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NexTier Oilfield Solutions (NYSE:NEX)
Q3 2020 Earnings Call
Nov 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' Third Quarter 2020 Conference Call. [Operator Instructions]

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

Kevin M. McDonald -- Executive Vice President, Chief Administrative Officer, General Counsel & Secretary

Thank you, operator.

Good morning, everyone, and welcome to the NexTier Oilfield Solutions' earnings conference call to discuss our third 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, which 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 earnings release for the third quarter of 2020 and, with respect to 2019 related non-GAAP financial measures, in our earnings release for the fourth quarter of 2019, each of which are posted on our website.

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

Robert Drummond -- President & Chief Executive Officer

Thank you, Kevin, and thanks, everyone, for joining us on this call this morning.

NexTier achieved another quarter of delivering on our commitments despite the continued challenging market backdrop. I'm proud of our team as we continue to execute on our strategy of maximizing NexTier's value proposition for now and the future.

Now I'll start with a few highlights from the quarter. Activity steadily trended upwards in Q3 and the momentum is now carrying over into Q4. We entered the third quarter at a relatively low base of activity after reaching cyclical lows late in Q2. While activity levels improved, we continued to navigate a path toward sustainable pricing and improved calendar utilization.

Despite these challenging market headwinds, combined with a relatively strong April included in Q2 results, we delivered adjusted EBITDA decrementals of 13%, ahead of our outlook of up to 25%. We continued to structurally drive out cost, which favorably impacted and will continue to impact our results. Third quarter adjusted SG&A of $20 million marked a 36% sequential decrease and nearly 60% reduction versus the first quarter. We fully integrated our digital platform across the value chain, which enables the success of our strategic plan to grow our business, generate new revenue and drive improved returns for next year.

We averaged 11 fully utilized and 13 deployed fleets, maintaining our US market share within the 8% to 12%. As of today, we have successfully redeployed seven fleets since the end of June and with minimal start-up cost, evidencing the strength of our readiness and customer relationships. And while nearly doubling our deployed fleet count, we are delivering operational efficiencies and safety performance on par or better than where we left off before the downturn.

As we navigate the remainder of 2020 and begin looking ahead to next year, I'd like to highlight several key points and observations. First, global economies begin getting back to work following the COVID-19 economic shutdowns. Late second quarter was the trough for NexTier, and we believe the worst is now behind us. Activity has begun to improve, and at the same time, there has been a significant increase in US diesel powered frac fleet retirements, reducing future availability of supply. As service providers continue to rationalize their assets, we anticipate a more balanced playing field as the market continues to rebound.

Second, despite market challenges and a fiercely competitive market, NexTier successfully gain share by providing our customers a superior, integrated service offering. This digitally enabled integrated offering enables well site integration of the services involved in and around the frac well site location and is being utilized by our customers to reduce their overall cost as well as reduce the carbon footprint at the well site. These new digital tools and our large completion services footprint are the foundation for our strategic efforts to increase our work scope. Thanks to these new tools, our logistic services are growing faster than our pure frac services and improving the overall value proposition for our customers.

Next, our fortified financial position ensures NexTier is here for the long haul and allows us to invest in technology and innovation. And finally, after having weathered what is likely the worst of this unprecedented storm driven by the COVID-19 pandemic, we've positioned the Company to win the eventual recovery and provide leading returns for our investors and customers.

We've recently reached a milestone with the one-year anniversary of Keane's merger with C&J to form NexTier. We have achieved and, in most instances, outperformed all the milestones and rationale for the deal. We completed a very efficient integration process, while maintaining focus on delivering for our customers, ensuring continued safety and service quality. We exceeded our targeted synergies, achieving these results more than six months ahead of schedule. We quickly divested of our non-core business with the sale of our Well Support Services business at a very opportunistic time in the first quarter, further bolstering our fortified balance sheet position. And we advanced investment in and deployment of innovation, including the rollout of NexHub on all deployed fleet in the second quarter. The real win for NexTier has been our people. We have the most outstanding employees in the industry, including our best-in-class management team, and I appreciate their loyalty and passion to always challenge the status quo while striving to reach the next tier.

With that as an overview, let's discuss what we're seeing in the market today. The dramatic pace and magnitude of this year's downturn, combined with the recent industry attrition has played an important role and beginning to sort out the frac supply and demand imbalance. We believe the total US horsepower has been reduced by over 30% and it's today approaching 13 million horsepower. At the same time, well completion activity levels are improving, resulting in a better utilization rate across the industry. The magnitude and cadence of recent activity growth, however, is uncertain and dependent on a range of factors influenced largely by the COVID-19 pandemic and associated oil demand.

The bifurcation among well completion players is more evident than ever, including a horsepower base that is becoming even more stratified by efficiency and sustainability. We estimate that 70% of today's horsepower base is 100% diesel-powered which sit at the higher end of the emission spectrum given its inability to utilize natural gas as a power source and thus is subject to a lower price point. While we continue to be a major player in this as a frac market, we preferentially focus our capital allocation on the upper 30%, comprised of natural gas-powered and other more sustainable solutions that attract higher pricing and returns. We've been investing in and growing our natural gas power capability for years, and today, NexTier is proud to have the largest natural gas-powered fleet deployed in the US market. In addition, we plan to allocate all future growth capital to equipment with enhanced returns and lower emissions.

While this bifurcation becomes more apparent, we continue to harvest the investments made in our traditional base of diesel-powered horsepower while growing the portion with natural gas-powered capability via the conversion of existing equipment. We are taking prudent and proactive actions that allow us to utilize our assets and capital in the most responsible way while maintaining flexibility and upside to meet our customers' demand in the future. To accomplish this, we will reduce our marketed hydraulic fracturing fleet by an additional approximately 400,000 horsepower and we'll utilize the major components over time to bolster our maintenance inventory. Once consumed, we will cut up the frames and permanently remove them from the marketed base of equipment.

