Good day and welcome to the ProPetro Holding Corp. Third Quarter 2022 Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Mr. Matt Augustin, 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 results for the third 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 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 would like to turn the call over to Sam.

Thanks Matt and good morning everyone. First and foremost, I’d like to express thanks for the continued hard work and high level of execution from our ProPetro team. We are excited to report that in the third quarter of 2022, we continued our track record of operational excellence, along with strong strategic execution and financial performance. I’ll let David speak more to this in a moment, but at a high level, we are very pleased to produce sequential top line and bottom line increases in the quarter. Some of our key highlights include the highest adjusted EBITDA margin in the history of our hydraulic fracturing business, with the exclusion of a COVID-related anomaly in the second quarter of 2020. Next, we had nearly 80% incremental adjusted EBITDA margins for the total company on flat effective fleet utilization, reflecting our disciplined returns-based strategy. Additionally, our cementing business had their highest revenue quarter ever, while achieving 100% sequential adjusted EBITDA growth. Also, this was the third consecutive quarter of positive operating income for the company, excluding impairments. And finally, we completed the acquisition of Silvertip Completion Services, a leading Permian Basin wireline and pumpdown company. There is a lot to talk about today and we are excited to share more on our strategy and recent actions mentioned above. We remain committed to executing on our disciplined and focused strategy and it shows. In the third quarter, we took meaningful steps in our efforts to advance our strategy of pursuing accretive growth opportunities that expand our margins and increase free cash flow generation to create a stronger, more resilient, and more diversified company. Chief among those transactions is the one we announced yesterday, our acquisition of Silvertip Completion Services. Also based in Midland, Texas, Silvertip is a leading Permian Basin provider of wireline…

Thanks Sam and good morning everyone. As Sam mentioned earlier, we are excited to have closed on the acquisition of Silvertip yesterday. The transaction consideration consisted of the issuance of 10.1 million shares at ProPetro common stock, $30 million of cash, the payoff of approximately $7 million of assumed debt, and certain other transaction costs, subject to customary post-closing adjustments, which implies a value of $150 million based upon the 15-day volume weighted average price of ProPetro’s stock as of October 27, 2022. The transaction was accretive on all financial metrics, including adjusted EBITDA multiple, free cash flow per share, and earnings per share. The Silvertip acquisition provides additional corporate scale and another capital-light business within our core area of operations, the Permian Basin, helping us create a best-in-class completions-focused industry-leading business. The transaction is very earnings and free cash flow accretive due to its low capital intensity, and we look forward to evaluating other opportunities that can accelerate free cash flow and earnings for our shareholders. As we have always done in our evaluation of potential transactions, we want to reiterate our commitment to acquire existing capacity rather than adding incremental equipment to the marketplace, particularly in this continuing supply chain-constrained environment. We believe this is also consistent with our disciplined fiscal strategy that informs our actions across the company. We also believe the combination of cash and stock was an appropriate balance of capital resources, enabling us to maintain healthy liquidity and a strong balance sheet while aligning Silvertip’s management and shareholders. Now to our financial results. During the third quarter, we generated $333 million of revenue, a 6% increase from the $315 million generated in the second quarter. The increase is largely attributable to additional net pricing gains, favorable job mix, strong cementing performance, and our team’s…

