FTS International, Inc. (FTSI) Q4 2020 Earnings Call Transcript

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FTS International, Inc. (FTSI)
Q4 2020 Earnings Call
Mar 5, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Thank you, and good morning, everyone. We appreciate you joining us for the FTS International Conference Call and Webcast to review Fourth Quarter and Full Year 2020 Results. [Operator Instructions] Presenting today's prepared remarks is FTSI's Chief Executive Officer, Michael Doss.

Before we begin, I would like to remind everyone that comments made on today's call that include management's plans, intentions, beliefs, expectations, anticipations or predictions for the future are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are subject to risks and uncertainties that could cause the Company's actual results to differ materially from those expressed in any forward-looking statements. These risks and uncertainties are discussed in the Company's annual report on Form 10-K and in other reports the Company files with the SEC. Except as required by law, the Company does not undertake any obligation to publicly update or revise any forward-looking statements. The Company's SEC filings may be obtained by contacting the Company and are available on the Company's website, ftsi.com, and on the SEC's website, sec.gov.

This conference call also includes discussions of non-GAAP financial measures. Our earnings release includes further information about these non-GAAP financial measures as well as reconciliations of these non-GAAP measures to their most directly comparable GAAP measure. We do not provide forward-looking reconciliations for forward-looking non-GAAP measures because the timing and nature of excluded items are unreasonably difficult to fully and accurately estimate.

I'll now turn the call over to Mike Doss, FTSI's CEO.

Michael J. Doss -- Chief Executive Officer

Well, thank you, and good morning, everyone. Let me begin by saying that I'm glad to be back to doing earnings calls. So I couldn't be more excited to introduce a far stronger and more nimble FTSI. We emerged from our financial restructuring on November 19 and eliminated $488 million of debt and other liabilities. I'd like to thank everyone involved in that process for a job well done. I'm particularly pleased that we were able to complete the process efficiently and preserve some value for our prior shareholders. Now with zero debt and $94 million in cash, we have more financial flexibility than ever and we are 100% focused on our customers and on creating long-term value for our shareholders.

For today's call, I'll start by going over our financial results for the fourth quarter and full-year 2020, I'll then cover several operational accomplishments and conclude with some comments on our outlook. I'll be discussing our financial results on a combined basis, that is by combining the predecessor and successor periods that we are required to report. The predecessor period runs through November 19.

Revenue for the fourth quarter was $49.8 million, up from $32.1 million in the third quarter. Both the third -- both the second and the third quarters of last year were low points in terms of industry activity due to weak commodity prices resulting from the effects of COVID-19 and the Saudi-Russian oil price war earlier in the year. The increased revenue in the fourth quarter was due to more active fleets; 10.5 average fleets compared to 7.3 in the third quarter. We completed 5,243 stages in the fourth quarter, that's up 60% from the third quarter. Our revenue continues to reflect mostly equipment charges with only minimal pass-through commodities. This is a function of our customers' preferences and we remain agnostic, instead focusing our attention on margin dollars and operational performance. We provided sand and last-mile freight on only 2% of stages in the fourth quarter and none in the third quarter.

Adjusted EBITDA was negative $5.2 million in the fourth quarter compared to negative $7.6 million in the third quarter. The improvement was primarily due to higher volume as prices were roughly the same in both quarters. While we incurred fleet reactivation costs and labor and repairs in both quarters, we did not add these numbers back in our EBITDA reconciliation.

As for the successor period, from November 20 through year-end, we had adjusted EBITDA of negative $5.8 million. Most of that was due to holiday impacts as well as the timing of repair expenses, much of which related to fleet reactivations. In other words, that period is not indicative of results that we are seeing in 2021.

SG&A was $9.8 million in the fourth quarter, including $1.9 million of stock-based compensation. This compares to $11.8 million in the third quarter, including $2.8 million of stock-based compensation. Net income in the fourth quarter was $93.3 million, but that includes a net benefit of $114.9 million from reorganization-related items. Our P&L going forward will be a lot cleaner now that the restructuring process is behind us.

