Good day and welcome to the ProPetro Holding Corp. Third Quarter 2023 Conference Call. Please note, this event is being recorded. I would now like to turn the call over to Matt Augustine, Director of Corporate Development and Investor Relations for ProPetro Holding Corp. 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. This morning, we released our earnings results for the third quarter of 2023. 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. Building on our strong momentum, ProPetro is pleased to report another solid quarter as we continued to execute on our strategy. We have been squarely focused on generating robust earnings, increasing free cash flow, and building towards enhanced shareholder returns and value distribution. I’m glad to report that in the third quarter we achieved a decrease in our CapEx spend, coupled with continuing strong profitability and activity that resulted in much improved free cash flow. Importantly, we expect these trends will continue as supported by three primary factors. First is our ongoing transition from legacy equipment to next generation assets. Over the past two years, we have made significant progress transitioning our hydraulic fracturing assets to more efficient and lower-emissions equipment and we expect our total investment to reach nearly $1 billion by the end of the year as we bring additional state-of-the-art technologies and services to ProPetro. With these investments largely behind us, we are poised to begin fully realizing the benefits of our fleet transformation going forward. In the third quarter we took delivery and deployed our first electric fleet as part of our FORCESM offering. We now have seven Tier IV DGB dual-fuel fleets and one FORCESM electric fleet operating, and the demand for our next generation services remains strong. We’ve already seen fantastic results in the first two months that our first electric fleet has been in the field with high efficiencies and strong customer satisfaction. We expect to begin to take delivery and deploy our second FORCESM electric fleet over the next month, with the following two electric fleets expected to be delivered and deployed in the first half of 2024. This is a clear testament to the differentiated demand that this equipment garners. The second area that’s supporting…

Thanks, Sam, and good morning, everyone. Just like last quarter, we have some great news to discuss today regarding our financial performance and progress in our strategic initiatives. The third quarter represented ProPetro's fifth consecutive quarter of net income. We also achieved a breakout quarter in terms of our free cash flow generation, as noted in our earnings release of $27 million, which we believe to be strong and sustainable going forward. Adjusted EBITDA less incurred CapEx is $49 million this quarter compared to negative $2 million last quarter. So the cadence and significance of cash flow is progressing as we had expected. As part of our commitment to shareholder returns, we also retired approximately 1.9 million shares during the quarter for the third quarter for $19 million in repurchases. We are pleased that our share price has increased by approximately 50% since the inception of the repurchase program. It's clear that investors are beginning to appreciate the longevity of this cycle and the value proposition we have created through the dramatic reconfiguration of ProPetro. On top of the share repurchases, we also paid down $15 million of our ABL during the quarter. Moving on to our third quarter financial results. The company generated $424 million of revenue, net income of $35 million and adjusted EBITDA of $108 million. Notably, we generated these strong results despite lower activity in our hydraulic fracturing and wireline businesses. Of note, our cementing business recorded record revenues and profitability during the quarter. As Sam mentioned earlier, our effective frac fleet utilization of 15.5 fleets exceeded our guidance of 14 to 15 fleets. Consistent with our disciplined asset deployment strategy and the fourth quarter headwinds and our fourth quarter 2023 guidance for frac fleet utilization is 13 to 14 fleets. Moving on to more details…

Thank you, David. Before we turn it over to Q&A, I'd like to summarize ProPetro's value proposition and why we remain as confident as ever in our strategy and our long-term future. We are proud of the unmatched bifurcation that we offer, including having two-thirds of our fleet equipped with next-generation capabilities by the end of the first half of 2024, and we expect continued strong demand for both our new and legacy assets, as well as our other services, moving forward. It is important to note that we believe our commercial architecture is best-in-class. Our sophisticated pricing model supports our asset deployment decisions, and accordingly, we will not sacrifice our fleet at the expense of pricing concessions. We believe this mindset and commitment positions ProPetro for strong performance in 2024 and beyond. Given recent E&P consolidation, we believe there are great opportunities ahead for ProPetro to be the service provider of choice for large-cap consolidators. ProPetro is in an ideal position to combine service integration with the deployment of industrial technologies, like our FORCE electric offering, and we are working to enhance our partnerships with the large Permian producers. To summarize, our key priorities are optimizing our operations and industrializing our business to unlock free cash flow, continuing to transition our fleet in a capital light way and pursuing opportunistic value accretive transactions while returning capital to shareholders. We believe if we continue to execute on our priorities ProPetro will continue to build on its momentum and generate enhanced value for shareholders. We also recently published our first inaugural ProPetro ProEnergy ProPeople Sustainability Report. This report tells the story of our approach to operating in a sustainable way by embracing our ProEnergy and ProPeople perspectives. Our desire to be a part of improving human flourishing in our world requires our best efforts at ProPetro to help our customers produce hydrocarbons safely, efficiently and in an environmentally friendly way and we will continue to execute our strategy to that end. I would encourage everyone to download the report from our website at propetroservices.com. I’d like to close by thanking the entire ProPetro team for their outstanding and safe performance this quarter and enabling our management team to move forward confidently with this strategy. It’s due to their hard work and dedication that we’re taking important strides forward for the benefit of our customers, ProPetro, and the environment through the integral role we play in the success of the Permian Basin and the overall energy system. With that, operator we can now open the line for questions. Operator?