Thanks, David. I’d like to again mention how proud we are here at ProPetro to be a vital part of an energy value chain in the Permian Basin that happens to be one of the most secure and reliable energy sources 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 and powering all other industries here at home and across the globe for decades to come. We, along with our peers, customers, and others across the oil and gas value chain, will continue to innovate and improve while providing the most reliable and secure energy for the foreseeable future. Inside of these broader circumstances, we are laser-focused on executing our strategy that we have outlined here today, optimizing, fleet transitioning, and executing on value-enhancing transactions and partnerships. To do that, we will look to enhance operational efficiencies and maintenance capabilities so that we can prudently deploy capital while at the same time, reduce our overall spend. We will continue to work to identify and capitalize on value-enhancing growth opportunities, particularly those in the completion services space. Additionally, we will continue to take steps to tradition our fleet. And as we do so, we anticipate the need to order additional electric fleets in the coming months. Of note, it is always important for us to acknowledge that the equipment discussed today will be deployed under our ongoing margin-over-market share strategy and will likely not add any net capacity to the overall market. Moving into 2023, we will continue to make certain that we are striving to achieve proper cash-on-cash returns or our entire deployed portfolio of assets across all service lines. Before we turn it over to Q&A, I want to again thank the entire ProPetro team for another quarter of reducing risk and creating value for our customers through safe, reliable, and predictable operational performance. The results we put forth today and the exciting transactions we have consummated would not be possible without their hard work and dedication to our mission, our safety record, and to each other. Our team’s ability to execute at such a sustained high level gives our management and our Board the confidence to move forward with our strategy, including the acquisition of Silvertip. Lastly, I want to again welcome the entire Silvertip team to the ProPetro family. We believe we have the most potent collection of services in the Permian Basin, and we will work hard to continue to enhance our ability to serve our customers. With that, I’d like to open up the line for questions. Operator?

[Operator Instructions] Our first question comes from Stephen Gengaro. Go ahead.

Good morning, everybody.

Hi, Stephen.

So a question, and I know you don’t want to go into a lot of detail on a specific customer. But when we think about the potential for price uplift on the Pioneer assets relative to what maybe is high utilization because you had a pretty consistent schedule. How should we think about those two factors and what it could mean for the underlying profitability of the assets?

Sure. Stephen, this is Sam. Throughout this year, there has been a portion of our fleet, some of which are with Pioneer who have had locked-in pricing for the entire year. That said, most of our portfolio has experienced steady pricing increases throughout the year. So there is a portion of the incremental – a pretty significant portion actually of the incremental margins that came through this quarter that are due large in part to that pricing progression. And as we stated in our prepared remarks, we do expect to see that to continue into 2023, albeit probably at a little lesser speed.

Stephen, this is David. I think one other thing just to add is we have a very sophisticated pricing model that evaluates customer productivity across our customer base. And so, differences in productivity at the well site are incorporated into the specific pricing, and we believe that our current market rates will be well improved from January 1 levels as of this year.

Great. Thank you. And then, just my other question was around the market. And Sam, you talked about the market and how your capacity adds are probably not net additions. We hear from all the public operators who kind of echo that sentiment. What do you see in the market as far as private? I mean, I think outside of evolution. I mean, I’m just trying to get a sense for drive insights into the overall market supply outside of what the publics are doing.

Yes, Stephen, I think the most important thing to focus on is you, and really we look at the entire frac market is that upwards of maybe over 80% of the market’s capacity is in seven to eight pressure pumping names. I would say all of those seven to eight companies have fairly sophisticated operations, maintenance programs, and supply chains that are going to allow them, and I would include us in this group to sustain their activity in a healthy manner going into next year. There is a significant portion of the remaining 20% that might be a bit disadvantaged in circumstances in the market like we’re seeing today, from a cost standpoint, from a supply chain standpoint, just an ability to persist in this environment. So while you may see somewhat are perceived as net adds from some of the bigger players, I would say that most of those ads are keeping up with overall attrition throughout the market.

Great. Thank you for the details.

Our next question comes from Derek Podhaizer, Barclays. Please go ahead.

Hey, good morning. Just wanted to dig in on the Silvertip deal a little bit more. Just talk about the synergies or the cross-selling with the wireline integration. You mentioned the $65 million to $75 million of EBITDA you expect for next year. But is this inclusive of the expected uplift that you’ll get by integrating the wireline fleets? Or is that more of a standalone figure? Just want to get more of a sense of the profitability uplift on an EBITDA per fleet perspective now that you are vertically integrated with wireline and Fran.

