts. Please join me in congratulating Kenny and wishing him continued success.

With that, I'll now turn the call over to Kenny.

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Thanks, Robert. Total second quarter revenue totaled $196 million, compared to $628 million in the first quarter. Sequential decrease was primarily driven by sharp activity declines in the divestiture of a well support services business and late Q1. Total second quarter adjusted EBITDA was $2 million compared to $72 million in the first quarter. Despite the dramatic pace and magnitude of revenue decline, our quick and significant cost reduction actions resulted in adjusted EBITDa decrementals of approximately 16% ahead of our forecast of 25% or better.

In our Completion Services segment, second quarter revenue totaled $179 million compared to $513 million in the first quarter. Completion Service segment adjusted gross profit total $32 million, compared to $98 million in the first quarter.

During the second quarter, we deployed an average of 13 completions fleets, and once factoring in activity gaps, we operated the equivalent of 11 fully utilized fleets. As Robert noted, activity remain resilient to start of the quarter with 17 average fully utilized frac fleets in the month of April. Activity fell dramatically beginning in May and we estimate a market trough was achieved in late May early June, before recovering somewhat until the end of June, where we exited with eight fully utilized frac fleets.

On a fully utilized basis, annualized adjusted gross profit per fleet, which includes frac and bundled wireline totaled $11.4 million compared to $13.4 million per fleet in the first quarter, which continues to position next year as a leader in relative peer performance.

In our Well Construction and Intervention Services segment, revenue totaled $17 million compared to $57 million in the first quarter. Adjusted gross profit totaled $1 million dollars compared to $9 million in the first quarter. In the quarter, we reduced our footprint of our submitting and co-product lines significantly focused on regions that support constructive near and long-term levels of activity.

Adjusted EBITDA for the second quarter includes management adjustments of approximately $33 million, consisting primarily a $19 million of market driven severance and restructuring costs, $5 million of non-cash stock compensation expense, $14 million of merger and integration costs partially offset by gains of $5 million, which includes an accounting gain associated with a make-whole provision on the basic notes received as part of the well support services divestiture completed in March.

Of the $33 million in management adjustments during the second quarter, approximately $8 million were non-cash.

Second quarter selling, general and administrative expense totaled $38 million compared to $57 million in the first quarter. Excluding management adjustments, adjusted SG&A expense totaled $31 million compared to adjusted SG&A of $48 million in the first quarter. Prior to the merger between Keane and C&J, we operated a combined annualized adjusted SG&A of approximately $250 million.

As part of our integration process, we identified a significant base of synergies. We accelerated and completed the capture these synergies at the start of the downturn and quickly pivoted the business transformation. With these efforts, we achieve second quarter run rate adjusted SG&A of approximately $124 million less than half prior to the merger. We continue to become more efficient in our support structure in back office processes and continue to target run-rate adjusted SG&A of approximately $80 million, reflecting a significant improvement in our cost structure, while retaining muscle and growth capacity. We will continue to keep SG&A expenditures and our support structure lean, which will support long-term enhanced financial performance as market conditions improve.

Turning to the balance sheet, we exited the second quarter with $337 million of cash compared to $340 million of cash at the end of the first quarter, excluding our ABL borrowings. Total debt at the end of the second quarter was $337 million, net of debt discounts and deferred finance costs and excluding finance lease obligations compared to $512 million in the first quarter.

As Robert mentioned earlier, we fully repaid the $175 million that we had previously drawn on our ABL facility in a defensive move during the first quarter. We have confidence in our balance sheet and it's lasting power. Net debt at the end of the second quarter was approximately zero, resulting in a leverage ratio of zero on a trailing pro forma 12-month basis.

We exited the second quarter with total available liquidity of approximately $430 million, comprised of cash of $337 million and availability of approximately $93 million on our asset-based credit facility. Cash flow from operations was $62 million during the second quarter, while cash flow used in investing activities totaled $36 million driven by maintenance capex and select investments in technology. This resulted in free cash flow of $26 million during the second quarter, excluding $13 million in merger and integration cash costs and $15 million in market-related severance and restructuring cash cost, adjusted free cash flow totaled $53 million in the second quarter.

Turning to our outlook. As noted earlier, we averaged 11 fully utilized hydraulic fracturing fleets in the second quarter, which is comprised of a strong April and significantly weaker May and June. We are entering the third quarter off of this slower base and expect to steadily increase activity as we progress throughout the third quarter, allowing us to maintain our historical market share average in the range of 8% to 12%.

