Good morning, and welcome to the ProPetro Holding Corporation Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Matt Augustine, Investor Relations. Please go ahead.

Thank you, and good morning. We appreciate your participation in today's call. With me today is Chief Executive Officer, Sam Sledge, Chief Financial Officer, David Schorlemer; and President and Chief Operating Officer, Adam Munoz. Yesterday afternoon, we released our earnings announcement for the second quarter of 2022. 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. 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 would like to turn the call over to Sam.

Thanks, Matt, and good morning, everyone. We're excited to report another quarter of excellent operating and financial results generated by the ProPetro team. Our margin over market share strategy continues to prove to be the prudent way to navigate this cycle, as our financial performance continues to improve. Major thanks to the entire ProPetro team for remaining focused and executing well during what is a dynamic time. Before we go into our highlights for the second quarter, I want to take a moment to provide our view on the state of the global energy industry and the North American pressure pumping market. It is apparent that liquidity issues, coupled with higher risk free rate and concerns of the Main Street recession have caused recent weakness in the energy equity and commodity markets. Despite these near-term issues, our forward view is that global crude oil market is structurally undersupplied with short-cycle energy investment in crude oil production particularly in the Permian Basin have less risk of recessionary impacts than in previous cycles. Moreover, we believe energy markets are currently more at risk of a supply crisis than a demand-side downturn. We see clear evidence of that from the shape of the forward WTI crude curve, which is currently backward dated in an unprecedented manner. It is important to acknowledge this, given the shape of the WTI crude curve today differs materially from that of periods, periods of prior weakness in the global economy. Consequently, our confidence in the sustained crude oil up cycle remains high, and we are planning our business accordingly. As are the largest and most sophisticated producers in our area, many of which ProPetro currently serves. In the North American pressure pumping market, we see continued evidence of an effectively sold-out market. This is most obvious in the…

Thank you, Sam, and good morning, everyone. During the second quarter, we generated $315 million of revenue, a 11.5% increase from the $283 million of revenue generated in the first quarter. The increase is largely attributable to additional net pricing gains, increased fleet utilization and our team's ability to consistently outperform for our customers. We also had our highest revenue month in July since February of 2020 with more pricing improvements expected in this quarter and going forward. Our effective fleet utilization for the second quarter was above our prior guidance to 13.5 to 14.5 fleets coming in at 14.8 fleets, which increased 8% from the 13.7% fleet utilized during the prior quarter. Our guidance for second half effective fleet utilization is a range of 14 to 15 fleets. As Sam mentioned, we believe our capital and disciplined approach continues to pay off. We have achieved a healthy sequential top line and bottom line growth for the past two quarters without deploying any additional fleets. This disciplined foundation that we've currently installed at our company will propel the ProPetro team forward as our asset base shifts to a higher percentage of ESG friendly equipment by the end of this year and again in 2023. Cost of services, excluding depreciation and amortization for the first quarter was $219 million versus $197 million in the first quarter, with the increase driven by higher activity levels and inflationary impacts, including labor and material costs. Second quarter general and administrative expense was $25 million compared to $32 million in the first quarter. Adjusted G&A was $20 million and excludes $5 million relating to nonrecurring and noncash items. Depreciation $31 million for the second quarter. The company posted a net loss of $33 million or $0.32 loss per diluted share compared to our first quarter…