Sure, Derek. This is Sam. Great question. The $65 million to $75 million in adjusted EBITDA that we mentioned attributable to Silvertip is in addition to the legacy business as you see it and model it today. So you could – that just goes on top of any estimates that you have for us next year. One of the things that we are excited about inside of this Silvertip deal is a pretty significant customer overlap. So there is quite a few frac locations that we’re on today where Silvertip is out there with us. And we’re excited to kind of push into maybe industrializing some of those locations with better processes, practices and possibly even trimming down the need for labor on some of those locations by kind of sharing the load and providing more of a packaged service to our customers.

Yes. Derek, this is David. Just to add to that. This is not a synergy story. We’re acquiring this business because of the goodwill and reputation of Silvertip, and we have not modeled any synergies here. So this is on a stand-alone basis. We’ve already seen collaboration between our business development groups that has been very positive, and we think that’s some upside, but no synergies modeled.

Okay. Understood. I mean, would you expect some synergies to flow through just considering you should get more utilization uplift integrating wireline and frac? You obviously had some cost redundancies that you could mine us out of the system. Just really looking for a sense of the uplift that you can see from that.

Yes, I think the short answer to that is yes.

Okay, that’s fair. Just want to switch over to the attrition topic again. I mean, I think investors are struggling with how that’s really going to look like as far as – from those top six or seven guys that you mentioned. Could you walk us through that if you have some more of these Tier 4 DGBs coming into the fleet and then particularly, the frac coming in? It sounds like you’ll be making additional orders. How does that slow down the line of your fleet and maybe your most underperforming Tier 2 pumps, how does attrition look like for ProPetro, where it’s not a complete net addition where we actually will see tangible evidence of fleet replacement with some of the newer fleets that are coming in.

Yes. This is Sam again. This is, I think, Derik, a very important topic for people to understand around our sector. A few different things come to mind inside of that question. One of which is just how different we’re operating as pressure pumpers today as we were in years past. If you rewind to, say, 2019 and you compare the average frac site to – in 2019 to a frac site today, it is not uncommon for there to be upwards of 50% more equipment on each individual location. And it is not uncommon for that equipment to be pumping, say, 30% to 40% more hours per day. So I think we’re really early innings of the market, in general, understanding the broader effects that this new attrition – speed of attrition is going to have on the entire market. That said, as we look at that in our fleet specifically, most everything you’re seeing us do from – especially from a Tier 4 DGB perspective is converting existing capacity. The long-term goal, as we discussed internally here, is to migrate investment away from equipment that burns diesel and towards more equipment that burns natural gas. And for us, those things are things like dual-fuel DGB and our electric offering. So we’re balancing real-time market opportunities with the speed at which we want to execute on that conversion program, key work conversion.

Got it. Very helpful. I will turn it back.

Our next question comes from Scott Gruber, Citigroup. Please go ahead.

David, good morning. I wanted to touch on CapEx for next year. You guys mentioned it’s going to directionally be down, but wanted to ask about a few of the moving pieces. So two e-frac fleet on order. Could you just remind us when the spending for those fleets hits kind of between this year and next year? And you mentioned potentially ordering additional fleets over time. So would any of that hit is any of that can be kind of built into the budget next year? So kind of thinking about the e-frac spend component of 23 if you could dimension that for us?

Sure, Scott. I’m glad you asked that question. This is something that we think is just a very favorable aspect of our transitioning to the electric equipment. We actually have a very favorable lease agreement. And essentially, we’re able to make this transition without any material capital investment. We’re going to be matching our revenues with our cost in that regard and still maintaining some healthy margin. We will be – there will be some customer-supplied equipment. I would consider it about 10%, 15%, 20% of the total cost of the fleet deployment, and that spending will probably be occurring in the first half of next year. So again, very minimal capital investment, and we’ve incorporated that into the general guidance that we’re giving you now. We will hopefully be able to provide some more specific guidance as we finish out our 2023 planning on the next call.

The e-frac fleet will be leased, not owned?

That is correct. We were able to negotiate a very favorable lease transaction that effectively enables us to have a very capital-light entry into the e-fleet space. This is something that we think is pretty exclusive and very favorable to us and our capital efficiency going forward.