As Robert noted, we will continue to maintain certain level of fleet utilization and activity, but not at the expense of our balance sheet.

From a revenue perspective, due to strong contributions from April in our second quarter, combined with the impacts of an increasingly competitive pricing environment, we expect third quarter revenue to decline versus the second quarter. As noted earlier, we continue to drive down support costs and expect to reduce third quarter SG&A by another 25% as compared to the second quarter. On this base, we expect to hold Adjusted EBITDA decrementals to less than 25%.

With that, I'll hand it back to Robert for closing comments.

Robert Drummond -- President and Chief Executive Officer

Thanks, Kenny. Before we open the lines for Q&A, I want to leave everyone with a few concluding comments. We believe that the U.S. land oil and oil business is a key component of the global economy and will be an important source of supply for decades into the future as oil and gas inventories settle into the post-COVID demand profile. We created a leading completions platform that while smaller, is stronger than ever. Our strategic planning is focused on this and continuing to be a technically innovative U.S. land focused completion company, that builds the long-term customer relationships with like-minded partners. We remain focused on market readiness and continuing to deliver leading service quality and safety performance, while balancing the market backdrop with our ongoing commitment of long-term value creation.

Lastly, I want to thank our employees for their continued perseverance and the endless dedication. I'm inspired by the way our team continues to lead innovation, challenge the status quo and uphold our mission of making NexTier a leading completions company.

With that, we'd now like to open up the lines for Q&A. Operator?

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question today is from Sean Meakim of J.P. Morgan. Please go ahead.

Sean Meakim -- JP Morgan -- Analyst

Thank you. Hey, good morning.

Robert Drummond -- President and Chief Executive Officer

Good morning, Sean.

Sean Meakim -- JP Morgan -- Analyst

Well, thanks for all the commentary. So you noted there at the end, you expect revenue down quarter-over-quarter, it sounds like pricing is a factor there. Can you just talk about maybe how many fleets you averaged in July, expectations for the balance of the quarter? I mean just trying to get a sense of the range of outcomes in terms of volumes versus the impact of pricing?

Robert Drummond -- President and Chief Executive Officer

Sure, Sean. Good question. Look at the end of the day, the reason that we are guiding a little bit revenue down in Q3 is that, pricing has certainly been a factor as we've migrated from a really ramped up Q1, where we were really clicking to where the markets at today, but also the mix of oil and gas basin is evolving as well, activity in the oil basin is starting to pick up a little bit more. There is more white space we see in the calendars as operators begin to pick up fleets to maybe attack the dub [Phonetic] count or it's just not as routine as it was when we were all home, and in 2019 or maybe early Q1 of this year.

So that's kind of the scenario. And trajectory was, when we were ramping down at the end of Q1 and into Q2, we were coming off of a reset of price that it rolled in from 2019 into 2020, and we saw the trajectory of Q2 April being the highest month and everybody can see that in June, probably beginning of June was the low point where frac fleet count in the U.S. probably got as low as 50. And then we see that market now beginning to work its way back up as these -- as the operators come in now with many -- in most cases, renegotiated pricing that occurred in the middle of the bottom of the worst downturn in history of U.S. land probably.

So that's the dynamic that is present. As for this guiding about how many fleets we got working it, we're going to stick with our guidance that no matter kind of where the rig count, our thinking of that, that we're going to be in that 8% to 12% market share range, and it doesn't behoove us really too much to talk exactly about where our rig count or frac fleet count is from a competitive perspective when the market is small as it is right now. But the thing that we would say is that, we are getting to look at everything and that we're being very patient about how we're going to price into that environment. It just doesn't make sense to price into a cash flow negative environment. And I would say the spot market in the U.S. could be said to be that in many cases.

Sean Meakim -- JP Morgan -- Analyst

Got it. I appreciate that, Robert, I think that's all fair. So that leads to the follow-up then. So thinking about that pathway to sustaining positive EBITDA and ultimately positive cash flow. So you've got directionally better activity, but still pretty challenged, you're working toward that optimized G&A level. Now the big step change in the third quarter, back-half of the year is primarily maintenance capital, in terms of your spend. Can you talk about your confidence, in your ability to sustain not just positive EBITDA but positive free cash flow for the back-half of the year?

