Good morning. And welcome to the ProPetro Holding’s First Quarter 2021 Earnings Call. All participants will be in a listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Sam Sledge, President. Please go ahead.

Thank you. Good morning, everyone. We appreciate your participation in today’s call. With me today is Chief Executive Officer, Phillip Gobe; Chief Financial Officer, David Schorlemer; and Chief Operating Officer, Adam Muñoz. Yesterday afternoon, we released our earnings announcement for the first quarter of 2021. Please note that any comments we make on today’s call regarding projections or our expectations for future events are forward-looking statements covered by the Private Securities Litigation Reform Act. Forward-looking statements are subject to several risks and uncertainties, many of which are beyond our control. These risks and uncertainties can cause actual results to differ materially from our current expectations. We advise listeners to review our earnings release and risk factors discussed in our filings with the SEC. Also, during today’s call, we will reference certain non-GAAP financial measures. Reconciliations of these non-GAAP measures to the most directly comparable GAAP measures are included in our earnings release. Finally, after our prepared remarks, we will hold a question-and-answer session. With that, I’d like to turn the call over to Phillip.

Thanks, Sam, and good morning, everyone. We were pleased to see a continued steady increase in customer activity levels during the first quarter, as global oil demand continue to recover in support of an improving economic backdrop. We expect relative oil price stability while COVID-19 vaccines rollout, further allowing more people to be able to resume the types of activities they were accustomed to prior to the onset of the pandemic. On that note, I want to once again thank the healthcare workers and first responders here in the Permian Basin for their tireless efforts over the past 14 months to help ensure the health and safety of the communities in the region. Partially offsetting the increase in customer activity levels we saw during the first quarter was the impact of the severe winter storm in February. The result was eight days of lost revenue and certain costs were enabled to pass-through to customers, while our fleets were idle. Additionally, we incurred costs and expenditures related to fleet reactivations earlier than previously expected. While David will discuss the financial impact of the winter storm in more detail in his prepared comments, I want to commend the ProPetro team for remaining nimble and quickly, and effectively responding to our customers’ needs, and for protecting our competitiveness in the marketplace despite the challenges we faced. Operational efficiency and equipment readiness remain key differentiators in the oil field services, as customers focus on utilizing the highest quality crews with the most reliable equipment available in the industry. Our proven track record of quickly and effectively responding to the needs of our customers, albeit in a mutually beneficial manner continues to differentiate ProPetro in the marketplace. During the first quarter, our best-in-class execution at the wellhead was on full display as we drove our…

Thanks, Phillip, and good morning, everyone. We generated $161 million of revenue during the first quarter, a 5% increase from the $154 million of revenue generated in the fourth quarter. The sequential quarterly increase was primarily attributable to increased activity levels. As Philip mentioned, effective utilization was 10.3 fleets versus 9.6 fleets for the fourth quarter of 2020. Our effective fleet utilization for the first quarter would have been higher had we not incurred the approximately eight days of downtime due to the extreme winter weather event in February. In summary, we estimate that our sequential revenue growth could have been closer to 15% or approximately $177 million for Q1 had we not experienced the severe weather interruption. We currently have 13 fleets working, two of which are Simul-Frac and our guidance for second quarter average effective fleet utilization is 12 to 13 fleets, up from 10.3 in Q1, which implies a 20% increase at the midpoint of our range, driven by anticipated highly efficient pumping activity and Simul-Frac operations. Cost of services excluding depreciation and amortization for the first quarter was $123 million versus $116 million in the fourth quarter, with the increase driven by higher activity levels in the first quarter, as well as certain costs of services including, labor and other fixed operational costs that were not passed through to customers primarily as a result of downtime from the winter storm and the accelerated pace of fleet reactivations. First quarter general and administrative expense of $20 million was flat with the fourth quarter. Excluding non-recurring and non-cash stock-based compensation, first quarter G&A increased to $18 million from $15 million in the fourth quarter. Contributing to the increase was higher insurance, payroll taxes and other expenses. Depreciation was $33 million for the first quarter, as compared to $35…