This path forward allows us to partially fund our carbon reduction initiatives by reallocating capital from maintenance capex to the stratified top of the frac market, which offers better pricing fundamentals and a lower emission profile. We expect that with these efforts, we will be able to further reduce our estimated annual frac maintenance capex spend per fleet from $3.5 million to $3 million. Combined with the fleets' retirements announced at the closure of our merger between C&J and Keane, we will have removed nearly 650,000 Tier 2 diesel-powered horsepower from the market since the merger one year ago. We continue to play our part in aligning frac supply with demand and applaud our industry colleagues who have taken similar recent measures.

Turning now to our market position. Our current base of deployed and working equipment demonstrates four key characteristics. One of the largest bases of horsepower in the US today; number one in wireline pumpdown plug-and-perf; the largest natural gas-powered fleet in the market today; and a diversified footprint across all major US basin with meaningful exposure to both oil and natural gas production.

We are pleased to report that the strong momentum gained in Q3 is carrying over into the fourth quarter. Today, we have a total of 15 fully utilized fleets in the market; 13 in the US and two in the Middle East, operating in partnership with NESR. This increase in our position demonstrates the strong customer relationships we have and the superior service offerings that we are offering. A critical component of our strategy during the latest market cycle is our ability to promptly respond to market growth opportunities, which we refer to as our market readiness strategy. Our strategy has been very effective, having nearly doubled our active fleet in the last 100 days. The foundation is built on three key factors: our equipment, people and balance sheet.

First, equipment. We've been investing approximately $1 million per month to ensure our idle assets from all product lines are well maintained and ready to work. Our digital capabilities enable us greater visibility on the location and status of our equipment and allow us to preserve and protect our assets most effectively. As we -- as we have redeployed equipment in response to increased customer activity across all of our product lines, the amount of maintenance capital and opex allocated to fleet deployment has been minimal, evidencing that we have been proactive as we planned in maintaining our asset base during the depths of the market downturn. In fact, we successfully deployed seven fleet since the end of June with minimal additional start-up costs and which are all included in our adjusted EBITDA results.

Second, people. I am pleased to share that we no longer have any employees on furlough. We were successful in bringing back the people placed on furlough and many that have been released at the start of the downturn. I am incredibly proud of our team for remaining laser-focused on delivering solid operational performance. In this competitive environment, it remains absolutely critical to hit the ground running. And NexHub has empowered our people to relaunch our fleet with higher-caliber execution immediately upon reactivation.

Third, balance sheet. With all that we've done, we still have ample liquidity to take advantage of opportunities as the market gradually recovers, exiting the third quarter with total liquidity of $371 million. Our fortified balance sheet allows us to invest in the ongoing integrity and readiness of our equipment while allocating capital to strategic investments that drive enhanced returns and lower emissions.

With our readiness strategy already delivering results, I would like to turn now to our long-term strategic direction that will support NexTier's ability to generate leading through cycle returns. Despite macro volatility in the near term, we never lose focus on the long-term goal of maintaining our position as a differentiated leader in US land completions. Our strategic focus is centered around expanding the work scope at the well site while lowering our carbon footprint. This strategic focus areas are enabled by our fully deployed digital platform and digital operating model, which is now deeply ingrained in how we do business and how we continue to evolve the way we will do business in the future.

NexTier is committed to a sustainable energy future in which oil and gas continues to play a critical role. We firmly believe in the economic and sustainability benefits of natural-gas-powered technologies. However, without reliable gas supply, the benefits and value of dual-fuel or other lower-emission technologies are not fully realized. Our customers frequently share how they have been seeking integrated solutions that aligned incentives of operators and service providers.

Having heard the voice of our customers, we are excited to announce that in 2021 we are launching NexTier Power Solutions, our natural gas treatment and delivery business that will power our fleet with field gas or CNG. Through NexTier Power Solutions, we will provide gas sourcing, compression, transport, decompression, treatment, diesel and related services to become a fully integrated well completions provider. We are proud to have the largest natural gas-powered fleet deployed in the US today. Our investments in clean natural-gas-powered equipment are paying off and our tiered service offering for displacing diesel with natural gas has been met with strong demand as customers can select the package most suitable for achieving their specific objectives.

We've always said that our strong and flexible balance sheet position NexTier to play offense and defense. With this in mind, and due to strong demand for our carbon-reducing-tiered offerings, we are investing in additional Tier 4 dual-fuel capabilities via converting equipment currently in our fleet with the expectation of delivering beginning in the current quarter. We plan to maintain our leadership position as a provider of natural-gas-powered technologies enabling NexTier to be a market responsible partner.

Executing our strategy of investing to expand our natural-gas-powered capabilities will enable maximized gas substitution rates and carbon reduction benefits for NexTier and our customers. Our mission is to make it easier for our customers to reduce their carbon footprint, while maintaining a leading efficiency and safety profile. We are focused on developing solutions that are scalable over time into a range of rapidly evolving next-generation equipment and solutions. We are in discussions with customers about our capabilities and plan and look forward to announcing updates in the coming months.

In addition to our carbon reduction initiatives, our digital infrastructure enables the expansion of the work scope of our operations in multiple ways. With our evolving set of digital tools, advanced AI-driven logistics capabilities, combined with the scale-impact personnel, we have a unique opportunity to deliver value on both sides of the equation which did not exist previously. First, our work scope expansion strategy enables NexTier to deliver the lowest blended cost of commodities like propane and fuel. Second, it allows incentives between operator and service provider in a way that leads to greater efficiency and overall savings. We are extremely focused on carrying out our strategic plans. We've invested in and built out infrastructure over the past two years, and we plan to harvest that value now. We believe that an integrated completion well site is better for next year and our customers, and we have the capability to drive value, lower the overall cost per well, while reducing emissions.