Capital expenditures were $1.8 million in the fourth quarter compared to $2.5 million in the third quarter. We ended the year with $94 million in cash and $13.2 million of availability under our revolving credit facility. We also had $12.7 million of restricted cash at year-end included in other current assets.

Now turning to full-year 2020 results. Revenue was $262.9 million compared to $776.6 million in 2019. We averaged 9.7 active fleets last year compared to 19.3 in 2019. Adjusted EBITDA was essentially breakeven last year, and that compares to $129.6 million in 2019.

SG&A was $52.5 million, including $11.3 million of stock-based comp compared to $89.1 million, including $15.4 million of stock-based comp in 2019. The decrease was due to cost reductions taken in response to the drop off in activity. We expected SG&A, excluding stock-based comp, to be between $40 million and $45 million in 2021. Stock-based comp also will decrease in 2021 as our new equity awards have a lower value than the old awards that were being amortized in the predecessor periods.

Capital expenditures were $21.1 million in 2020 with $16.4 million of that spent in the first quarter, pre-COVID. Included in this amount is about $3 million for dual fuel upgrade kits. Cash flow used in operations was $43.6 million in 2020. However, that includes $54.4 million of cash payments associated with the restructuring process as well as sand shortfall payments of $18.8 million and cash interest paid of $14.6 million in the predecessor period that will not be continuing.

Total sand shortfall payments for the year were $31.3 million, but $12.5 million event was associated with the restructuring. Excluding all these items, operating cash flow was positive for the year, driven by a release of working capital. As mentioned in our earnings release, we terminated all sand supply contracts in connection with our restructuring. The carry on those contracts plus interest payments on the debt we had totaled nearly $50 million per year, cash that we'll now have to invest in the business or return to shareholders.

Moving on to operational updates, we set a company record of 632 stages per fully utilized fleet in the fourth quarter. That's up from 579 stages per fully utilized fleet in the third quarter and way up from earlier periods. Pumping hours per day per fleet continues to increase, hitting a new high in the fourth quarter, with fleets working for our most efficient customers routinely averaging 17 to 19 hours per day. We frequently have days with fleets pumping over 20 hours. Much progress has been made in achieving ever higher efficiency in recent years, utilizing innovations and techniques to reduce time between stages and time between pads. Not only are we pumping more hours per day and more days per month, but our equipment is also pumping some of the most demanding job designs out there in terms of rate and pressure. All of our equipment has 15K [Phonetic] iron.

We're currently working closely with customers who are utilizing the simul-frac technique that stimulates two wells simultaneously. We currently have two fleets performing simul-fracs. These jobs require more equipment and labor but result in outstanding productivity. As customers continue to find ways to reduce completion costs, we expect this technique could gain traction, another area where we have seen success in partnering with our customers relates to dual fuel. We currently have seven dual fuel fleets out in the field. Dual fuel allows our customers to reduce fuel costs depending on the relative prices of diesel versus natural gas as well as reduced CO2 emissions. It costs us about $2 million to install a kit to upgrade a Tier 2 fleet to dual fuel, which has a diesel displacement rate of approximately 50%, depending on operating conditions. We're working on software updates to optimize the utilization of our dual fuel pumps, which could further improve these diesel displacement rates. We're also evaluating the efficacy of fuel additives.

Next, you may have seen in our press release yesterday, I'm pleased to announce that we have successfully field tested MachineIQ or MIQ, in partnership with KCF Technologies. MIQ is integrated into our frac software and pump control and mimics the accuracy of a highly skilled operator but does so automatically in a fraction of a second. MIQ constantly monitors equipment health. And if it detects a problem with a pump, it automatically shuts that pump down and rebalances the system to healthy pumps. This prevents more costly failures and does so with no downtime or loss of rates that might otherwise affect performance relative to job design. This is a major accomplishment and one that has been more than five years in the making. MIQ was much more than just equipment health monitoring that has become commonplace in our industry. It has the artificial intelligence to take corrective action without human intervention, saving critical time. This capability will improve our reliability, reduce downtime, increase efficiencies and improve safety.