Robert Drummond -- President and Chief Executive Officer

Sure. Look, as far as free cash flow, we're still in that path of ending this year with more cash than we ended last year with and we're confident about that. But we knew that the working capital one-down is going to be front-end of this year loaded. And as far as balancing, pricing and market share and margins, there is a lot of moving parts going on in the market right now, and one inside the company. We've got a huge focus on driving an operating cost down and you're going to see, we have been guiding toward a $3.5 million minus capex for example, we're kind of well in that track. This NexHub implementation that I referred to, is allowing us to catch major equipment component failures before they occur. This is having an positive impact on our operating performance. So it's a moving dynamic that we continuously rolling into our modeling as we price into the market.

So all I would say is that, there's probably going to be a period where cash or negative EBITDA is a real scenario, but we're factoring all of that into our pricing discipline and we -- and versus our cash flow projections. And we still committed to having more cash at the end of this year than we had at the end of last year, and things are playing out pretty much kind of as we had thought they would as we were making these plans back in March. So it's very dynamic is what I would say.

As far as, if we're at a upper end or the lower end of that market share guide guide, we'll have a lot to do with the strategic opportunities that present themselves and how we price into those. If it's just to bring a crew online, to go address a short set of dugs and then go -- and then it goes back down, that's not something that would be the same as something that was going to be sustained for all the way into next year for example. I hope that was what you thought you were asking.

Sean Meakim -- JP Morgan -- Analyst

Yeah. Very helpful. Thanks, Robert.

Robert Drummond -- President and Chief Executive Officer

Thanks, John.

Operator

Our next question is from Tommy Moll with Stephens. Please go ahead.

Tommy Moll -- Stephens Inc. -- Analyst

Good morning and thanks for taking my questions.

Robert Drummond -- President and Chief Executive Officer

Hey, Tom.

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Good morning, Tom.

Tommy Moll -- Stephens Inc. -- Analyst

Robert, I wanted to talk about your Middle East footprint for a second. So two crews over there currently. First off, how is the partnership going? And secondly, what kind of visibility do you have to, how active those crews will be for the balance of the year and potentially whether you might add more crews during that same time frame?

Robert Drummond -- President and Chief Executive Officer

Thank you, thank you for that question. And look, we are honored and lucky to be partnered with a company like NESR, it's just some company has got a very good handle on understanding the market in MENA. We were -- it's kind of the best of both worlds. They got -- their strengths are and our strengths bringing efficiencies and expertise into the frac and wireline pump down arena.

We, as you heard, added our second crew into the mix during the last quarter. And I would say that the upside of that arrangement is directly linked to NESR's business development process and that they are good at that, and I think the customers in the region are very interested in seeing that grow. I would say that during the COVID period, we've been going through the operating costs are inflated because of the challenges associated with moving people around and that's something that we can continuously improve on and will do so. But I think as a team, we're getting better and better. And as far as just the best I could say is that in the future, the growth is directly tied to NESR, but I don't anticipate a significant increase from where we are now during this year.

Tommy Moll -- Stephens Inc. -- Analyst

That's helpful, Robert. Thank you. Wanted to shift to a strategic question for you. Robert, if you could comment on how you see the competitive dynamic evolving in North America frac? Specifically, you've already started to see some restructuring, you're likely going to continue to see some under investment by some of the players that aren't as well capitalized. So in that environment, how do you see the marketplace evolving? There has been some talk of maybe a bifurcation in terms of horsepower, quality or availability. And potentially, if you see more opportunity for consolidation and how that might impact the dynamic?

Robert Drummond -- President and Chief Executive Officer

Yeah, I like that question. Then, and I would just say that this is that, when you go into a period level we're going through right now, it is one of those that may be most people's downside scenario they had been planning in the past, this got beyond that. And then you see the scramble that has occurred related to pricing during the trough of the market. And when we say that we don't believe that the pricing current, level of pricing is sustainable, that's because we believe that in many cases, that pricing is cash flow, negative free cash flow. Negative, meaning that the gross profit levels that being generated are not able to pay for the maintenance capex or to the corporate support necessary to cost-safely administered that fleets activity.

And when that happens, cash is going to be consumed to maintain the equipment one way or the other and it's going to drain liquidity, or either the equipment deteriorates and maybe an operator this challenge for cash has supported by cannibalizing stacked equipment which is taken capacity aftermarket, or they have been adequate support, at least in some sort of catastrophic issue that accelerates both of the above. So what we believe when we say we are willing to be patient, we believe that that evolution is going to put the pressure on that bifurcation as it exist and we'll see maybe some capitulation in the market.

Whether or not that drives consolidation or not, I think is somewhat yet to be determined. I would say there is also kind of an evolution going on to movements to using gas as the -- natural gas as the power source, and you have to have investment capability to be able to do that. So if you were going to kind of consolidate a market with the conventional assets, you get wonder, that there is a scenario that makes sense for everybody. But consolidation around some sort of next generation of evolution that have helped you address this power conversion from diesel to natural gas, then maybe there is some opportunity there.