Got it. And when do you guys think about maintenance for next year on the legacy fleet? And how much is the fluid end component running for you guys on a per-fleet basis?

So I think, just generally speaking, as we continue to invest in equipment that doesn’t have the same refurbishment requirements, and I’m talking about the electric equipment that, over time, that will decrease our maintenance CapEx. But I think right now, given what Sam mentioned regarding the intensity of how equipment is used on location, it’s essentially going to be similar to what we’ve experienced recently. And although we are – have a very significant optimization program to help to expand and lengthen the equipment life. I would model what we’ve utilized in the past, which is approximately $3 million.

And just the – I mean, you’re going to have what seven DGB fleets by the middle of next year, fairly new equipment. Is that a mitigant in terms of the maintenance expense, just having those pumps so new?

I mean Sam mentioned, and we have a slide in our investor deck showing the age of our assets and how the significant investments we have made over the last couple of years and are finishing up this year and continuing into next year somewhat gives us a young fleet. That being said, there is still significant utilization of equipment with the pumping times that we have seen continue to increase and the size of the fleets on location, as Sam mentioned as well. So, I think overall, as we continue to renew our fleet that we should see some mitigating of that spend, but don’t want to understate the intensity of what goes on location. I think our big pursuit here is to replace diesel and even Tier 4 DGB engines with electric motors over time, but that’s going to take some time.

Got it. And just overall, kind of the legacy fleet, are you still thinking kind of the like high-single digits, maybe like $9 million per inclusive of the fluid…?

Yes. That’s right. I think given inflation, that could be biased to hire. But if that eases somewhat in 2023, then maybe we are able to keep it in that range.

Okay. Appreciate all the color. Thank you.

Our next question is going to come from Arun Jayaram of JPMorgan Chase. Please go ahead.

Yes. David, I was wondering if you could maybe help us think about how the accounting around the leases, maybe a follow-up to Scott’s question on the two e-fracs will work? And how do we think about margins, including kind of the lease obligations? So, just trying to think about some of the moving pieces for the model.

Sure. And we are continuing to evaluate the specific characterization of those leases, but we believe that they will be embedded in our cost of services and that I think you will have some slight degradation with that cost. But the way we priced the fleets, we are still generating very high-quality EBITDA per fleet in the 30-plus range, and that’s how we are looking at it. So, I think overall, total company, it may be a slight degradation. But I think given the re-pricing that we are expecting in 2023 and the cadence of the industry, overall, we are still sticking with our guidance for next year as far as EBITDA per fleet.

Hey. Arun, this is Sam. I will just add on to what David said. Our overall goal with this structure was to smooth out, from a free cash flow perspective, what has traditionally been a pretty jagged and lumpy sector from an investing standpoint, where absolute risk and capital gets passed around in big chunks. So, when you hear us mention working to industrialize our business, this type of economic model, we think fits that kind of longer, flatter type of line rather than the investing volatility that our sector has been so accustomed to in the past.

Yes. And Arun, one more note on that. When we take delivery of the assets in the late second quarter, early third quarter of next year, we will gross up our balance sheet for those minimum lease obligations and then we will essentially accrete those through cost of services as we use the equipment. And then we will have purchase options on the back end of those leases should we choose to acquire them.

And just real quick, David, is the leasing arrangement with the manufacturing of the equipment, or is with a third-party kind of financing company?

It is with the manufacturer.

Okay. Great. And then as we think about incorporating the acquisition under our model, can you give us – can you give me a little bit of help on thinking about DD&A, G&A, and any maintenance CapEx for that business?

Yes, I can give you some general ideas. I think that from a quarterly depreciation perspective in next year, we are probably going to be $32 million to $33 million per quarter. We will continue to refine that as we incorporate that business into our model. As far as CapEx going forward, we have provided some information in our Investor Relations deck that reflects kind of less than $10 million of maintenance CapEx next year for the business.

Great. Thanks a lot.

Our next question comes from Luke Lemoine of Piper Sandler. Please go ahead.