All right. Thanks, David. As we have mentioned on today’s call, our customer activity levels have continued to modestly increase, given the improved commodity price environment. Assuming no other disruptions like we saw in February due to the severe weather or other external issues, we expect this level of activity to be consistent. While the outlook for customer activity levels remain healthy, it remains challenging to increase pricing for our service -- services, given the level of excess pressure pumping equipment capacity currently in the marketplace. During the first quarter, we experienced isolated shortages in our supply chain, although our team was able to efficiently minimize operational disruptions. Moving forward, as we have done in the past, we will work with all of our customers to mitigate cost inflation that may come from supply chain tightness. We do expect true pricing -- service pricing increases in the future, although the timing remains uncertain, as we are in the early innings of what we view as a multiyear recovery. In short, while customers recognize a clear benefit of our industry-leading service offering, our entire sector is on average pricing their work at unsustainable levels. In this environment, we remain squarely focused on working with customers that are interested in partnering with a service provider that best understands their needs and develops creative solutions for their requirements at the well site. This collaboration drives critical efficiencies to maximize their return on investment. In support of the needs of our blue chip customer base committed to the substantial future operations in the Permian Basin, we will continue to make target investments that promote our collective future success. Most importantly, this includes analyzing and investing in technologies that best position ProPetro for the impending equipment transition to gas burning power sources to drive lower…

[Operator Instructions] Our first question comes from George O'Leary with TPH & Company. Please go ahead.

Good morning, guys.

Good morning.

Good morning.

I think you all alluded to discussions with customers, the duration of the work they are willing to discuss with you extending and I thought that was an interesting point that needed to touch on. So can you talk about maybe six months ago, how far customers were willing to look out versus over the last quarter, even the last few weeks, how far out they are willing to look on the calendar?

Yeah. George, this is Sam. I think that more forward planning began late last year, obviously, in 2020, everyone’s plan was significantly disrupted on both sides of the table. And as the recovery began late last year, I believe that the theme of capital discipline and just operational discipline in general started to show as we started to go back to work with many of our customers. They began at more long-term planning, probably, late last year and that has persisted into the first part of this year. I think it’s a healthy sign for not only us but the entire space to be able to think a little bit more in advance.

And George, I would add to that. That’s not really new for this year. That’s been going on for some time where we have had a longer view of many of the operators that we worked for in terms of their development plans. And I’d say, even at the downturn, one of the things that became pretty clear, I think, was operators started worrying about quality of crews coming back to work and the quality of the equipment. So, we saw a number of customers engage us for work program at least for a year, provided we could provide the crews that they were used to having. So, I don’t think it’s new, it may sound as new, but I think it’s -- we have had that long view range of customer’s plans for a while.

Great. And then just an extension of that question, as customer dialogue is increased and you guys have gotten busier. As you think out about the back half of the year, one of the big thing investors seem to be resting with is completions activity cadence, are we plateauing at these levels that seems to be what one of the biggest questions investors have? So just curious how you think activity progresses broadly, not looking for any specific guidance, for pressure pumpers and completions activity in the back half of the year, Q3, Q4, are we puttering out here or is there more work on the horizon?

I think it’s hard to say anything definitive across the Board. There will be opportunity for activity adds in the back half of the year, but I think they will be a bit more isolated than they have been in the first half of the year. I think you have seen almost everybody across the board in the E&P space participate in the activity recovery up to this point this year. I think any activity adds probably more measured in the back half of the year and isolated to specific customers that maybe have specific plans or economics that they are allowing them to make those adds.

Yeah. I think I would also add that, as the strip price moves forward, operators see their cash flows increase. If I don’t have balance sheet issues where they need to turn that cash to repair the balance sheet, the amount of money that they are going to reinvest will grow along with -- even though they are going to only invest 70% to 80% of the cash flow. That number is getting bigger with prices as they move forward. So I would think that activity would modestly continue to increase, of course, lot depends on India, Europe and all the other external factors that play into the price going forward.