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

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Thank you, Robert.

Total third quarter revenue totaled $164 million compared to $196 million in the second quarter. The sequential decrease was primarily driven by reduced calendar utilization and lower pricing in our Completions and Well Construction and Intervention Services segments, partially offset by efficiency gains. As noted earlier, when NexTier is at the well site, we are operating at a very high level of operational performance.

Total third quarter adjusted EBITDA was a loss of $2 million compared to $2 million positive adjusted EBITDA in the second quarter. Despite significantly lower revenue and navigating through what we believe was the market trough, we remain focused on controlling what we could control. We maintain our relentless focus on continuing to reduce costs at the well site and at the corporate level, which resulted in decrementals of approximately 13% ahead of our outlook of 25% or lower.

In our Completion Services segment, third quarter revenue totaled $154 million compared to $179 million in the second quarter. Completion Services segment adjusted gross profit totaled $15 million compared to $32 million in the second quarter. During the third quarter, we deployed an average of 13 completions fleets, and when factoring in activity gaps, we operated the equivalent of 11 fully utilized fleets. As Robert noted, we exited the second quarter with eight fully utilized completions fleets. As market conditions started to improve, we successfully redeployed one or two fleets each month throughout the third quarter, resulting in 13 fully utilized and 14 deployed fleets upon exiting in September.

On a fully utilized basis, annualized adjusted gross profit per fleet, which includes frac and bundled wireline, totaled $6 million compared to $11 million per fleet in the second quarter as we were significantly impacted by utilization inefficiencies resulting from calendar white space in the quarter. We are already seeing utilization improvements across the fleet, and we believe that the worst for US land activity is now behind us.

In our Well Construction and Intervention Services segment, revenue totaled $10 million compared to $17 million in the second quarter. Adjusted gross loss totaled $1 million compared to $1 million of adjusted gross profit in the second quarter. As discussed last quarter, we significantly reduced the footprint of our cementing and coiled tubing service lines during the second quarter and then into the third quarter. We remain focused on regions that will support both near-term and long-term levels of activity, and we have positioned ourselves for strong operational and financial performance as market conditions improve.

Adjusted EBITDA for the third quarter includes management adjustments of approximately $20 million consisting primarily of $7 million of merger and integration costs mainly from the implementation of our NexTier ERP platform and associated legacy software writedown; $5 million of non-cash stock compensation expense; $4 million for an accounting loss associated with the make-whole provision on the basic notes received as part of the Well Support Services' divestiture in March; $3 million of inventory impairment; and $1 million of market-driven, severance and restructuring costs. Of the $20 million in management adjustments during the third quarter, approximately $12 million were non-cash. Looking ahead, we do not anticipate material future merger and integration or restructuring expenses for the -- for the fourth quarter and going forward.

Third quarter selling, general and administrative expense totaled $26 million compared to $38 million in the second quarter. Excluding management adjustments, adjusted SG&A expense totaled $20 million compared to adjusted SG&A of $31 million in the second quarter. Last quarter, I announced we successfully accelerated and completed the capture of our merger synergies. We reduced our annualized SG&A costs by more than half of the consolidated SG&A at the time of the merger.

I'm happy to share that through our business transformation results and continued efforts to improve efficiencies, we have further reduced our SG&A costs in the third quarter. Achieving this lower SG&A run rate positions us extremely well as the market continues to improve. We are committed to maintaining a lean support structure, and with the recent deployment of our ERP system, our support capabilities will be more robust than ever. These factors, combined with our smarter and more efficient way of working and powered by our digital platform, will help to drive long-term financial performance and results.

Turning to the balance sheet. We exited the third quarter with $305 million of cash compared to $337 million of cash at the end of the second quarter. Total debt at the end of the third quarter was $336 million net of debt discounts and deferred finance costs and excluding finance lease obligations compared to $337 million in the second quarter. Net debt at the end of the third quarter was approximately $31 million, resulting in a leverage ratio of 0.2 times on a trailing pro forma 12 month basis.

We exited the third quarter with total available liquidity of approximately $371 million, comprised of cash of $305 million and availability of approximately $66 million under our asset-based credit facility. Cash flow used in operations was $28 million during the third quarter while cash flow used in investing activities totaled $3 million driven by maintenance capex and the finalization of our NexTier ERP deployment. This resulted in free cash flow use of $31 million in the third quarter. Excluding $7 million in merger and integration cash costs and $1 million in market-related severance and restructuring cash costs, adjusted free cash flow use totaled $23 million in the third quarter.

As Robert mentioned, we are increasing our investment in Tier 4 dual-fuel capabilities that will be partially delivered in the fourth quarter of this year. Factoring in these strategic investments, we are slightly revising our 2020 capex outlook from the range of $100 million to $120 million to a new range of $120 million to $130 million. We are proud to have a flexible balance sheet that positions us to make these select investments, combined with ongoing cost control measures and digital investments that are directly contributing cash savings across our business.

Turning to our outlook. Since the trough experienced in late Q2, every month has been better than the month before, and we expect this pattern to continue through November. Visibility remains low on December, and at this point, we do anticipate a slowdown in activity due to normal seasonal factors. Based on our current visibility and assuming no improvement in pricing, we forecast sequential fourth quarter revenue growth of between 10% and 15%, with a path to positive adjusted EBITDA for the quarter. This is including an early assessment of December and continued efforts to optimize calendar utilization. Visibility into Q1 also shows continued increase in revenue and overall activity for NexTier [Phonetic] were similar to the third quarter, and now into the fourth quarter, we expect to continue to steadily increase our working asset base.

Since the beginning of the year, hundreds of millions of dollars of costs have been taken out of our system. That said, we did not cut to the trough nor do we size next year to operate at current deployed fleet counts. We adjusted our operations to where we saw the market headed while maintaining ample muscle to ensure we're positioned to participate in and lead the market recovery, and that's exactly where we are today.