We will now begin the question-and-answer session. [Operator Instructions] And our first question comes from Derek Podhaizer from Barclays. Derek, please go ahead.

Hey, good morning. I just wanted to get some more detail around the seasonality that you guys discussed led by the budget exhaustion due to efficiencies. Maybe can you expand on that? What's the main driver? Is it completion design logistics equipment type? Just some more colour on what's driving that substantial pickup in efficiencies because this is really the first time we're hearing of budget exhaustion due to efficiencies.

Yes. I mean, Derek, this is Sam. I think this has been something that's been in play for a few years now that we're just trying to be honest about. As we continue to push the envelope ourselves and other large competitors of ours around how many hours we're pumping a day, how many feet we're completing a day. I feel like I sound like a broken record, I get on here every quarter and say, just when I think we're going to plateau we're up and to the right again, that continues to happen. So if you extrapolate that out through our customers' plans and the wells and footage that they want to get through on an annual basis, you just finish up, maybe a little bit more quicker than you expected. And that affects everybody a little bit differently. But definitely a bit of the activity drawback we'll see in fourth quarter is due to exactly that.

I mean, was there anything specific as far as like just logistics getting to the well site faster or maybe just some of your new equipment like I know you could specifically point to?

It's probably a little bit of everything really. And also the success of our next-generation offering, our dual fuel in our electric offering really hitting the ground running in a really good way, but really a little bit of everything.

Got it. Okay. That's helpful. And just your comments around first half of next year improving over the back half of this year maybe just how do you expect that to unfold? What gives you your confidence in that statement? Is it just the commodity backdrop? Are you having specific conversations with your customers about returning to work and maybe a preliminary outlook as far as your fleet count? Do you expect to return that idle fleet in the first part of next year?

Yes. I think leading the way in that outlook is direct conversations with our customers. That's to us is always the most powerful variable in the activity equation is what our customers are planning, and how they're involving us and their plans moving forward. So I'd say that's number one. Number two is that I think us and our customers are viewing the commodity outlook fairly positively, which kind of bolsters the first thing that I mentioned and look, we think we provide a very high-quality service that is in demand with next-generation technologies. And I think that's keeping us at the front of the line or front line with most of our customers. The fleet that we parked in the -- earlier in the quarter, third quarter, we would expect to come back first part of next year. And I think just year-over-year, I think you could see our overall average fleet count would be slightly up year-over-year in 2024. And we'll be -- as we deploy the remainder of our FORCE electric fleets, I think we'll be deliberating on how much of that is replacement, how much of that is additive given what other opportunities there are in the market.

Derek, this is David. Just to add to that. We talk about the market industrializing. This is a consequence of exactly that. What you're seeing particularly for the companies that have a bifurcated service offering like ProPetro is lower amplitude in the movements of the market, but also not the same level of amplitude when things turn around. So I think overall, that means that we have more durable and repeatable results. I think that's attractive to investors long term. And I think we like it that way. It's easier to manage a business where you have more expectations of demand. And that's what we're building in the business for is that long-term repeatability and durability in earnings.

Great. Appreciate all the color. I'll turn it back.

Thanks, Derek.

And our next question comes from Luke Lemoine from Piper Sandler. Luke, please you may proceed

Hi. Good morning. Sam, you gave us the cadence for the upcoming FORCE fleet deployments. But could you maybe provide some commentary on FORCE Fleet 1operations and how it's been going? And then maybe provide a contracting update on 2, 3 and 4?