Okay. I will sneak in one more, if I could, just on that final point that you hit at, Phil. The pricing discussion at least qualitatively feels like its improving, it just feels less combative. Our realized prices are rising at this point, which makes sense, given the supply/demand picture and calling timing when prices rise is always challenging. But can you just talk about the nature of discussions with customers and whether that’s become -- truly has become less combative? How are those discussions going and what’s the receptivity when you broach the topic of pricing increases with your customers? Adam Muñoz: Yeah. George, this is Adam. I think as we continue to communicate that with our customers and partners, we are just continuing to stay in constant communication as far as like how our cost structures are looking and any -- maybe short-term or long-term type inflations that we are seeing on our cost structure. Just kind of letting them know that, certain things are impacting the industry, whether it’s trucking rates or supply chain -- other supply chain as far as chemicals or acid or anything like that are increasing on our side. And then as well as communicating with them and reminding them as far as us to be able to continue to invest in the new technology and next-gen equipment that they are inquiring about and as more of these bids are coming out requesting pricing for. I think we have just been pretty consistent on the communication that pricing will have to change and I think we have been focused more on just getting activity back on the first part of this year, and probably, begin focus -- begin the focus more on the second half of the year as far as price increases.

And George, I’d say, I would sum it up in one word, inevitable. They see the allocation of cement, they see the inflationary pressures, they have seen the disruptions. So, I would say now there’s more a resignation that pricing is going to improve. The question is how much and how fast and that’s what we can’t really answer.

Got it. Thank you all for the color.

Our next question comes from Stephen Gengaro with Stifel. Please go ahead.

Thanks. Good morning, gentlemen.

Good morning.

I think you mentioned on the call that the economics were supportive of bringing fleets back. Are you -- and I assumed you are talking on a fleet level profitability measure, is that how you think about the deployment? And then maybe the follow-on, when you think about your current fleet size, at what point in deployment of vital assets do you start to see the costs rise materially to reactivate?

Yeah. Stephen, this is David. I think what I wanted to do there is just really differentiate the cost of reactivating a fleet and I think we are at that point where we believe we can recover those costs in a fairly short period of time as compared to reinvestment or newbuild pricing. We are really not at that level and we have got some way to go there. So that’s kind of how we are thinking about the reactivation. We want to make sure that that cost which -- there’s going to be some expense there, there’s going to be some CapEx there. We have visibility in that reactivation that it’s going to recover pricing. In terms of how we look at that too is, the additional cost, as we put each incremental fleet back, will gradually increase and so there’s a limitation there as well. So those are definitely things that we are considering and evaluating as we look at reinvesting in the fleet.

Great. Thank you. And then, do you -- I am not sure if you mentioned this, did you mention idle fees in the quarter and where they stand going forward?

We did not, but we had about $4.5 million of idle fleets during the quarter.

Okay. Great. And then just one other follow-up to that, as you think about your EBITDA per fleet is running probably $10 million to $11 million in the last couple of quarters excluding idle fees, do you think on utilization, that number can get back to the mid-teens and you think you need some pricing behind it to get yourself back there, so I am assuming maybe sometime next year?

Well, keep in mind, the quarter was significantly impacted by the weather event. We had eight days of near zero revenues and when you are running 11 fleets pre-freeze event going to zero for a couple of weeks or liver a week, it’s a significant impact. So, I think that you got to consider that for the quarter. I think that as we exited the quarter we were back at a good level. As we mentioned, we have got 13 fleets operating today, two of which are Simul-Frac and so we will be continuing to evaluate that performance. But we should see some operating leverage play out, given that we would expect as is normal better weather conditions in the second quarter.

Yeah. Stephen, this is Sam. I will just add on to that. I don’t perceive the effective efficiencies, say, daily throughput on location to be as big of a contributor to increase profitability as much as pricing and operating leverage, moving forward probably are. So you mentioned the mid-teens annualized EBITDA per fleet number. We think we can get there. We are not sure when exactly. But pricing definitely helps in that aspect of which Phillip alluded to the fact that we believe it’s inevitable. We will treat that on a customer-by-customer basis and the timing will be very calculated depending on economics.

And it seems like if you add back the $5 million, you are kind of at $12.5 million range already. So that was -- so you are right...

Right. So $12.5 million to say $15 million, we call it mid-teens is we don’t think it’s too much of a jump. We think pricing is probably the biggest contributor to get us there.

Right. Thank you for the color, gentlemen.