Thanks, David. We're very excited about the future of our company. The purchase of the additional Tier 4 DGB units announced yesterday reinforces our commitment to meet our customers' urgent desire for gas burning engines that can lower their completions cost and lower their emissions. Accordingly, we are seeing higher demand and higher pricing for this equipment today and in the quarters to come. This should provide ProPetro with an early catalyst in achieving a healthy cash-on-cash return for these investments. We did the same thing last year around this time, and our investment has paid off handsomely with significant margin expansion earlier this year and continued. Market conditions today are even better than they were then. Given our view on the state of the global energy industry and the associated severe undersupply of crude oil, we at ProPetro are convinced that we are in the early stages of a sustained multiyear long cycle. For that reason, ProPetro is committed to playing a critical role in the next phases of industrializing our energy through initiatives like electrification of the region. Our conversations with our customers suggests that demand for this equipment is high and sustainable. We're expeditiously working to meet that demand and expect to provide a reliable electric solution for our customers in 2023. Also it is important to acknowledge that the equipment discussed today will be deployed under our existing margin over market share strategy. While it's too early to project our total fleet count for 2023, we will make certain that we are striving to achieve proper cash on cash returns for our entire deployed portfolio of assets. Lastly, I'd like to mention how proud we are here at ProPetro to be a vital part of an energy value chain in the Permian Basin that is one of the best sources of reliable energy in the world. We believe that the oil and natural gas produced in this region and across the United States will be fundamental to producing products, empowering all other industries here at home and across the globe for decades to come. We along with our peers and customers across the oil and gas value chain will continue to innovate and improve as we continue to provide the most reliable and secure energy for the foreseeable future. Finally, I'd like to thank my ProPetro teammates once again for another quarter of reducing risk and creating value for our customers and other stakeholders through the safe, reliable and predictable operational performance. We'd now like to open it up Q&A.

[Operator Instructions] [Technical Difficulty] to put me on. Sam, you guys – you have the sixth DGN fleets and at least one electric. But you work for some really good customers, so I assume, are seeing the value of the fuel-efficient fleet. So it does beg the question like what's the optimal fleet mix in ProPetro in terms of DGB electric and legacy. If you could just opine on that and the timing too/

Sure. That's a fantastic question, John. I think the answer is slightly different for what we think the right mix is short term and what we think the right mix is long term. And on a short-term basis, we feel given these most recent orders we've placed on the dual fuel side and what we're working on, on the electric side, we feel really good about our portfolio going into next year. I think this most recent order we placed kind of finishes off the mix of equipment that we think is optimal. I can't say that without mentioning what's going on in the Tier 2 diesel-powered space, given the markets effectively fully utilized. And I think you'll find many of our competitors that agree the pull on conventional diesel equipment is also very hard, if its not very differentiated from some of these next-gen solutions. So we feel really good about where we're positioned there. Just a brief comment on the long term, John, I don't know what the right time frame is? Is it 5 years or 10 years, but there's going to be a lot more natural gas burns through frac equipment as we go into the medium and long term. And we're positioning ProPetro today to be a very participant in that natural gas future of frac equipment.

And just one more for me and I'll turn it over. And this I guess for Adam. But on the DuraStim, is there another application where the technology might work you know, vertical frac or pump down? Just any color on what the potential use of the asset could be if any?

Yes, John, I would say right now, you know, no, I'm not, no, we're not really focused on that either. But as I mentioned in the past, we just wanted to focus on getting our margins back on the Tier 2 and then converting our fleet going into the future of the gas burning equipment, but for the time, though, I would say.

Fair enough. Just curious. Thanks, guys, good quarter.

The next question comes from Scott Gruber with Citigroup. Please go ahead.

Yes, good morning. I wanted to ask somewhat of a follow-up question to John's question. In renewal and the kind of ongoing dynamic. You laid out you know, where you'll be at year-end and into next year. But how do we think about fleet renewal over the long run, you know, if rates to stay healthy, do you go out and maybe order two new frac fleets a year or maybe it's one in a few DGB based on customer preference, gas availability? Or maybe it's $1 amount, like you're willing to commit to $100 million to fleet renewal every year. Just how would you frame up the kind of multiyear fleet renewal program for you guys?

Scott, great question. This is Sam. I think as we think about that today, and this has been pretty topical here within our team in terms of trying to figure out the most appropriate long-term capital allocation. But today, it's based mostly on specific customer conversations. So we're seeing, as it pertains to gas burning equipment, both dual fuel and electric, we're seeing a very high willingness from the sophisticated customers, E&Ps in the Permian Basin to contract this gas burning equipment. So right now, most of those conversations are led by that customer willingness to emit more commercially around that. Long term as more gas bringing equipment comes into the system. There might be a more specified year-over-year allocation to - capital allocation to converting the fleet.