We're entering the fourth quarter with nearly double the base of deployed fleets we had operating roughly 100 days ago. We're not letting this robust pace of redeployment take our eye off the ball as we remain intensely focused on operational excellence and safety performance. Even with the recent improvement in deployments and an outsized reduction in our marketed fleet, just 40% of our total fleet is in operation today. Additionally, calendar inefficiencies remain in place, impacting our ability to operate at the most profitable levels.

What this means is that we have tremendous operational leverage embedded in our organization. Frac supply remains in excess of demand, but dynamics continue to improve. As activity continues to ramp, additional horsepower will have to be staffed and deployed in the market at more constructive pricing. At the same time, this improvement in activity is expected to result in greater scarcity of clean natural-gas-powered equipment where we maintain and are growing our market leading position and are deploying more fleets into this upper tier portion of the market.

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

Robert Drummond -- President & Chief Executive Officer

Thanks, Kenny.

2020 has been a challenging year for every economy, company and community around the world. Despite the unprecedented impacts of the ongoing pandemic, NexTier continues to deliver on its commitments. We remain on pace to grow our cash balance year-over-year, while generating close to quarterly breakeven EBITDA even during the very worst of the market conditions. Even before considering our new low-cost NexHub-enabled operating structure, our Company generated significant earnings. Pro forma 2019 adjusted EBITDA was approximately $450 million for the combined Keane and C&J on 32 fully utilized fleets. With the more than $125 million of fully realized cost synergies resulting from our merger and accounting for the sale of our non-core businesses, this implies total earnings power in excess of $500 million of adjusted EBITDA per year. We have retained this level of earnings capabilities even after post-merger permanent frac fleet retirements, reflecting attractive valuation versus peers and upside potential.

Before we open up the line for Q&A, I'd like to leave everyone with a few concluding comments. Our well-maintained equipment, world-class team and fortified balance sheet are positioning NexTier to emerge from the downturn in a leadership position. Our readiness strategy, combined with our investments in our strategic initiatives means that we can best respond to the demand today while setting up to outperform in the future. We will continue to advance on our digital journey, which is enabling better performance, lower operating cost, work scope expansion and a lower carbon footprint at the well site. We are further streamlining our resources through additional horsepower retirements allowing us to partially fund our carbon reduction initiatives by reallocating capital from maintenance capex into next-gen equipment with better pricing fundamentals and a lower emission profile. We are building on our platform as the largest operator of natural-gas-powered equipment conversions and are committed to making the carbon footprint reduction transition easier for our customers.

In sum, through maintaining a sharp focus on executing our strategy, we are well positioned to deliver value to our stockholders through a fortified investment platform. With that, operator, we'd now like to open up the lines for Q&A. Thank you.

Questions and Answers:

Operator

[Operator Instructions] And the first question comes from Sean Meakim with JPMorgan.

Sean Christopher Meakim -- JP Morgan Chase & Co. -- Analyst

Thanks. Hey, good morning.

Robert Drummond -- President & Chief Executive Officer

Hey, good morning.

Sean Christopher Meakim -- JP Morgan Chase & Co. -- Analyst

So starting on the fourth quarter. Given the guidance is pretty straightforward and consistent with what we've heard from your peers in terms of activity, I'd like to maybe dive a little more into your margin guidance. So it's pretty open-ended. So could you maybe just talk about the range of outcomes in terms of incrementals or gross profit per fleet and the factors that will drive that range from the low end to high end?

Robert Drummond -- President & Chief Executive Officer

Yes. So, Sean, look, I'll say first of all that we knew early on kind of that Q3 was going to be the bottom for us. As soon as COVID hit, we started adapting to that. And we kind of knew we were going to go EBITDA negative in the worst part of Q3 and that we were establishing ourselves to work our way out with solid incrementals as we redeploy fleets. And we've been managing our cash to address that potential prolonged suppressed activity levels as necessary, but while also positioning ourselves as the economy recovers. Kenny, why don't you give a little more detail on Q4?

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

So look, as we mentioned, Sean, we see a path to positive adjusted EBITDA. Visibility on December is still very limited. It's not good enough to really call a range of outcomes yet on the incrementals. Well, look, what I will say is, September margins were better than our Q3 margins. October and November is adjusted EBITDA positive based on the activity that we have today. So you can expect some incremental at the GP level for sure.

Robert Drummond -- President & Chief Executive Officer

And I would say the profitability -- these three kind of factors that are going on right now. You got -- obviously, you have price and you have the geographic mix of our activity, which is pretty volatile, and then you got the mix going on between profit and logistics, and I called out our logistics growth is happening at a pace even faster than our frac fleet readds. But all those are factors in -- in the future profitability.

Sean Christopher Meakim -- JP Morgan Chase & Co. -- Analyst

Understood. I appreciate that feedback. I think that naturally brings us to talking a little more about G&A and free cash flow in 4Q. So you noted 3Q is the last quarter of major charges associated with the C&J merger. You had the ERP conversion, lots of costs coming out, a mix of cash and non-cash. So as you look forward, can you give us a sense of where you see G&A exiting the year? Are we -- are we below the $80 million annualized target ex adjustments? And just -- given the uncertainty, I know EBITDA getting part of that, the moving pieces, but how you see moving pieces for free cash flow in the fourth quarter?

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Sure. Thanks, Sean. So, look, I'll start with SG&A. But we've done a lot of work around the SG&A cost through the year -- I mentioned that in my prepared remarks -- especially in the last quarter on non-labor costs. We expect Q4 to be very similar to SG&A levels in Q3.