We kind of believe that increasing the scope of the activity, our scope of the activity at the well site, where we can use our footprint and our support structure to leverage across a bigger piece of business that we can get more efficient for both us and the operator, more cost efficient. They can utilize people differently and so forth. So when we think about strategic consolidation or M&A in general, that's kind of the logic will be sales.

Tommy Moll -- Stephens Inc. -- Analyst

All helpful...

Robert Drummond -- President and Chief Executive Officer

Hope that kind of addressed it, but the bottom-line is for us, we believe that being patient now, let that market evolve a bit that way and then, we got a lot of focus on having our assets ready, and they will be ready to hit the market when things change a little bit to the upside more, more materially.

Tommy Moll -- Stephens Inc. -- Analyst

Yeah, all helpful. Thank you, Robert and I will turn it back.

Robert Drummond -- President and Chief Executive Officer

Thanks, Tom.

Operator

Our next question today is from Stephen Gengaro of Stifel. Please go ahead.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thanks, and good morning, gentlemen.

Robert Drummond -- President and Chief Executive Officer

Good morning, Steve.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Two things, if you don't mind. Can you start with your -- I mean, I think you mentioned in the market you saw bottom at or around fifty fleets in the quarter. Do you have any color on kind of where you think we are right now?

Robert Drummond -- President and Chief Executive Officer

Stephen, I wouldn't profess to be an expert, but we do spend a lot of time making sure that we understand competitive landscape. And when you say how many fleets are in the market, we always got to be careful to define what we're asking. Are we talking about fully utilized that many of our reports, or it just deployed. And I kind of believe that the market is in the number is around 85 or so deployed, meaning that, somewhat less than that fully utilized. And I'll go ahead and say that, I think that that number will kind of continue to walk up slowly and we are on the right side of this recovery curve now, and more and more operators are getting their plans in place and obviously going to be linked to oil price, but I would think it would be heading to somewhere around 110, something like that, in the neighborhood of that in Q4.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Great, thank you. And then just you touched a little bit on this earlier, but as we think about the longer-term and it's sort of coming kind of this downturn into some level of normalized environment, maybe, it's a lower environment, as many are thinking. But if you thought about and I'm using 2022 as an example, but just longer-term, do you think there is anything structural that impacts your ability to get back to the gross profit levels per fleet that we had seen in the past?

Robert Drummond -- President and Chief Executive Officer

I'd -- define the past, but I would say, if you compare it to 2019, that I would say that is very much, very possible to get back to that. Partially because of the discussion we just had about the evolution of the market. And I would also say very much linked obviously to the macro of oil price and what does that look like. But you can make a case that it's going to take -- when you get to the back half of 2022, you kind of believe it's going to need about the same kind of well count in the U.S. that it was taken in Q1 of 2019, and I think that's maybe a new kind of market size of say 300 or so frac fleet in the U.S. And this is after there has been some reductions in the total frac market capable being deployed, while simultaneously taking into account the fact that the things that we're doing utilizing digital program to improve our operating costs these are sustainable into the future. And I think that for those reasons, I absolutely believe that is true.

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Thank you. That's helpful color.

Robert Drummond -- President and Chief Executive Officer

Thank you.

Operator

Our next question will come from Chase Mulvehill from Bank of America. Please go ahead.

Chase Mulvehill -- Bank of America Securities -- Analyst

Hey, good morning, everybody.

Robert Drummond -- President and Chief Executive Officer

Hey, good morning.

Chase Mulvehill -- Bank of America Securities -- Analyst

Robert, I guess a quick kind of clarification, maybe. You talk about 8% to 12% market share and I guess maybe, does that include or exclude the two Middle East fleets? And then on the Middle East fleets, if you can just kind of quickly comment about the duration of the contracts, and maybe try to frame the P&L impact as far as those two fleets are related to?

Robert Drummond -- President and Chief Executive Officer

Good point. Good question. Indeed, when we're talking the market share guide, we're talking U.S. only, our U.S. fleet deployment versus the U.S. total frac fleet, whether you're talking deployed or fully utilized. And as far as duration of the Saudi contract, I mean, I'd like to be able to say evergreen, I mean, I think Sherif might to, but as far as on paper, it does have a term that that we hadn't went public with, but multi-year and kind of right to first refusal kind of thing for as they grow. So it gives us both, a chance to look at how things are going, and to make decisions on the -- as we expand, whether or not we want to do it or not. But that's that I think that's the answer.