Speaking of safety, I'm pleased to report that our total recordable incident rate, or TRIR, was 0.20 last year, a company record and far below the industry average of 0.8. We also had no lost time incidents last year. I couldn't be more proud of our operations and HSE teams for doing an outstanding job of making the safety of our employees a priority each and every day.

Finally, let me provide some guidance on how we are performing so far in 2021. As mentioned in our release, we are off to a strong start. We currently have 13 fleets active, and our efficiency numbers are strong. Of the 13 fleets, six are in West Texas, four are in South Texas, and we have one each in Oklahoma, the Northeast and Utah. One of the South Texas fleets will soon be going to West Texas.

Last month, all frac companies were negatively affected by the severe winter storm that came through. We estimate that we lost about 760 stages. Most locations shut down for the weather itself, but then experienced lingering delays related to fuel and sand deliveries. Despite this, we have seen pricing improvement that we expect will put us in EBITDA positive territory for the first quarter, likely a single mid-digit figure.

As for the second quarter, we are currently working with customers on additional price increases that will improve our results further. We believe the market and our performance supports higher pricing. And we are optimistic about the remainder of the year.

Capex for the first quarter will be relatively light. And for the full year 2021, we currently expect to spend roughly $2.5 million per average active fleet for maintenance. Separately, we are actively considering investments in lower-emissions equipment to assist our customers in achieving their ESG objectives. We like the performance of the new Cat Tier 4 DGB engines but have not yet made any decisions. We also are monitoring developments in electric frac equipment. We continue to believe that there is room for more innovation in this area and that the economics are not currently justified, but we are starting to see some interesting ideas that could soon change the equation.

That's all I have for our prepared remarks. Operator, let's now open the lines for questions.

Questions and Answers:

Operator

Thank you very much. [Operator Instructions] And we'll get to our first question on the line from Ian MacPherson with Simmons. Go ahead with your question.

Ian MacPherson -- Simmons -- Analyst

Thanks. Good morning, Michael. Appreciate all the color there on the operations. It sounds like things are going very well. I'd love to hear a little more on simul-frac. How much of a step-up in horsepower per fleet is normal for conducting a simul-frac? And then have you -- what type of maintenance savings do you think or efficiencies do you think you derive from that from pulling less on the horsepower in that configuration?

Michael J. Doss -- Chief Executive Officer

Yeah. It's not a significant difference in maintenance costs. But in terms of equipment, it's roughly 1.5 fleets worth of equipment, and that will vary based on the rate and pressure requirements. But the two locations that we currently have about 1.5 fleet worth of equipment.

Ian MacPherson -- Simmons -- Analyst

Okay. Good, thanks. And then I was just reflecting on your new balance sheet after you've come through. Congratulations on that. And clearly, your new valuation is at a significant discount to the public peers based on your new balance sheet. I'm sure that's something that you're looking at and thinking about strategically. Do you think that the landscape is right for continued consolidation? And how do you see you all participating in that regard, if so?

Michael J. Doss -- Chief Executive Officer

Well, as you mentioned, with our clean balance sheet and liquidity, we're now in a position to be able to productively participate in consolidation, whereas previously, I think there was always a question about the debt maturities and what was going to happen with the Company. So I think we're in a great shape to consider opportunities. We're interested. And so we think there's a couple of potential combinations that could occur out there. I can't really speculate on that. But other than just to say that we are interested, and we think that consolidation either with us or other players in the market, it will continue to happen over the next year or two.

Ian MacPherson -- Simmons -- Analyst

Do you think that the pricing power in the business right now, which is improving, but it's obviously improving off of a low valley and is far from where you would like for it to be? Do you think that consolidation is a needle mover for getting a better competitive structure and more pricing power that's needed for your business?

Michael J. Doss -- Chief Executive Officer

Potentially. It would depend on what type of commercial synergies are involved. For example, if it's -- if it helps improve geographic diversification, access to different types of customers, there could be some benefit on that. I don't think consolidation itself will do a whole lot for pricing unless it was at the industrywide level. I think if the industry itself became a lot more consolidated with fewer players, I think you'd see more pricing discipline. But just for any particular company, I think the real benefits would come from the cost savings involved, elimination of duplicate expenses and just having more purchasing power and so forth.