Hey. Good morning and congratulations on Silvertip. So, you have talked about ordering – I believe you talked about ordering more additional fleets in the coming months. Can we probably think about this as a couple more? And then I guess at this point, would these be 24 deliveries? And do you see a need to order additional Tier 4 DGB fleets, or do you think all replacement fleets going forward are probably electric?

That’s a great question. I think yes, it’s fair to look at additional fleet orders in the ballpark of a couple. We have said this multiple times past. And really, it’s been our strategy here at ProPetro for a long time in terms of committing to orders for new equipment is that we like to see demand specific demand of ProPetro, outstrip our ability to supply before we pull the trigger on certain things like this, like especially electric fleets. So, demand is still very strong, as we mentioned multiple times in the scripted remarks. And to tie back to a mention I made earlier in Q&A, winding down investment in diesel-burning equipment and winding up investment in natural gas-burning equipment is a key part of our fleet conversion strategy, if not a cornerstone of it. So, from a Tier 4 DGB standpoint, I think we are in pretty good position where we are now. We will probably wait to see a couple more specific opportunities materialize before we change the speed of that conversion program. So, you are looking at a fleet next year that if we are running the same number of fleets we are today, we would have 9 out of 15 of our fleets less than 2-years-old and natural gas-burning. So, we think that’s a very significant competitive advantage.

Got it. And then, if you did order more equally in the coming months, would it be a ‘24 delivery, or could it still be late ‘23 at this point?

Yes. It would be cutting it close. I am not sure if we have a direct comment on that yet, but it would be very close.

Okay. Got it. Alright. Thanks so much.

Our next question comes from John Daniel of Daniel Energy Partners. Please go ahead.

Yes. I got a few this morning. Thanks for including me. I am going to follow Luke’s lead here and stick with the electric. Can you remind me, because you may have said this on the last call, and I just simply heard docs and getting old, but who is going to own the power on the electric fleets when you get them?

John, this is Sam. It’s going to be kind of on a customer-by-customer basis. Each of these first two fleets, the prospective customers, we had them earmarked for – we will probably be supplying power through the third-party on one of them. And on the other, they will likely be sourcing power themselves directly. And we will look to remain nimble on that front moving forward.

Okay. Just housekeeping, a couple more here. I know you have been sort of asked multiple different ways on the e-fleets, whether they are just on how you – they are not expected to be additions. But I guess my question is, obviously, you know who the two customers are, and you probably won’t say which is fine. But when they look at these e-fleets, are they looking to replace an existing fleet? Are they looking for these to be incremental? And if they are looking to replace a fleet, is it one of yours? Does that make sense?

John, as it sits today, it could be one of each.

Okay.

So and we are trying to measure up against how we want to – what activity level we want to hold throughout the year next year as well, but it could be a little bit of both.

Okay. A couple more and I apologize for being a hog here. You mentioned on the investments in dual fuel and electric, clearly, that’s a big push on your frac side. As you look at the integration of Silvertip, what are the demands there for dual fuel or electric wireline? There has been a few companies out there that have been dabbling in it. I am just curious, like what’s the – what are the demands from customers with respect to that? And if they say, hey, we want all these to be electric. What’s the capital cost for you guys if that happens?

Sure. Great question. I think the demand or focus is probably much lower than it is on something like frac equipment, just given the fuel consumption intensity, right. You don’t have wireline units consuming really only a fraction of 1% of the fuel that something like a frac fleet consumes. That said, given our transition into more natural gas burning and electrified offerings, that becomes a pretty significant kind of play to run into this conversion and this electrification of the oilfield. So, through our diligence of Silvertip and conversations about how we can work together going forward, that has definitely been a part of them and especially on the e-fleet side.

Yes. And it’s – John, this is David. It’s not a significant expense to convert those to be able to support electric capability.

Got it. My final one is a very big picture. But Sam, just your thoughts on the Permian Basin frac market in ‘23. As you are talking with customers, you are starting to go through the budget process. Do you see big incremental gains in Permian frac crew count or stable, just opine, if you will?