Our next question comes from Ian Macpherson with Simmons. Please go ahead.

Thanks. Thanks. Good morning. I was frankly surprised that the weather impact was only $5 million given the concentration of your exposure there to the weather for whatever it was 10 days. So -- but be that as it may, it seems like you have at a minimum that plus healthy incrementals on the organic activity growth from Q1 into Q2. So I just wanted to sanity check my thinking on EBITDA, the EBITDA walk from Q1 into Q2, should probably be a healthy incremental margin on the 20% topline, as well as some or all of the recovery that $5 million. Is that a fair way to think about it?

Yeah. I think that’s fair. Ian, I don’t think there’s anything magic changing in our cost structure or anything like that. We talked about the fact that we are collaborating up and down the value chain to try and mitigate cost pressures that have presented themselves within our cost structure. But kind of going back to our most recent comments around operating leverage in just the near-term, Q1 to Q2, then there is some modest upside to say the EBITDA margin because of that.

Okay. And then on free cash generation, again, if we add back $5 million of weather impacts in Q1, you would have been free cash flow neutral in the first quarter and with rising EBITDA and like you kind of level set on your CapEx cadence, flat-to-positive free cash flow for the rest of the year, does that jibe with your modeling?

Yeah. That’s right. Ian, this is David. We believe we will be free cash flow positive for the year.

Excellent. And then last one for me, you said you are at two Simul-Fracs out of 13 total fleets today, so about 15% of your activity. Do you think that that’s indicative of the broader Permian penetration kind of coming back [Technical Difficulty] how do you see that total penetration rate plateauing over the next few quarters?

Yeah. Ian, this is Sam. You broke up there at the end. But I think you are asking around how -- maybe how much Simul-Frac there is out there in the market right now. I think our most recent guess was somewhere in the 10% ballpark. If there’s say 100 fleets working in the Permian today, we believe maybe 10, possibly 15, but somewhere in that range. We don’t see that number changing significantly near-term, but going into next year, you could see that inch up as more operators begin to plan for these type of operations.

Yeah. The one thing I will mention, Ian. This is Philip. Just talking to a couple of operators is Simul-Frac seem like the way to go. But I think at least two customers we have talked to are not convinced that’s necessarily getting the savings that they think that they expected to get out of it. So I think it will take a little bit longer for to shake out to see if it’s going to be an expanding part of the service offering or it’s going to kind of stay at a low 20% or less of the operations, we will see. But it is kind of very contradictory when you talk to two different operators on how Simul-Frac works for them.

Yeah. Certainly very idiosyncratic, I am sure. All right. Well, thank you. I appreciate all the insights today.

Thanks.

Thanks, Ian.

The next question comes from Chris Voie with Wells Fargo. Please go ahead.

Thanks. Good morning. Maybe first on kind of the ESG fleet market, so it sounds like they are mostly sold out across in all the pumpers, as additional Tier IV fleets come to market, how do you handicap the risk of customers switching away from your offerings to take those fleets and do you think you are going to have to invest in addition to your current CapEx guidance if that starts to happen?

Yeah. Chris, that’s a great question. I think our entire sector is in an interesting place right now in trying to make sense of adding more of this type of equipment to the market, yet facing economics that don’t support those investment decisions. We -- it is a demand. We have seen a good strong demand on things like dual gas equipment, evidenced by our investments this year. If economics continue to improve, I think you could very easily see us continue to go down the path of converting more of our Tier II equipment to Tier IV. But right now at any more accelerated rate than you are already seeing us reinvest is tough, goes back to some of the pricing conversations we have talked about earlier and the continued improvement we need to see around our profitability overall to continue to make these investments. I will also mention that, Philip mentioned a couple different places in his scripted remarks that, efficiencies on location and the ability to keep costs low for our customers and value high via those efficiencies still remains of the utmost priority for us and our customers, definitely our customers. So there could across the sector be some movement of assets for customers that are placing a higher priority on this lower emission equipment. But we see today still leading the way as efficiencies and throughput at the well site. We think that we are very well-positioned if not best positioned in the Permian Basin to provide that. So we think we will remain very competitive and will pick our spots to make investments to continue to evolve our equipment offering.

