Release Date: July 25, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Strong free cash flow generation in the first half of 2024, with $206 million in free cash flow.
- Successful integration of NexTier and Ulterra, leading to significant share repurchases and debt reduction.
- Introduction of a fully integrated drilling and completion arrangement with performance-based contracts, showing potential for growth.
- Expansion into power services, leveraging natural gas fueling and electrical engineering capabilities.
- Continued investment in electric frac equipment, with positive customer feedback and operational success.
Negative Points
- Increased white space in completion services, particularly in natural gas basins, leading to lower-than-expected activity.
- Impact of customer-specific churn and natural gas takeaway constraints in oil basins, causing slight declines in activity.
- Lower margins in US contract drilling due to contract rollovers and lower rig count impacting fixed cost absorption.
- Challenges in maintaining pricing and margin protection in a competitive market with Tier 2 diesel equipment.
- Potential bottlenecks in component supply for fuel blending technology and CNG business, requiring proactive management.
Q & A Highlights
Q: Can you frame up the magnitude of the power solutions business today and its potential growth over the next three to five years?
A: William Hendricks, President and CEO: This business is underappreciated. We have both an electrical engineering and controls business and a large natural gas fueling position. We operate two CNG facilities and deliver compressed natural gas to power roughly 2 million horsepower of equipment, equivalent to 1 gigawatt hour per year of electricity. This business is already over $100 million in revenue and has significant growth potential, especially with the expansion of electric frac fleets and new opportunities in data centers.
Q: What are your initial reactions to running electric frac fleets compared to dual-fuel fleets?
A: William Hendricks, President and CEO: We've been running electric fleets for almost a year and are excited about the efficiencies we're seeing. However, the industry will still rely heavily on Tier 4 dual fuel for years to come. We are seeing good service quality and efficiency with our electric fleets, but we will continue to be measured in our capital deployment.
Q: Can you elaborate on your integrated drilling and completion offering and its potential to expand?
A: William Hendricks, President and CEO: This is not about bundling services but about providing a more efficient and productive service across the spectrum. We are currently working on a project that includes drilling rigs, drill bits, directional drilling, data analytics, and completion services. This integrated approach aims to improve well productivity and efficiency, and we are excited about the potential for upside through performance-based contracts.
Q: What are the drivers behind the white space headwinds in completion services, and how do they differ between natural gas and oil basins?
A: William Hendricks, President and CEO: The increased white space is somewhat our choice due to price-competitive work that we decided not to pursue. We are protecting pricing and margin, especially in natural gas basins. We expect activity to pick up in the third quarter, but we are being selective about the work we take on to maintain sector pricing and margin integrity.
Q: Will you invest in turbines or natural gas reciprocating engines to power non-oil and gas applications?
A: William Hendricks, President and CEO: We are already operating natural gas turbines and gas reciprocating engines in the field. We see more reliability and predictability in maintenance costs from turbine systems and anticipate growing this aspect of our business. We can provide holistic solutions or various components like gas treatment facilities, microgrids, and battery backup systems.
Q: Are you seeing price competition from older diesel assets, and how are customers thinking about price?
A: William Hendricks, President and CEO: Pricing in pressure pumping is stabilizing, but there is competition from Tier 2 diesel equipment in the spot market. We are not competing at those lower pricing levels and expect Tier 2 equipment to be consumed over time due to insufficient cash returns. Our pricing for higher-tier equipment remains stable.
Q: How should we think about the impact of integrated drilling and completion contracts on margins?
A: William Hendricks, President and CEO: These contracts bring in services that we might not have provided otherwise, without offering discounts for bundling. The goal is to share the benefits of improved efficiencies and production with E&P customers, which should positively impact activity and margins.
Q: What are the lessons learned from the NexTier and Ulterra transactions?
A: William Hendricks, President and CEO: Integrating two companies simultaneously is challenging, but our teams did an excellent job. The operations and people are better than expected, and we are seeing further upside from vertical integration within our services. The integration is essentially complete, and we are excited about the future prospects.
Q: Can you provide more color on the potential JV with ADNOC Drilling?
A: William Hendricks, President and CEO: We are excited about expanding our presence in the Middle East in a capital-efficient manner. The process is ongoing, and we look forward to providing more details when we have something more definitive to report.
Q: How should we think about CapEx for the rest of the year and into 2025?
A: C. Andrew Smith, CFO: We expect CapEx to be below our original $740 million budget due to lower activity levels. Maintenance capital remains stable, and we have flexibility to adjust our spending. We will provide more details on our CapEx plans in future earnings calls.
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