Got you. But it sounds like as long as the contracts are in place, you would place the order for additional equipment and meet your pay back or return hurdles that way to think about at this juncture?

Yeah, Scott, this is David. I think the way we look at it is, you know, we're wanting to facilitate the industrialization of this business, and we think that lower costs, lower operating costs solutions are really going to be part of that. So I think that whether or not we get contracts is really secondary. I think our primary pursuit is ensuring that we're putting in place a model that's sustainable going forward and that enhances margins over the long term. And I think when you think about ProPetro, we've done that in a very disciplined way for utilizing the resources that we have and not going beyond that. And I think we'll continue to do that. So moving forward, the pace will be dependent on market conditions, on customer - customers and a variety of different things. But over the long term, as Sam mentioned, we believe these technologies are really the solution long term.

Got you. If I could squeeze one more in, just kind of, at the other end of the spectrum. Sam, you mentioned strong pull for Tier 2. How many idle Tier 2 fleets do you have on the sidelines? And we saw with your competitors reactivate some any opportunity for ProPetro to reactivate and get some nice payback on that reactivation spend?

It really depends, Scott. And anything we have sidelined as it requires varying investment - investments to get it back off of the sense. I think in our scripted remarks, we mentioned the 15 fleet, putting a 15 fleet into the system this year. We've been operating in 14, right around 14 fleet since the beginning of the year. That will be one of those fleets that will be somewhat created by the additional Tier 4 DGB program that we continue to execute on. So at the minimum, we think we can get a - we will get a 15th into the system at the end of this year. And I think we'll see what the market gives us going into next year. But with what we know today, it's - we're looking at 15 going into next year.

Got it. I appreciate the color. Thanks, Sam.

The next question comes from Arun Jayaram with JPMorgan. Please go ahead.

Good morning. Sam, one of the trends that we saw from public E&Ps, call it, starting in the 2014 time frame was the fact that they were debundling their service offering. And so if you're a vertically integrated frac supplier during that time, you're kind of forced to discount some of your ancillary services to compete. And obviously, I think that serves ProPetro well as you just essentially were a pure play on frac. But it feels like the market is changing a little bit, maybe given the rising role of privates and we are starting to see some margin benefits accrued to at least in this cycle to more integrated frac service providers. So I wanted to get your thoughts on where your heads out and potentially for ProPetro to expand its service offering just beyond pure frac you know, sand and things. And so what's your thoughts on that? What's - what are you thinking about from an R&D perspective?

Yeah. Good question, Arun. And I think I think you described the circumstances of the past and the present fairly accurately. We were very competitive against some of our bundled competitors and peers back in prior cycles because of exactly what you described. We have a really, really strong convictions about the length of the cycle that we're in right now. And as we look through that lens, I think it's forcing our team to evaluate other strategic opportunities a little bit differently than we have in the past. And I personally look at that in kind of two different ways. You can integrate vertically you can integrate horizontally. And when I say horizontally, I'm talking about different services that they're out of the well site with our, let's say, our frac services right now. So I guess my short is that there's probably more to look at there for a company like ProPetro than there has been in the past. That said, there's a lot to choose from in the Permian Basin. This is - from a services standpoint, the most well equipped, the most well-equipped resource play in North America by a long shot. So I think if you're talking about bundling services, say, in South Texas and East Texas or somewhere like the Bakken, it might look a little differently than bundling services in the Permian Basin. So we have to kind of account for that as well.

Great. And just my follow-up, maybe a difficult question to answer, but I wanted to get an update on kind of where we stand with the negotiations with Pioneer. They had a nice slide highlighting some of the efficiency gains that they're citing, if you go to Slide 13, and there deck from last night. So it seems like you guys are executing really well for them in the field. But where do we stand with that? And are some of the investments we're seeing in next-generation technology with Pioneer in mind as a key customer as you move into e-fleets and a higher mix of Tier 4 equipment?