Ian MacPherson -- Simmons -- Analyst

Certainly. Hey, Michael, thanks for taking my questions. Appreciate it.

Michael J. Doss -- Chief Executive Officer

Thank you.

Operator

Thank you very much. [Operator Instructions] We'll get to our next question on the line from Stephen Gengaro, Stifel. Go right ahead.

Stephen Gengaro -- Stifel -- Analyst

Thank you. Good morning, gentlemen. I guess, two things. One, when you talk about the DGB Tier 4 assets and looking into them a bit, when you think about an investment decision like that, what are your key parameters as far as sort of visibility on demand and returns, et cetera?

Michael J. Doss -- Chief Executive Officer

Well, I think for us, one of the benefits is gaining access to a new customer. And so a customer that has high utilization which is critical to profitability. Certainly, if we were to build a fleet for a customer, we would want to have that fully utilized. We'd want to have a contract with some term associated with it and also good Ts and Cs. And so it's just -- it's an opportunity for us to build a bit of a high grade, if you will.

And so I think in terms of return, I think having a two to three-year payback is a reasonable starting point. And then we would just consider the other benefits that would come along with that, particularly in terms of customer mix.

Stephen Gengaro -- Stifel -- Analyst

Thank you. And then when you -- just sort of from your perspective, so when you look at these dual fuel fleets or these e-fleets, and maybe this even ties in a little bit to my other question, which was sort of about pricing around simul-fracs and how you get compensated for that, but do you believe that you'll start to see this bifurcation in the market where these higher-quality assets will command a more material premium?

Michael J. Doss -- Chief Executive Officer

Well, that's a good question and certainly on the minds of a lot of analysts and investors in the space. And just my personal opinion, I'm not totally convinced that it's a significant bifurcation. I give you electric fleets, as I mentioned in my comments, I think there's a lot of innovation on the come in that space, and so there are some interesting ideas. Still relatively early innings, and so I think the fleets that are out there still are a bit of a niche. I think as far as Tier 4, I think when we -- when a frac company wants to have large independent E&P companies as customers, they are going to have ESG mandates and so they're going to be looking for every opportunity to reduce emissions. And so Tier 4 definitely fits into that, electric fits into that. And so I think there will be some bifurcation, but I still think the larger market is well served with existing equipment.

Stephen Gengaro -- Stifel -- Analyst

Okay. Great. And if I could slip in one more. You mentioned your maintenance capex per fleet numbers. And I think you said you basically had 13 active fleets today in the press release. As you look forward to adding fleets, I'm sure there's a tier to this. But how do we think about reactivation if you went from 13 to 15 or 16 and then 16? More like, how do we think about is there a material reactivation cost in the near term? Or does it just get more significant as you kind of get deeper into your asset base?

Michael J. Doss -- Chief Executive Officer

Yeah. It's the latter. And so as we get deeper in -- if we were to go back up to 25, 26-plus fleets, those last few fleets would probably cost $6 million, $7 million, $8 million in terms of rebuild costs and refurbishment expenses that we need to incur. On the front end, going from 13 to 14 to 15 to 16, maybe $1 million or $2 million per fleet. And a lot of that would be expensed fluid ends, for example. So not a lot on the front end. And I will say that if we did get into a market where FTS is running 25, 26-plus fleets, that's got to be a strong market, and the economics would provide a very quick payback on those reactivation expenses.

Stephen Gengaro -- Stifel -- Analyst

Great. Very good. Thank you for the color.

Michael J. Doss -- Chief Executive Officer

Sure.

Operator

And we'll proceed to our next question on the line from the line of Sean Mitchell with Daniel Energy Partners. Go right ahead.

Sean Mitchell -- Daniel Energy Partners -- Analyst

Thanks, guys, for taking my question. I want to go back to what Ian was talking about on the simul-fracs. I think you mentioned 1.5 additional fleets, so in terms of horsepower. What about people on the job in terms of how many -- is a reduction in personnel available for efficiency gains? And then the second question would just be around the labor market in general. You guys obviously are growing the fleet count, which is great to see, and I think some others are seeing similar activity pickup. What's the labor market look like? And can you give us any color on that front?