On the cash flow, look, at the beginning of the year, we were just stepping into the downturn driven by COVID-19. At that stage, we committed to ending 2020 with a higher cash balance than where we started. That number was $255 million. Today, we have line of sight to deliver meaningfully above that target of $255 million. In Q4, in terms of the elements of the cash flow, we will be funding some working capital on our revenue growth, but that will be partially offset by some collections that moved into Q4 from Q3. And other than that, we'll just be financing debt service, maintenance capex, and then we caught out the additional Tier 4 dual-fuel deliveries. So we're really seeing Q4 expectation of cash use to be slightly lower than in Q3.

Sean Christopher Meakim -- JP Morgan Chase & Co. -- Analyst

Got it. Understood. I appreciate the feedback, gentlemen. Thank you.

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Thanks, Sean.

Operator

Thank you. And the next question comes of Chase Mulvehill with Bank of America.

Chase Mulvehill -- Bank of America -- Analyst

Hey, good morning, everyone.

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Hey, good morning.

Robert Drummond -- President & Chief Executive Officer

Hi, Chase.

Chase Mulvehill -- Bank of America -- Analyst

Good morning. I guess I kind of want to talk about activity in the fourth quarter. I think you said that you exited at 13 fully utilized fleets. You said at 15 today. And so kind of overall for the fourth quarter, what do you think that you average for fully utilized fleets? And then if we think about first half activity, you said it continues to climb. Do you think it continues to climb versus kind of activity levels today or kind of that -- whatever that average is for the fourth quarter?

Robert Drummond -- President & Chief Executive Officer

So, Chase, I'll start by just saying that ever since the bottom, we've been steadily leaking upward and -- as far as activity and fleet deployment go. One key thing that we had to deal with was the -- our three biggest customers laid down seven fleets during the worst part of that. So we've had to -- we've introduced new dedicated customers to our mix. And I'm very proud that that is -- it gives us a bigger foundation to build upon as activity recovers.

But we still don't have excellent visibility in December. I mean, we -- we see October is solid, and we know that November is going to continue as we said in our script, that it will be above October. When we get to December, we could have a lot of white space that takes total utilized fleets a bit lower [Indecipherable]. But then, as you go into Q1, we do have line of sight to new customer start-ups, particularly around our dual-fuel offering. So can you give -- provide a little more color on Q4?

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Yeah, look, I mean, as Robert said, we exited September. As you mentioned, Chase, we've been building and adding customers. December, based on our client mix, is -- will be down versus November. It's too early to call yet, but we do see additional fleets versus our base today in Q1. As we enter Q1, we think Q1 will restart a bit quicker than it did last year, and then hopefully steadily increasing from there.

Chase Mulvehill -- Bank of America -- Analyst

Okay. A quick follow-up on that. I mean, do you think that your frac revenues will keep up with the pace of your increase in fully utilized fleets or is there some mix in pricing and anything like that, that might be weighing on the revenue side?

Robert Drummond -- President & Chief Executive Officer

There is going to be a significant amount of mix changing going on. But, I mean, we do see keep enough -- keeping pace going forward.

Chase Mulvehill -- Bank of America -- Analyst

Okay, all right. And quickly here on fleet mix, obviously, you're doing some investing to high grade your fleet. Could you talk about where kind of Tier 4 dual-fuel horsepower -- total horsepower is for you today? And then kind of where you see that going over the next one to two years?

Robert Drummond -- President & Chief Executive Officer

So, Chase, we will try to call out in our comments about the stratification is occurring in a market where about 70% of it is pure diesel burning and the other 30% is dual fuel. We're purposely not being too clear about how much capacity we have in dual-fuel for competitive reasons, but we are focusing in that upper 30%, because the demand there is significant. And we are growing our capabilities as we speak and we'll probably have deployed as much as we'll deploy as we get into the middle of Q1. And we created a pricing arrangement that is based upon diesel conversion. We have a pro and a platinum package that's linked to the amount of diesel displacement. And you create that via deployment of Tier 2 or Tier 4 dual-fuel equipment associated with some of the other technologies like hibernating others that help you manage your diesel consumption down. And the customers are -- we're meeting a lot of interest in this offering because it gives them the opportunity to move in a direction they want to move and with this Power Solutions model that we talked about we deploying, this is making it easier for them to do that. So it's leveraging our investment in dual-fuel to deploy it quicker. Our objective is to stay a little bit ahead of the demand, but that's kind of the story overall without being too competitively revealing.

Chase Mulvehill -- Bank of America -- Analyst

Yeah. That makes sense. Appreciate the color [Indecipherable].

Robert Drummond -- President & Chief Executive Officer

Thanks, Chase.

Operator

Thank you. And the next question comes from Tommy Moll with Stephens.

Tommy Moll -- Stephens -- Analyst

Good morning and thanks for taking my questions.

Robert Drummond -- President & Chief Executive Officer

Hi. Good morning, Tom.

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Good morning, Tom.

Tommy Moll -- Stephens -- Analyst

Robert, I wanted to talk about the announcement on your Power Solutions business. How long has this idea been in the pipeline for you guys from a competitive standpoint? What's the value you think you can bring to a customer where they can come to a single source for the service package and now some of the fuel consumed in the delivery of that service? And can you give us anything in terms of revenue opportunity, unit economics, how quickly you can scale it more on the financial impact side? Thank you.

Robert Drummond -- President & Chief Executive Officer

Look, Tom, I really appreciate these questions. I'm excited about this because we have been thinking about it for a number of quarters and we've been building up the expertise in the Company through hiring the talent, to help us build it out. We thought about doing it inorganically, but decided that doing it fit for purpose for fueling our own needs was a much better way to do it for us and our customers. And objective really is to build the capabilities to fuel our own demand. And when you think about the economics around that, a hard running diesel fleet, a burn in excess of $12 million a year in diesel, so converting that stream to natural gas or CNG is an opportunity to not only reduce emissions, but to take advantage of the fuel arbitrage between natural gas and diesel, which as oil price goes back up and diesel price goes back, that's only going to make those economics even better.