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

And Chase, to address the profitability, I mean, we've always said it's accretive to our U.S. market. I mean that was a hurdle to get it into the international arena and still today that holds. Robert mentioned, we did have some additional costs in this COVID environment, but we're managing through that.

Chase Mulvehill -- Bank of America Securities -- Analyst

Okay, very helpful color. And then if we kind of think about your U.S frac fleets, how many would you consider to kind of be crude or staffed? And then when we think about bringing cold-stacked equipment that's not staffed, what kind of free cash flow level would you need to actually reactivate kind of more what I'll consider kind of cold-stacked fleet?

Robert Drummond -- President and Chief Executive Officer

So we spend a lot of time to try to balance our pipeline of opportunity with what warm our hot assets we have, and definition of warm, meaning, equipments ready to go, not crude definition of hot being both, equipments ready to go and the people are ready, and try to keep one typically or two, depending on the pipeline of hot equipment ready to go if we needed to be able to do so. That way, our ability to respond to opportunities, and one of those have occurred recently where we were able to jump out there and take advantage of it, and we hit the ground running at the same efficiently -- efficiency levels that we have had in Q1, customers were extremely pleased, but we liked that strategy.

But as far as what kind of free cash flow scenario drives our willingness to grow bigger, I think it's got a lot of components to that. First, can you get -- do you have visibility on the efficiency and the volume of work being committed is a rough space in the schedule and so forth and all of that drives pricing. Is it worth bringing a fleet up if -- even if it's free cash flow neutral? I would argue no, unless it has a strategic component and some visibility to free cash flow positive even in this environment, and that's what we mean by saying that we'll be patient. So that's about, Chase probably as much as I could probably say. Ken, anything to add on that?

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Yeah. Chase, look, I think we've talked about our GP level of cash flow breakeven in the past, in this market it's very competitive, because it's a very small market. But what I would say is we have our own internal hurdles that we work through and their pricing levels go below their hurdle. We're going to take a disciplined approach, especially, in this environment in Q3 and likely in the Q4.

Chase Mulvehill -- Bank of America Securities -- Analyst

Okay. If you were to add those hot and warm stacked kind of crews together, how many fleets would that add to?

Robert Drummond -- President and Chief Executive Officer

Look, Chase, we -- I mentioned it earlier that, when a market is smaller, is it is right now. If we give guidance of what we've had historically about how many we got deployed, is starting to become a competitive then negative.

Chase Mulvehill -- Bank of America Securities -- Analyst

Okay.

Robert Drummond -- President and Chief Executive Officer

So we had -- we haven't said anything about it publicly.

Chase Mulvehill -- Bank of America Securities -- Analyst

Yeah. I understand.

Robert Drummond -- President and Chief Executive Officer

Good. Thank you.

Chase Mulvehill -- Bank of America Securities -- Analyst

Yeah, OK. I'll turn it back over. Thanks guys.

Robert Drummond -- President and Chief Executive Officer

Thanks, Chase.

Operator

Our next question is from Ian McPherson of Siemens. Please go ahead.

Ian McPherson -- Siemens -- Analyst

Thanks. Good morning, gentlemen. Congratulations on the free cash flow on the quarter. Robert, you did talk...

Robert Drummond -- President and Chief Executive Officer

Thank you.

Ian McPherson -- Siemens -- Analyst

About the continuing uptake for dual fuel. Can you speak to what proportion of your fleet there is not only well, on one hand dual fuel ready? And on the other hand, can you speak to the usage of natural gas as a proportion of your total hours on the fleets that are engaged in that mode?

Robert Drummond -- President and Chief Executive Officer

Ian, I'd first say that, a fleet that can burn natural gas right now has got an advantage in the market in general and haven't anticipated that, and been participating in that for a while. We have, in the past, and or in the present, kind of continually to invest and grow in that capacity among our fleet. And the benefits are obvious from the sustainability, for the emissions aspect is much lower and the conversion from basically gas saves both of us a lot of money. When we went and had the acquisition was C&J and brought in the MDT control systems into our to our mix. We've been able to control the proprietary controls of the engines a bit, to maximize the amount of conversion from the diesel to natural gas. We think a little bit better than the market in general is dual fuel systems.

But I got to say, we haven't for competitive reasons, again, we haven't just come out and said how many of our fleets are dual-fuel. But I would just tell you is that we've been just barely one step ahead of the demand for our fleet so far and we're trying to stay that way.