Sure. Yes, usually, when talking to investors or analysts, Arun, have to remind them of the historical context of what Pioneer ProPetro have achieved together, but you've done it pretty efficiently for me by pointing towards how Pioneer presents their own operating efficiencies that we've played a large part in. And we're really proud of that. We're proud of what the Pioneer and ProPetro relationship has done over the past few years in terms of creating value in a very mutual way. We're talking to Pioneer almost on a daily basis as we have for the last few years, and we'll continue to do that as we plan going into next year. That said, I personally and I think our leadership team is highly interested in ensuring that we're putting our equipment, our people in the greatest opportunities to succeed and create value. We think that Pioneer will be definitely a part of that going into next year. But there's a lot work going on in that arena right now to ensure that we're exposing closing our offering in a company to all the best value-creating opportunities in 2023 and beyond.

Great. Thanks, Sam.

The next question comes from Waqar Syed with ATB Capital Markets. Please go ahead.

Thank you. And good morning. Sam, there's a slide in your presentation deck where you guys give you bumping our productivity and if I remember correctly, I think last quarter, it was around 71% and now it's around 53%. And if I understand correctly, that would mean that there was a big dip in productivity in Q2. Am I understanding it right? Or is there something that I'm missing?

I think when you look at it, and this is pretty consistent with slide that Arun just referred to. Pumping our - pumping productivity has increased nearly 100% over the period that we show. So I think that's what we're looking at. The numbers you might be looking at are annual versus quarterly. But when you look at it back at the period that we're reflecting and again, this has also shown by Pioneer pumping our productivity has increased pretty significantly and continues to.

Right. For onboarding [ph] morning purposes because we actually use that in our models. Was there a dip quarter-over-quarter then? Is it fair to assume?

No, no. It wasn't.

Okay. Fair enough. And then one other question that, you know, you mentioned next year would be very strong free cash flow. How do you define strong? What would you be happy with in terms of the use of the word strong, whether you want to describe it as a percentage of revenue or EBITDA conversion or anything like that?

I think in the neighborhood of 40% to 50% of EBITDA conversion to me represents strong. And when we look at EBITDA per fleet and the cadence that we're expecting next year, we could see that up 25% to 40%. So that's kind of how I would expect strong to play out.

That’s great. And then in terms of your total hydraulic horsepower, we've been using a number of about 1.4 million hydraulic horsepowers. So number one is that the correct number? And number two, any of these upgrades that you're doing right now, is that bringing in any incremental horsepower? Or is it mostly all replacement engines?

Okay. This is David. Let me answer that. One of the things you should know is prior to this quarter, we did include the DuraStim in the available horsepower that we had removed that , so we're down to 1.3 million of capacity and the investments that we're talking about essentially are replacing investments that otherwise would have been in legacy equipment. Now I think Sam talked about the fleet cadence for next year. We do think that we'll be able to generate growth, but we haven't laid out our full investment plan for 2023 yet either.

That's great. And just one final question. Following the impairment charge, could you provide some guidance for DD&A for Q3?

Yes, that number is going to be right around $32 million, call it $30 million to $34 million.

Okay. Great. Thank you very much. Appreciate all the color.

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

Thanks and good morning, gentlemen. So two things for me. The first just is you talked about in July, and I think you said record revenue quarter - record revenue month. And when we think about the puts and takes in sort of the profitability per fleet, I'm just kind of curious if what are the headwinds versus pricing, as we think about profitability for because it feels like your guidance is solid and beatable. And I'm just trying to understand if there's anything that is sort of offsetting what appears to be continued price momentum as we get into the second half of the year?

Steve, this is David. There are continuing headwinds that Sam and Adam and I have spoken about inflationary pressures. I think that some of those are receding a little bit, but we're going to continue to face those. However, the demand for services and the tightness in supply of frac equipment is such that we believe that the pace of change on the pricing side is going to be greater than the inflationary pressures that we would have to absorb. So I think that we feel good about that.