But the key thing is our customers want to use field gas and many of them are building their networks to be able to do that. Support of the service offering of Power Solutions is going to be able to help them make that connection and make that happen most cost effectively. And when you think about the fact that we, as a frac company -- integrated frac company with a large number of personnel on location, it gives us the ability to think about integrating around the staffing as well, so that the ability to do it for a better economics and currently being done in piecemeal arrangement is built around that bigger footprint. And when we talk about the evolution has occurred within our logistics capabilities around AI, this is real -- this is a real game changing situation where we can do things much more effectively and cost effectively than we have in the past. So in the gas delivering process, there's a lot of logistics built into that. So those were -- there's where have advantages of putting it together that way and the customers can see that clearly, and we're in early days of that and we will -- we expect it'd take a little while to build this out. We expect to be bringing this into the market in Q3 of 2021. And we may even accelerate that for a couple of cases earlier than that as we get into the opportunities in 2021. So this is a big deal for us. We think it's obviously enabling our already strong dual fuel fleet and it -- stand-alone has solid economics.

Tommy Moll -- Stephens -- Analyst

All very helpful contexts, Robert, thank you. And as a follow-up, I wanted to pivot to the theme of consolidation, which is one where Keane has been active really throughout its history. As you look forward and as we see a lot of the customer base consolidating, does it change at all the rationale from your standpoint, Robert? I mean, post the C&J transaction, you had a scale that felt like it was sufficient to service the market in North America that you didn't need a whole lot more. Any change in the thinking there as the operator landscape has changed? And if maybe if not for next year, just for your competitor base, how do you see this unfolding on the service company side?

Robert Drummond -- President & Chief Executive Officer

I think many of us in the service company side kind of anticipated E&P consolidation was going to be on a horizon. I think COVID, obviously, probably moved that up. You can see that everywhere. As far as our interest in M&A, we feel that we did it at a good time for us. We got solid balance sheet now, we got some technology things that will really enables us to strategically differentiate ourself. And we don't want to seem like we don't have a lot of interest, because we are open-minded. And I think that we've established that we're very good at integrating and I think that we can do that very handedly. And I think that the integration needs to occur in the OFS space just as much as it does in the E&P space. But when we look at it, we want to be kind of in-tune with our strategic drivers that we've put a lot of effort into establishing. So I hope you take all that to say is that, based on our history in our new ERP system, we can do it, but it's going to need to be something that makes a lot of good sense for our shareholders. And I think it, in general, is good for OFS when it happens and thus, I salute to people who're making it happen recently and getting some of that done. So it's kind of open-ended, but we do have an open mind.

Tommy Moll -- Stephens -- Analyst

Thank you, sir. I'll turn it back.

Robert Drummond -- President & Chief Executive Officer

Thank you.

Operator

Thank you. And the next question comes from Chris Voie with Wells Fargo.

Chris Voie -- Wells Fargo -- Analyst

Thanks. Good morning.

Robert Drummond -- President & Chief Executive Officer

Hey, Chris.

Chris Voie -- Wells Fargo -- Analyst

Curious if you could give us a little color on capex in 2021. I think you said about $3 million maintenance capex per fleet. But how much should we budget for things like ESG, your technology investments like Tier 4 dual-fuel, the other business lines and NexTier Power Solutions?

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Yeah, let me kind of walk out the 2021 capex and obviously, it's a bit early. But what I would say is, we made a lot of progress in reducing our maintenance capex per fleet for frac this year. With our NexHub, we've been able to get that down to about $3.5 million per fleet. We believe that this is a sustainable level of capital to allocate to conventional equipment. We've talked about our fleet rationalization. So we'll be bringing that down to $3 million per fleet. Non-frac service lines will be in the range of $8 million to $10 million depending on the activity. For the strategic capex, it's probably still too early to comment. We will be funding some Tier 4 early in the queue and we will be funding our power initiative, but until 2021 unfolds more, we're not ready to talk about the level of spending just yet.

Chris Voie -- Wells Fargo -- Analyst

Got it. Thanks. And then, just want to touch on NESR. So is there any upside to the number of fleets? I think you have two there now in 2021?

Robert Drummond -- President & Chief Executive Officer

So, appreciate you asking that question. Our partnership with NESR is creating a lot of value in the Middle East for our customers there. Operational performance management continues to get better and better and we've raised the bar a lot. And I think it represents the excellent team work that we got between three parties, the customer and two service companies, which just makes little bit unique.

The regional opportunities are very much dependent on the commercial potential for attractive ROI for us. And we've clearly increased the ROI for frac and dollar spent by the E&Ps in that region because of the amount of stages being delivered per fleet. NESR is a great partner and very good at being able to do business development in the region. So we maintain some expectations and hope that there will be opportunities into 2021. But do not have a direct laser view of any on the near-term horizon.

Chris Voie -- Wells Fargo -- Analyst

Thank you. I will turn it back [Indecipherable].

Robert Drummond -- President & Chief Executive Officer

Yeah. Thank you.

Operator

Thank you. And the next question comes from Ian Macpherson with Simmons.

Ian Macpherson -- Simmons -- Analyst

Good morning.

Robert Drummond -- President & Chief Executive Officer

Good morning.

Ian Macpherson -- Simmons -- Analyst

And thanks, gentlemen, for all the information already. Maybe following up on Power Solutions. I'm curious if this is envisioned to expand your dual-fuel capacity overall if it's more designed to allow you to customize a substitution rate a little more nimbly for your customers at their preference or just to raise substitution rates overall across your fleet -- fleet-by-fleet, and maybe you could -- if you could indicate too as where you think substitution rates are on average on your dual-fuel fleets today and where you see them heading in the future. What's been enabling of this new business line?