Michael J. Doss -- Chief Executive Officer

Yeah, sure. Just going to the simul-frac in terms of resources required on location, it's not -- so it's 1.5 fleets worth of equipment. Repair costs per hour are slightly less. And then I think if you look at labor, it's roughly about the same number of crew members on location, maybe one or two more just given the additional pumps, but not dramatically more. So you're getting a lot more volume spread over a smaller cost. And so a lot of those economics flow through to the customer. But we are -- but we do think there's pricing improvement potential on the simul-fracs as a result of that. The performance is good. It's not widely practiced, but we think it could gain some traction. And it helps the customer, and it helps us as well.

And so in terms of labor, haven't had any difficulties with crewing up our recent fleet reactivations. It's -- there's still ample workforce available. I think if we were to see another significant leg up, I think everyone is a little surprised that we've got as many fleets working at the industry level now as compared to what we may have thought three or four months ago. So that was a big leg up. Before we see another leg up, which we're not anticipating, then I think we will see some greater attention in terms of wages and ability to hire. Anything else, Buddy?

Sean Mitchell -- Daniel Energy Partners -- Analyst

Got it. Thanks, guys. Thanks for the...

Michael J. Doss -- Chief Executive Officer

Yeah. Buddy, do you have any further comments on that?

Buddy Petersen -- Chief Operating Officer

I think the one variable component on the labor piece is because there's additional assets required to get to location, it takes a little bit more labor. It's a little more labor intensive, rigging up and rigging down. But during the normal course of operations, it's the same. So we manage to kind of flex around with some of our other fleets that may or may not be in a move situation and offset it that way.

Sean Mitchell -- Daniel Energy Partners -- Analyst

Right. [Indecipherable] Thanks, guys.

Operator

Thank you very much. And Mr. Doss, we have no further questions on the line. I'll turn it back to you. I apologize.

Michael J. Doss -- Chief Executive Officer

Okay. Well, thank you everyone for your interest. Yeah, please, go ahead.

Operator

I apologize. Before concluding, if it's OK, I have one question that just queued up?

Michael J. Doss -- Chief Executive Officer

Sure.

Operator

Very good, thank you. And we'll proceed with our question from the line of Andy Clark with FEF. Go right ahead.

Andy Clark -- FEF -- Analyst

Hey, guys. Thanks for taking my question. I was wondering if you could discuss the profitability outlook into Q2. It sounds like Q4 was burdened with start-up costs and four-month ago [Phonetic] pricing and of course, Q1 has the weather impact. So any color on go-forward profitability would be helpful. Thank you.

Michael J. Doss -- Chief Executive Officer

Yeah. It's hard to give a lot of crystal guidance on that because we're currently negotiating across a number of customers right now for pricing for second quarter, but it's definitely headed up into the right in terms of -- we've already achieved some pricing improvements already agreed on. And so I mentioned the single mid-digit EBITDA number for the first quarter results. Still kind of a transitional period in first quarter. I think, second quarter, I think we'll -- quite a bit higher, double-digit number for EBITDA. Current guess.

Andy Clark -- FEF -- Analyst

Appreciate that. Thank you, guys.

Michael J. Doss -- Chief Executive Officer

Current guess [Indecipherable], yeah.

Operator

Thank you very much. And Mr. Doss, we have no questions on the line. I'll turn it back to you once again for any closing remarks.

Michael J. Doss -- Chief Executive Officer

Okay. Well, good deal. Well, thank you, everyone, for your interest in FTSI. We look forward to speaking with you again next time.

Operator

[Operator Closing Remarks]

Duration: 27 minutes

Call participants:

Michael J. Doss -- Chief Executive Officer

Buddy Petersen -- Chief Operating Officer

Ian MacPherson -- Simmons -- Analyst

Stephen Gengaro -- Stifel -- Analyst

Sean Mitchell -- Daniel Energy Partners -- Analyst

Andy Clark -- FEF -- Analyst

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