Ian McPherson -- Siemens -- Analyst

Understood. My other questions have been answered, thank you very much.

Robert Drummond -- President and Chief Executive Officer

Thank you for the question.

Operator

Our next question today is from Chris Voie of Wells Fargo. Please go ahead.

Christopher F. Voie -- Wells Fargo Securities -- Analyst

Thanks, good morning.

Robert Drummond -- President and Chief Executive Officer

Good morning, Chris.

Christopher F. Voie -- Wells Fargo Securities -- Analyst

So curious, I know you're trying to be a little sensitive on fleet numbers, but is it fair to assume at least that you will be making some reactivations in the third quarter?

Robert Drummond -- President and Chief Executive Officer

Yes. We, like I was saying in the beginning, we kind of saw the Q2 fleets going from hard to low, front to back of the quarter. We see the same thing occurring where our fleet count would trickle up all the way in October as from a visibility perspective of the bottom, so, yes, it's a little bit dynamic, our fleet count can go up and down pretty easily. And we -- I can't tell you how much time we've spent on this readiness aspect, so that when we put these assets in the readiness program, they're going to do a cycle where these equipment is checked and put on pressure test and continuously, the mechanics run to it for any kind of thing that might need to be fixed, so that we got the equipment ready to go straight away, you can respond quickly. So you got what you can see clearly. And then you have these opportunities that pop up that you might be able to make an arrangement, it makes sense to get the cash flow positive work. So we try to differentiate ourselves there with the customer base so they can see that we can move quickly and hit the ground running and we're going to continue to do that.

Christopher F. Voie -- Wells Fargo Securities -- Analyst

Okay, that's helpful, thanks. And then on capex, your guide for this year, I guess is unchanged 100, 120. If you think about next year, are there any benefits from having -- harvesting equipment that remains idle? And I think you called out about $3 million expectations maintenance capex per fleet, but should we think about some kind of technology budget or Tier IV DGB engine budget on top of those numbers as you -- new technologies are always coming to market. Should we think about 3 times the number of fleets plus $20 million or how should we think about capex in 2021?

Robert Drummond -- President and Chief Executive Officer

So I think, Kenny and our team tie this question and I would just say is that, we really do have a lot of opportunity right now to invest in things that we believe have a good return profile, many of those related to the evolution of the fleet, I know over time. And we continue to look -- we plan to continue to be disciplined until we get to the point where our visibility on the future is a little more clear and because we have the balance sheet that we do. When we say we can be defensive or offensive, defensive, we kind of have already showed that by making sure that we get our maintenance capex as low as possible to stop most of the strategic investments. But when we -- when the time becomes right and we know that we will have the cash flow to support working capital, perhaps in the 2022 ramp up, we are going to start to come back and look at the strategic investments that are focused on, I think largely around gas burning and taking the fleet that exist to another level of efficiency to technological innovations that will require some investment. So that's kind of our logic.

Kenny, why don't you elaborate on where we're going at. We're already soaring at the top end of that. If you project our current fleet count and our lower maintenance capex per fleet, we're kind of at the top-end of that. Kenny?

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Yeah, so on capex, look, H1 spend was as anticipated those front-end loaded, mainly driven by strategic capex spend, and then winding down our maintenance spend in line with our activity. In H2 on capex, it's going to come down significantly. We'll be spending money primarily on maintenance and right now we see about 110 to 120, still within our range, but in the 110, 120 range. In terms of next year, look, we pull those levers that we talked about and we have been able to achieve maintenance capex per fleet of $3.5 million or less 3.5. We're really encouraged at the impact of our NexHub, specifically our equipment health monitoring program which is going to help us to keep that maintenance capex per fleet to a lower level than what we've seen in the past. So that will continue into 2021 because we will continue to plug the fleets in as we continue to grow into our equipment health monitoring program and into our NexHub.

Robert Drummond -- President and Chief Executive Officer

And regarding the part of the question you asked about, would we sacrifice some portion of the fleet for cannibalization, I think is what you're saying, and I think that is a card for us to consider what we would do it in a manner that was controlled and planned and it would ultimately mean, take an additional horsepower aftermarket permanently and using those component up to consume and not least rent capital, which is a card in our deck for sure, but it would be in a very controlled manner...

Christopher F. Voie -- Wells Fargo Securities -- Analyst

Okay. So to wrap it all...

Robert Drummond -- President and Chief Executive Officer

If we needed.