Robert Drummond -- President & Chief Executive Officer

Yeah. I appreciate that question. And a little bit all of the above, I would say that our control system that we are using there across our entire fleet, dual-fuel and otherwise, has brought a lot of advantages. One of them are -- is in this area. When we do have a dual-fuel system, being able to tune the engines to maximize, the conversion has been -- is obviously working and we have a number of data points to prove that out from our customers and some of our suppliers. So doing that is an advantage. Also levering our ability to make this process easy for our customers will move our utilization of our dual-fuel capacity higher up in that tier that we've been trying to describe. So those are exciting things for us. But also, I think that the business itself has a lot of opportunity to grow. As we start out, we are going to be focusing on one region out of US and then we will expand that over time. You asked that what are the conversion rates with that pro-package that we have? It's a package that will displace on average at 50%. And the platinum package will displace diesel at a rate of 65%. And you can do with a pure fleet of Tier 4 dual-fuel you can get it up into the '80s. So we're tiering it, so the operator can choose where he wants to enter at. And I think that meets the needs. And the gas supply opportunities vary across the regions in a way that allows them have a menu. And so far, so good. People like that and I think it's good for all involved. I hope that addressed it.

Ian Macpherson -- Simmons -- Analyst

Yeah, absolutely. Thanks, Robert. I wanted to also just ask on the topic of total market attrition. You said you think the U.S. is at 13 million horsepower today, 70% basically pure diesel. When you drew the line on your latest 400,000 horsepower retirement, can you qualify for us what the threshold was for your fleet in terms of what didn't make the cut and what did make the cut? Was there any defining attribute or was it really just kind of the obvious factors of age and state of duty?

Robert Drummond -- President & Chief Executive Officer

So that's a good question. You had to kind of have a view of the macro before you make a call like that. And we've been stating that we don't intend to invest further in the conventional fleet, meaning that, every time we're doing, the future will be related to our strategy that we've been outlining. So that made it -- that was the defining factor. And then you look at the projections for 2021, 2022, our U.S. land projection is, maybe, smaller and rig count and fleet count activity. We wanted to be able to deploy a large number fleets. And after this rationalization, we're still able to do 37 fleets. And if you remember in my prepared remarks, I made some comments around 30 something fleets generated $500 million in EBITDA. So we think in that, that bottom of part that we're using for maintenance capex support was not going to be deployed probably within the next year or two. And based upon that, it's seeing more capital efficient to harvest that [Technical Issues]. We do believe there is a little bit more visibility on that total number. It's been flashed around a lot over the last years as all of us have been trying to determine what that number is. Some -- the components were basically unknown and there were happened to be assumptions made. And I think there has been more clarity in the last three or four months than we've had before, so that's why we've kind of been willing to say that we think it's somewhere around 13 million in total.

Ian Macpherson -- Simmons -- Analyst

Very helpful. Appreciate it.

Robert Drummond -- President & Chief Executive Officer

Sure.

Operator

Thank you. And the next question comes from Stephen Gengaro with Stifel.

Stephen Gengaro -- Stifel -- Analyst

Thanks. Good morning, gentlemen.

Robert Drummond -- President & Chief Executive Officer

Good morning.

Stephen Gengaro -- Stifel -- Analyst

Two things. First, I think you referenced about $5 million or $6 million of annualized EBITDA per fleet in the quarter. And when you talked about sort of the earnings power of the business, I think, that implies sort of a $15 million to $16 million EBITDA per fleet number, if my math is right. What do you think the path is to get there from an activity level perspective, fleet attrition? How do you think that plays out? I know this is probably a two year to three year question, not a six-month question, but what do you think you need to get back to those levels of profitability?

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Look, thanks for the question. I'm going to kind of step you through that. So I think it's too early to call what a mid-cycle EBITDA per fleet will be. Obviously, it has to be cash flow positive. And we're charting our path to that and we're increasing our earnings potential through our strategy. We talked about our increased scope. We talked about our lower emissions. Today, we see a path to adjusted EBITDA in Q4. We think our cost structure is largely sorted out. In that 50 fleets today, we're seeing much better GP per fleet and that's translating into a positive adjusted EBITDA.

But look, the path to free cash flow is going to be in 2021. We're going to continue to get productivity on our fixed costs and SG&A with additional deployments. We're starting to see better utilization from a calendar perspective. Assuming this continues, that will be part of that path. And then, we continue to drive down our maintenance capex per fleet in overall cash cost to doing our business. So first, we had to see positive Adjusted EBITDA and now we're on a path toward positive free cash flow.

Stephen Gengaro -- Stifel -- Analyst

Okay. Thank you. And then just the second question, when you look at the competitive landscape and clearly there has been consolidation on the E&P side, but a little bit on the frac side as well. You've got companies that are in bankruptcy, you have weak cash positions. Have you seen any impact yet on the bidding process preference for NexTier or other more stable providers? Has that's shown up at all yet? And if not, do you expect it to?

Robert Drummond -- President & Chief Executive Officer

When you're going through a turmoil, like we went through in Q2 and coming out of now, you see a lot of varying behavior among the competitive landscape, I would say. I think that when the outlook for 2021 becomes more clear, maybe people are being more consistent. But I think if the 2021 outlook is not a significant rebound, the part of the market that is struggling with liquidity will do different things and we've seen some pricing that is, no matter what, is extremely cash flow negative that we -- in a bottom tier of the market that we've talked about burning pure diesel with the Tier 2 equivalent, that you know is not sustainable. And maybe it's a playbook to try to prepare for M&A of some sort. I'm not sure, but it's certainly one that -- it's not sustainable. So I think we have seen some of that even now. And going forward, I think, I don't know what is going to look like in 2021, but it's very much linked to the macro view of each individual company.

Stephen Gengaro -- Stifel -- Analyst

Okay. Great. Thank you for the color, gentlemen.

Robert Drummond -- President & Chief Executive Officer

Thank you.

Operator

Thank you. And the next question comes from Scott Gruber with Citigroup.