Yeah. Chris, this is David. Just to add on what Sam said, we have brought on some new customers this quarter and we have existing customers. And when we look at the comparison of the competition, we believe that they are getting a significant productivity differential with ProPetro. And so when customers are talking about different fleet options and emissions, they have to think about what they are going to give up if they move away from ProPetro in terms of overall productivity. So what we are trying to do is execute a strategy that has capital discipline and continue to build those relationships with our customers, deliver that operational top tier performance, while also making some moves toward integrating Tier IV DGB and other equipment into our product offering over time, but doing it on a gradual and disciplined basis.

Okay. That makes sense. Thanks. And for my follow-up, I guess we have been talking around it on a per fleet basis, but maybe I can shortcut this. If run rate activity from April continues for remainder of the quarter, do you think consensus of $35 million EBITDA is achievable?

Yeah. I think it’s achievable, Chris. I think we are still going to be measured in how much this operating leverage that we have spoken of brings us in the next quarter. We are not expecting pricing to move in the second quarter. That’s probably second half of the year. So, I’d say, it’s achievable. But we would probably like to remain a little conservative.

Okay. Thank you.

[Operator Instructions] The next question comes from Sean Mitchell with Daniel Energy Partners. Please go ahead.

Good morning, guys. Thanks for taking my question. Just a kind of a quick one for me, we have heard a lot of issues, I guess, in the field over the conference call season here about labor issues in North America, you have mentioned trucking earlier being tight. Are there any other areas where you guys are seeing labor issues in your operation? Adam Muñoz: Yeah. Sean, this is Adam. Labor is always a struggle you find, especially as activity ramps up, coming and even more so coming out of the downturn we hit. Certain labor forces exit the energy sector altogether forever. And then some are just waiting for maybe rates and pricing to get back to where it needs to be and to attract that talent pool back to the oil fields sector. But as of right now, we are not seeing anything as far as labor internally on our side being able to provide our customers and our partners with high performing and highly efficient personnel on location. So, I would say, the trucking has probably been the one that has been hit the hardest just because it’s a combination of things. It’s a really heavily owner operator type business. So those type of drivers are demanding better rates for their equipment, as well as with the increase -- the inflation of diesel prices going up, they are just wanting to -- I think that’s where you are seeing most of the tightening happen.

And Sean, I will add to that. I think our position -- our competitive position being very single basin Permian focused. In our history with the customer base that we continue to serve provides a lot of comfort to not only our own employee base, but other supply chain partners we worked with. So, consistency in that aspect comes at a very high value, which I don’t think solves all the problems for us in the labor market, but it makes us a lot more competitive when you are trying to source that next employee or that next supply chain partner to help you execute. They know that working with ProPetro is going to come with increased consistency and predictability, which is very helpful as we source that additional person up and down the value chain.

That’s helpful. Maybe one more for me, just as we think about, we have heard -- if we read a lot, you have heard a lot about steel cost inflation and when you go back to thinking what some of the guys have hit on that Tier IV DGB upgrades, if you upgrade a Tier II to a Tier IV. Any idea where that cost is today versus say six months ago, steel prices have really ramped higher? I mean, where are we on the cost side of upgrading a fleet here from Tier II to Tier IV?

I think it’s safe to say it’s going up. We are trying to keep track of that on a real-time basis. The economics that we got with the approximately 90,000 horsepower that we have either built new or converted are probably not sustainable, which is why you hear us continuing to go back to needing to see our profitability continue to improve, because the costs for those items, specifically engines and other components that are very steel based, we perceive will continue to grind higher throughout the year.

Got it. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Phillip Gobe for any closing remarks.

Okay. Thank you everyone for joining us on today’s call. Although, we are in early stage of a multiyear recovery, the American entrepreneurial spirit is alive and well in Midland Texas. So presently we are bringing a safe alternative to hydrochloric acid on location through a new partnership and deploying and evaluating next-generation equipment. But the diligent work continues as we progress on our sustainability journey. We are proud to play a part in an innovative industry and look forward to the exciting improvements that will come from the unique experience we have gained in the past year. Thank you again, everyone, and we will look forward to talking with you on the second quarter.

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.