Christopher F. Voie -- Wells Fargo Securities -- Analyst

Thanks. So,to wrap it all together, it would probably be a starting point of about $3.5 million per fleet in '21, plus technology investment that obviously is not yet clear but it's likely to occur?

Robert Drummond -- President and Chief Executive Officer

That's a very good assessment.

Christopher F. Voie -- Wells Fargo Securities -- Analyst

Got it. All right, thanks a lot.

Robert Drummond -- President and Chief Executive Officer

Thank you.

Operator

Our next question is from Marc Bianchi of Cowen. Please go ahead.

Marc Bianch -- Cowen & Co -- Analyst

Thank you. I wanted to ask about G&A, I think the target to get to kind of an $80 million run rate is still out there and the guidance here for third quarter, down 25% would sort of put you at about $23 million in the third quarter, so suggesting some more room to go to get to that that $80 million run rate. Should we expect that run rate by the end of the year? And along with that, should we see some more adjustments called out in the third and the fourth quarter, either related to the G&A or other reasons? And if you could put some brackets around that, that would be helpful.

Robert Drummond -- President and Chief Executive Officer

Yes, sure. So, look we, as I mentioned, we've kind of cut our G&A a half or our adjusted SG&A in half from pre-merger levels and we took 35% out last quarter, we're going to take another 25% out last -- next quarter. And I wanted to mentioned, we did finalize our ERP conversion. We actually closed our books fully in one system in June. And having one ERP is going to give us additional and I would argue, long-term improvement in our back office efficiencies. So that's what you're going to start to see some results from that marching toward the $80 million as we exit Q4.

In terms of adjustments, one of the things I wanted to mention is on costs related to the merger and our market driven restructuring, we see less than about $8 million as we wrap up the year. So we're concluding both of those programs mainly in Q3. So you're going to start to see some of the management adjustments both cash and book come down as we wind up those programs.

Marc Bianch -- Cowen & Co -- Analyst

Thanks, Kenny, would you say that $8 million is a similar number for both the income statement and cash flow statement?

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

It's going to be $8 million cash.

Marc Bianch -- Cowen & Co -- Analyst

Okay. Okay, great. And then just at that that $80 million kind of run rate, what would you say that sized for in terms of a fleet count, and if we get above that fleet count, maybe help us think about the sensitivity for G&A?

Robert Drummond -- President and Chief Executive Officer

Well, you know, the reason we came up with that target was because when we were keen, we ran like 27, 28 fleet with that kind of number. So I mean I think that we, with NexHub and the new ERP and a few things like that, we can probably get beyond that at the same level as support cost. So to project that in the -- look, the expectations are for total market size and our piece of that in 2022, 2023, it's probably sustainable at least through that kind of period.

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Yeah. And just to add, as I mentioned in my prepared remarks, I mean we're going to keep that level tight as we grow, so that will position us for better incrementals as the market rebounds.

Marc Bianch -- Cowen & Co -- Analyst

Yeah, thanks for the answers, guys.

Robert Drummond -- President and Chief Executive Officer

Thank you, Marc.

Operator

[Operator Instruction] And our next question will come from Connor Lynagh of Morgan Stanley. Please go ahead.

Connor Lynagh -- Morgan Stanley -- Analyst

Yeah, thanks. I just wanted to ask about capital allocation here. I don't want to be flippant about the magnitude of decisions that you guys just had to make and adjustments you've had to make over the past few months here. But as we sit here at what looks to be a little bit past the bottom, you've got your organizational structure in line, relatively speaking, and you have a lot of cash on the balance sheet. What's your thinking around potential return of capital maybe some buyback to support the shares, given how strong your balance sheet is in your relatively upbeat free cash outlook? Just wondering if you could discuss the puts and takes on that.

Robert Drummond -- President and Chief Executive Officer

Thanks for the question, Connor. And of course, in our board room, we would have a discussion all the time. But I would just say, for right now, there is still a significant amount of uncertainty in the market. We've been to great extreme -- extremes to position ourselves to give us a lot of flexibility. One on the runway, no matter kind of what happens, we can be OK with our liquidity, and then number two, a lot of opportunity we believe, to invest that capital in a manner that will -- might be better than stock buybacks or dividends. So I wouldn't think that you would see much of us talking about that in the foreseeable short runway, I mean mid-runway, and that we got -- until the uncertainty or the clarity gets there, we need to keep it on the balance sheet.

Connor Lynagh -- Morgan Stanley -- Analyst

Okay, that's fair. I mean, if we do get to a market where we are in slightly better shape from a visibility perspective, I mean how much cash or what sort of level of net debt, do you feel is appropriate to run this business at?