Scott Gruber -- Citigroup -- Analyst

Yes. Good morning.

Robert Drummond -- President & Chief Executive Officer

Hi, Scott.

Scott Gruber -- Citigroup -- Analyst

Most of my questions have been answered, but just a quick one on the dual-fuel fleets. How much is the economic benefit from diesel displacement are you capturing versus the customer? It sounds like there is a -- a bit of a range based on your pricing strategy. But ballpark, what is that range look like?

Robert Drummond -- President & Chief Executive Officer

The most interesting way to look at -- I know it's the way it's been looked at a little bit in the past, but we're just establishing, like as I was trying to point out while ago that different pricing tiers associated with the amount of displacement and then the customer can look at it if -- to see if it makes sense for him commercially or not. And we know it. We're setting it up, so it does make sense for us. And as we get Power Solutions put in place, I think, we will able to put together up overall package versus what they're doing, no matter how they're doing it. It's going to demonstrate that the value of integration and all the things I explained earlier is -- will make our package better for them and us. So that is -- that's what it's going to look like. And we wouldn't be investing in it otherwise.

Scott Gruber -- Citigroup -- Analyst

Got you. That was good for me. It sounds like an exciting opportunity, so appreciate it. Thank you.

Robert Drummond -- President & Chief Executive Officer

Thanks. Appreciate the question.

Operator

Thank you.

Robert Drummond -- President & Chief Executive Officer

We've got time answering for one more, a little bit of time.

Operator

Okay, very good. And that comes from John Daniel with Daniel Energy Partners.

John Daniel -- Daniel Energy Partners -- Analyst

Hey, guys. Thanks for letting me in. Robert can you give us [Technical Issues].

Robert Drummond -- President & Chief Executive Officer

Hey, John. John, we can't hear you.

John Daniel -- Daniel Energy Partners -- Analyst

How about now?

Robert Drummond -- President & Chief Executive Officer

Better. Yes, thank you.

John Daniel -- Daniel Energy Partners -- Analyst

Sorry about that. The first question just on Tier 4 dual fuel and how you see that versus you guys also looking at for the turbine solutions are forthcoming?

Robert Drummond -- President & Chief Executive Officer

Yeah, so good question. So when you look at the benefits of next-generation equivalent, the burn natural gas to lower emissions, the customers have the options of the older generation Tier 2 or Tier 4, as you pointed out, or perhaps migrating toward fully electric. When you look at electric, you guys start talking about what is the power solution look like as you well know, whether that be a turbine powered or some other source of power that they can make it work. That is the most challenging part of the capital investment process. I mean, understanding how that would work and how you can get -- become capital efficient with it. We're looking at it hard and I expect it will be field testing our version of that in Q1 of this coming year.

John Daniel -- Daniel Energy Partners -- Analyst

Okay.

Robert Drummond -- President & Chief Executive Officer

That will give us a chance to offer to our customers who want to go that route, that option. At the same time, we do believe that -- from the complete package assessment that Tier 4 dual-fuel like our platinum pro-- platinum package is the answer that is best suited for both players. So I'd just say there're more to come on that.

John Daniel -- Daniel Energy Partners -- Analyst

Okay. So, it's safe to say you could actually provide both down the road?

Robert Drummond -- President & Chief Executive Officer

Yes.

John Daniel -- Daniel Energy Partners -- Analyst

Yeah. The other one is when you look at the competitive landscape, a number of your peers have Tier 2 fleets or Tier 4 without dual-fuel. Given your emphasis on the dual-fuel solution and perhaps down the road turbines, should we even assume that those companies with, call it, the legacy fleets are effectively not M&A candidates for you guys?

Robert Drummond -- President & Chief Executive Officer

We get asked that a number of times that I want to answer it carefully to say is that, we've got an open mind. But when we prioritize, we would certainly be prioritizing equipment that would fit to our strategy better.

John Daniel -- Daniel Energy Partners -- Analyst

Right.

Robert Drummond -- President & Chief Executive Officer

Now, the benefits of -- the pure benefits of a macro consolidation weighed against that, that's was what we have to look at, obviously.

John Daniel -- Daniel Energy Partners -- Analyst

Okay. Fair enough.

Robert Drummond -- President & Chief Executive Officer

So we don't want to say no for anybody off from consideration because we do believe we are very good at integrating. But on the other hand, we also want to look at the best fit for us first.

John Daniel -- Daniel Energy Partners -- Analyst

Fair enough. Okay. Thanks for putting me in.

Robert Drummond -- President & Chief Executive Officer

Hey, thanks, John. All the best.

Operator

Thank you. And ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to Mr. Robert Drummond for closing comments.

Robert Drummond -- President & Chief Executive Officer

Thank you. I'd like to recognize the NexTier employees. Because of the magnitude of the downturn, our team has worked extremely hard to navigate all the challenges, while delivering the leading, safety performance and top-service quality that our customers expect. Every day our employees collaborate and design solutions to maximize value for our customers, investors and the Company. It's been my honor to work alongside with each of you and I share your commitment to the long-term success of NexTier. Thank you for participating in this call today. Thank you. [Operator Closing Remarks]

Duration: 68 minutes

Call participants:

Kevin M. McDonald -- Executive Vice President, Chief Administrative Officer, General Counsel & Secretary

Robert Drummond -- President & Chief Executive Officer

Kenneth Pucheu -- Executive Vice President & Chief Financial Officer

Sean Christopher Meakim -- JP Morgan Chase & Co. -- Analyst

Chase Mulvehill -- Bank of America -- Analyst

Tommy Moll -- Stephens -- Analyst

Chris Voie -- Wells Fargo -- Analyst

Ian Macpherson -- Simmons -- Analyst

Stephen Gengaro -- Stifel -- Analyst

Scott Gruber -- Citigroup -- Analyst

John Daniel -- Daniel Energy Partners -- Analyst

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