Yes, Stephen, Sam. I'll just add to that. Over the last 8, 10 months as we've tried to employ a more aggressive pricing strategy and our kind of what we call margin-over approach. It's been kind of baffling as you might be working with one customer in particular to get their pricing in the right spot, and it takes you a month to do that. And in the meantime, something pops up in the supply chain that was very unpredictable either from a delay or from a cost inflation standpoint or both. So I think we're trying to be kind of prudent conservative in trying to factor in some expectations that some of that will continue, as David said, hopefully yet, to a lesser extent. But just trying to be realistic with ourselves around the headwinds and crosswinds still exist and that may come, say, in the next six months to a year.

Stephen, the last part of your question, regarding conservatism. I think what you've seen out of ProPetro is we typically provided pretty minimal guidance and try to be very conservative around that. So we are coming out with a bit more guidance regarding EBITDA and our full year. So I think conservatism is something that we'd like to stick with.

No, that's fair. That's fair. I appreciate the commentary. And just as a follow-on, when you are - you may have mentioned a little bit in the prepared remarks. When you're looking at the Tier 4 DGBs and when you're thinking about the electric fleet, are you looking for strong commitments and/or contracts before the build? Or are you pretty confident in the visibility you see that there's customer demand?

Stephen, it's Sam. It's a little bit of both, actually. We have a strong willingness for multiple customers to contract any gas burning equipment, whether it be electric or DGB. That said, as David mentioned earlier - in an earlier question around our idea of trying to participate in the industrialization of the sector and of the Permian Basin. Some of this next-generation equipment that burns more natural gas is just more cost-effective solution. So as we talk about capital allocation moving forward, we want to do our best to be allocating capital to the most relevant technologies and tools to do our job that brings the best returns profile. So we do believe that we will be securing contracts for many of these different gas burning offerings. That said, we think it's going to be prudent for the top tier pressure pumpers like ProPetro and its larger peers to be pulling equipment into the system that plays to that industrialization and is more efficient, cost effective and brings better emissions profiles.

Great. Now that's very helpful. Gentlemen, thank you.

[Operator Instructions] The next question comes from Derek Podhaizer with Barclays. Please go ahead.

Hey, good morning, guys. I wanted to go back and address the Pioneer contract and if it could be potentially limiting exposure to the rapidly rising pricing environment. Can you talk about your profitability outlook for 2023 when these contracts roll off the year-end? How much pricing leverage could this allow you as you roll into spot market rates, plus you're adding your high-grading the fleet with Tier 4 DGB and any frac, just a little more color around potential profitability uplift would be helpful.

Sure. This is Sam again. I think our addition of more dual field units, our commentary around e-fleets next year is really directed towards what we believe is happening in the broader market and maybe even more so directed towards what we think the medium and long-term circumstances are going to be in the North American pressure pumping market for really the years to come. We're extremely confident about what the market is going to look like really the back half of this year and going into next year and beyond that, the - and this is no news to most informed people listening to this call, but the structural undersupply of oil and gas globally, we think is going to take many years to fix. So as we look through that lens on the top-down basis, we want to give our company the best tools to work with going into that. You mentioned in your question, something like exposure to spot market. Not that we don't do spot work here and there, but it is an extremely small portion of our work. So when you see our and financial performance, it is a direct look into a very committed, dedicated model and we look to keep it that way going into 2023 and beyond. We just think that's the best way to run one of these businesses and make it as predictable as possible. Will the Pioneer be a part of that? Yes, yes. We believe they will. What will the right mix be of all of our customers? We're working hard, as I mentioned earlier today, to figure that out. One interesting thing that is happened this year that's been different from many cycles past, is that we're sitting here really from June through today, is the bidding and tendering season for 2023. That usually happens in November. So it's four to six months accelerated. And that's a fantastic indicator we think of demand and how tight the market is. And we've had more inbounds from different operators than we've ever had really maybe in the history of at least my tenure here in the last 10 years at ProPetro. So we're taking a close look at every opportunity that we think plays towards that dedicated efficient, predictable model that we at ProPetro like to put our equipment, our people into.