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Look, I mean if you look at how this is going to play out? What you always have to keep in mind is that you have to fund the growth cycle, you want to participate in that growth cycle. So you have to have a minimum amount of cash to be able to fund working capital. And in the meantime, be able to invest, as Robert mentioned, in next-gen technologies or in dual fuel or gas burning technologies that allow you to compete and compete at the higher tier of the spectrum. So I'm not going to call out a number, but what I would say is that you need a substantial amount of cash to cash the rebound.

Connor Lynagh -- Morgan Stanley -- Analyst

All right. I appreciate it.

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Thanks, Conn.

Operator

Our next question is from John Daniel of Daniel Energy Partners. Please go ahead.

John Daniel -- Daniel Energy Partners -- Analyst

Hey. Robert, thanks for putting me in. Just one question...

Robert Drummond -- President and Chief Executive Officer

Hey, good morning, John.

John Daniel -- Daniel Energy Partners -- Analyst

Can you guys -- just given your financial strength, any thoughts or plans to roll out new pumps technology next year given the -- as you guys know several OEMs are designing new pumps, just curious, your thoughts?

Robert Drummond -- President and Chief Executive Officer

So John, that's a good question. Obviously next generation frac as we like to call it is certainly on the horizon, the question is when. And we obviously consider ourselves to be maybe number two size frac company in U.S. land, we expect to participate in that. And we just got to time strategically deploying that when pricing can support the investment, with what is the best technical solution and many of these in our view are not proven yet and being a fast follower maybe is the best way to deploy capital. Hence, our logic has been bridge into it with a lot of dual fuel tier diesel engines the burn natural gas as you will know.

John Daniel -- Daniel Energy Partners -- Analyst

Sure.

Robert Drummond -- President and Chief Executive Officer

And how do you avoid strand -- how do you minimum stranded capital from the old conventional fleets. So all that is a bit of a timing dance. And we are in the process of investigating at least two options that we believe could make the timeline that you project and essentially more about optimizing the power solution as part of that investment. And we get that right, and we got some customers who are talking about the timing, and we expect to be participating in that. But obviously, this capital discussions we just had that we've got to make sure that we got sustainability and runway to deal with the worst scenarios first and then, second, really close second, is dealing with that evolution.

John Daniel -- Daniel Energy Partners -- Analyst

Okay. Do you get any sense from of the -- let's just call them the more ESG sensitive customers, that they're going to help underwrite those types of investments and ultimately benefit to them?

Robert Drummond -- President and Chief Executive Officer

Yes, I do. I think that around the power solution, there is a lot of different scenarios that can evolve there and some of those make the capital investment, much more palatable for service company. But -- and there's ways to participate in that in many different ways I think, and the business model itself will be a bit different, I think than what perhaps exist today and that will be what probably enables it to take off whatever speed it takes off.

But the bottom-line is, the bridge with dual fuel is really a very good bridge. We needed to, as a sector, evolve our ability to burn natural gas because of all the good, the financial reasons, but also for the emission reasons and dual fuel is a significant step in the right direction. Our order line right at at beginning is good as anything else in the next-gen arena. So it's not a bad spot for us as a industry, individually are between service company and the operator.

John Daniel -- Daniel Energy Partners -- Analyst

Got it. Thanks for putting in guys.

Robert Drummond -- President and Chief Executive Officer

All the best.

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Thanks, John.

Robert Drummond -- President and Chief Executive Officer

Well, Allison, I think that's the end of the questions. We really appreciate everybody participating in the call today and your interest in NexTier. We hope you will stay safe and have a great day. Thank you.

Operator

[Operator Closing Remarks]

Duration: 46 minutes

Call participants:

Kevin McDonald -- Executive Vice President, Chief Administrative Officer and General Counsel

Robert Drummond -- President and Chief Executive Officer

Kenneth Pucheu -- Senior Vice President and Chief Financial Officer

Sean Meakim -- JP Morgan -- Analyst

Tommy Moll -- Stephens Inc. -- Analyst

Stephen Gengaro -- Stifel Financial Corp. -- Analyst

Chase Mulvehill -- Bank of America Securities -- Analyst

Ian McPherson -- Siemens -- Analyst

Christopher F. Voie -- Wells Fargo Securities -- Analyst

Marc Bianch -- Cowen & Co -- Analyst

Connor Lynagh -- Morgan Stanley -- Analyst

John Daniel -- Daniel Energy Partners -- Analyst

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