I think it will be relatively stable, John. There is obviously a good number of dual fuel conversions and new fleets coming into the system. We are fairly confident that attrition is outstripping all of those adds on the bottom end of the market. So, we think it will remain tight and virtually sold out throughout the entire year next year.

Great. Thank you for allowing me in.

[Operator Instructions] Next question is going to come from Don Crist of Johnson Rice. Please go ahead.

Good morning gentlemen. Just one on Silvertip for me. Can you say what the utilization of the 23 wireline units are today? Are they fully utilized?

Just shy of 20 right now.

Okay. So, there is some upside there for increased EBITDA if those three go to work. And on the last call, David, I believe you talked about free cash flow being somewhere in the neighborhood of 50% of your EBITDA for 2023. With the Silvertip acquisition and the estimated free cash flow of $55 million to $60 million, is that additive? And is that close to 65% or 70% now after this acquisition? Am I thinking about that right?

Look, Don, we are going to be continuing to incorporate the financial numbers and evaluating our budgets for next year. So, I want to be very thoughtful about that and let you know that we will provide further guidance. I think we have provided some information in our Investor Relations deck that you can take a look at, but definitely accretive to free cash flow for sure on an absolute basis. And I think it would certainly help blend our conversion upwards. So, let us spend some more time finishing out our planning for next year. We will give you a bit more guidance on the next call.

Okay. Yes. I wasn’t trying to nail you down on a specific number. I just wanted to know that it was accretive. Okay. I appreciate all the color. Thank you.

You bet.

[Operator Instructions] Next question will come from or Waqar Syed of ATB Capital. Please go ahead.

Thanks for taking my question. Sam, as you look at Silvertip, I understand there is supply chain challenges. It’s very difficult to recreate a company like that. But were you to buy all these assets somehow, let’s say, theoretically, what would the cost be? What is the kind of the replacement cost of all the assets? Because there is always a lot more than just like 23 wireline trucks [ph] and 15 pump-down units. There is also all the other cranes and other equipment that comes with it. And so, what would the replacement cost be in your view?

Yes. Waqar, I think we would rather not comment on what the replacement cost we perceive. May be some of that’s a little bit of competitive information. That said, you are correct inside of what is a very tight environment, labor, supply chain, equipment, all of the above, coupled with the fact that this is a business that ProPetro has not historically been in. We think that this is definitely the right way for us to enter another service line that’s complementary to frac. So, I think what’s most compelling for us is one, the team that Silvertip brings along with them, the expertise, reputation, execution they bring from a performance standpoint, and the free cash flow profile of their business. Those two things lead the way for us, and we are pretty excited to push into 2023 with that offering.

Yes. Waqar, this is David. Just to add one little comment. We have no desire to create additional equipment capacity in the marketplace. So, our strategy around pursuing high-quality operations and acquiring that free cash flow and earnings capability, we believe is the right strategy here. And we have done that. We have got a lot of confidence in Mike Wood and his team, and we think that’s the right way to go.

Okay. And then there are multiple different e-fleet designs out there. What design are you buying, or who the manufacturer is?

Yes. We are not publicly disclosing the name of the manufacturer, but we can tell you that this is a very tried and true solution that exists and has been in operation for years and years across the globe. Mainly, we will have conventional pumping systems on the back of these trailers. So, a fairly significant portion of this equipment will be something that our legacy team here at ProPetro is already very familiar with. So, you can look to us to hit the ground running operationally with this electric offering.

Great. Thank you very much.

Thanks Waqar.

This concludes our question-and-answer session. I would now like to turn the call back over to Sam Sledge, CEO. Please go ahead. End of Q&A:

Thank you and thanks again to everyone for joining us on today’s call. As I mentioned before, and I would love to mention again, we are very proud here at ProPetro to play a part in the innovative energy industry where oil and gas remain critical to everyday life across the globe. We hope to talk to you soon and we hope you join us for our next call.

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