Yes, Derek, this is Adam. The only thing I would add to that is, as we look into going to next year, any contract regardless of customer definitely has to compete with our opportunity cost. So we're looking really hard as Sam mentioned of that. We're looking at all our opportunities, especially in the tech market that we sit in today.

Yes. Derek, this is David. Just to chime in on top of Sam and Adam's comments, which they've communicated well. I think you've actually characterized it quite well in your commentary from last night. And I think that just like every other management team, we're going to be commercial. And we owe it to our shareholders, we owe it to our employees and we're going to be looking to put our assets in the best place to generate the appropriate returns. And our business development team is very excited about that. So we feel like we've got the best services in basin and we've proven that, and we're going to take advantage of that going into what we think is going to be a very tech market in the latter half of this year and into 2023.

Got it. That's great. I appreciate all the color. Switching over to the CapEx outlook for 2023. It sounds like growth capital is still up in the air, but maybe we can address maintenance CapEx, still running at a very high level, almost double that of your peers, you're folding in a few more Tier 4 DGB, you're bringing in a new electric frac fleet. I'd imagine that's going to drive that number down. Is that how we should be thinking about it that we can cut that back down to the $3 million to $4 million range that we're seeing from your peers? If you could just help bridge us from where you are today to what you could see next year as you continue to high-grade the fleet?

Yes, I think you're right. This is something that think is happening and may not really be recognized by the market. We have been converting assets, legacy assets like new equipment with new technology. What we announced today is an additional down payment on that, not only in our Tier 4 DGB, but electric. So I think what's happening at ProPetro is a recapitalization of the fleet where we're going to be providing very relevant assets to the marketplace, along with the efficient and effective frac performance that we've delivered historically to top providers, top operators. So in terms of completion performance and our overall capital spend, I think it's going to be trending in a very favorable way getting into 2023, as we're able to take advantage of those investments that we made this year and prior to that.

Derek, this is Sam. I'll just add on top of that. I think it's going to be very important for ProPetro, as well as our entire sector in the pressure pumping space to fix this problem and convert as much EBITDA into cash as possible. We have very intense internal efforts to do that this year and going into next year, which we think will bear fruit on something like the maintenance CapEx line item. We also believe that we're in the early innings of what I continue to call the industrialization of our business and our sector to migrate to technologies and tools that are just more efficient, more effective from a cost and equipment life standpoint. So we're really excited to be playing a part in that, and we'll look to continue to do so. Because really, there hasn't been significant innovation or change in pressure pumping equipment maybe the last 30 years. So it will take us a while and the sector to get the equipment offering right, where we can do something like minimize maintenance CapEx significantly and make the investment rationale much more competitive and compelling.

That's great. And if I can squeeze one more in. I want to ask about your new e-frac offering, if you could. How is it different than DuraStim. can you give us maybe some techs or specs about what it looks like? And then secondly, on the power generation side, I know you sold your previous turbines that those are not necessarily oilfield ready. Will you be considering power generation ownership? Or will you be using the third-party power as a service as you start to go into the e-frac space starting next year?

Sure. I guess on your first question around the e-frac offering, I guess I would say stay tuned there. We're working on some things that we'll hopefully be able to tell you more about soon. On the power side, it's really - I think what we've learned is that it's very customer and geographic dependent. So our strategy currently on the e-frac power side is to remain flexible, study all of the options out there and work with our customer to make sure that we have the best purpose bid option. So it could be a little bit of a couple of different things for us.

Got it. Good color. Appreciate it, guys. Thank you.

Thanks, Derek.

This concludes our question-and-answer session. I would like to turn the conference back over to Sam Sledge, Chief Executive Officer, for any closing remarks.

Thanks, Andrew, and thanks, everyone, for joining us on today's call. As I mentioned earlier, we are very proud to play a part in an innovative energy industry where oil and gas remain critical to our everyday lives across the globe. We enjoyed talking with you today and we hope to talk to you again soon. Please join us on our next quarterly earnings call. Have a great day.

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