Sure. Yes. Fleet number 1 has been at work for a couple of months now. We started out as kind of a hybrid half electric half dual fuel fleet. And we've since I think each additional pad added more and more equipment, and we're basically running very close to the full electric fleet, if not a full electric fleet on that location right now. The main data point for us is that the customer is very satisfied. And the initial deployment has probably gone better than expected for us and our customers. So that's really strong for us in terms of how we move forward into 2, 3 and 4. Number 2 should hit the ground here start hitting the ground here in the next few weeks. And I think it's safe to say that the contract for that one is basically imminent -- we're basically on the one-yard line. I don't have anything tangible to announce today, but very, very positive in terms of where we sit on number 2. The demand for 3 and 4 is very strong. It's not going to be -- is it going to go to work under a contract. It's going to be who is it going to go to work under contract for. So we're being deliberate and picky about how we move forward with 3 and 4, but we feel really, really good about where we sit commercially with those.

Okay. Thanks, Sam. David, thanks for the fleet count for 4Q. But could you talk about any variances in EBITDA per fleet you see for 4Q? Or should this be fairly unchanged with most of the delta coming from the fleet count move?

Well, I think that the seasonality will end up seeing some contraction in fleet performance. As we mentioned in our guidance, we do expect activity to be less robust than what we saw in the third quarter. So I think you should expect some contraction there. In addition to that, we talked about how we have this operating lease. Those lease costs will show up in our cost of services. So that will impair a little bit on the EBITDA per fleet performance, but we are incorporating the capital charge in there, which we think is overall a great return on capital but something to keep in mind in your modelling.

Okay. All right. Thanks guys.

And our next question comes from Arun Jayaram from JPMorgan Chase. Arun, please go ahead.

Yeah, good morning Sam and team. Sam in your backyard, we've seen a tremendous amount of consolidation of the resource base with companies such as Concho, Parsley and Pioneer effectively in the hands of the majors. What do you think this means for pump long-term? And talk about how you've adjusted your marketing approach to adapt to this kind of new market reality?

Yeah, great question. You're exactly right. There's been quite a bit of consolidation in the E&P space this year, and we wouldn't be surprised if it continues in the next year at almost a similar pace. I think if you look back historically, it's safe to say that most of us having grown up here and been in the oilfield service industry for a while now. Big consolidation like that for the oilfield service space might have been scary and created some uncertainty. But if you look at it through the industrialization that we keep talking about and how ProPetro is positioned within that, I can confidently say I think we welcome it. I think everyone on our team does knowing the quality of service we provide with the technology that we bring and the commercial architecture that we bring to the party and how it positions us with the larger operators that are making these acquisitions, doing these mergers with more of a long-term tilt to their kind of planning and mindset. And that really to us plays exactly to our model. So it's always interesting to see who it is and how it plays out. But overall I think we feel really well about how we're positioned within kind of that changing.

Great. And just a follow-up, Sam, I was wondering if you could maybe help us quantify or think about the magnitude of frac efficiency gains that ProPetro has been able to deliver over time, I'd love to hear about maybe hours pumped per fleet on a monthly basis. Just to maybe allow us to think about the impact of those efficiency gains on future demand, you characterize this and we agree with this as a low to no growth operating environment with E&P focused on efficiency gains. And maybe the question is you mentioned that you employ a very sophisticated pricing model. How do you adapt that pricing model to take advantage of – if you deliver strong efficiency gains where you can get paid for that efficiency gains and value delivered to the E&P?

I think the last part of that question is really important. It's a great question. And look some of that gets into kind of competitive things from a pricing standpoint. But I can tell you we're very interested in making a return on the amount of assets we deploy and how hard we work with them. Those are some of the main drivers in how we think about pricing and returns. And look when I find myself talking about efficiencies, I think, I probably have this conversation with you Arun. It's kind of fun to look back to prior peak like 2019 and you look at what we were doing then. And if we had a fleet that was continually pumping say 15 hours a day on a regular basis that fleet was highly celebrated. Now it's why isn't every fleet pumping over 20 hours a day. That's kind of how we look at our portfolio and we know that we have competitors that might look at it similarly. That's kind of the general bar water mark right now. But as you look at our daily operational metrics it's not uncommon to have a single fleet pump over 23 hours for multiple days at a time. So you get to a point where there's only 24 hours in a day. So the engineering upstream of us as it pertains to things like simul-frac and all the different ways you can complete a pad probably is part of the next frontier that is a much longer transition and maybe as a part of bigger broader E&P consolidation I don't know but we'll see. But the surface efficiencies and what we're doing what our team is doing at the well site is really just unbelievable. So you can imagine if you have average a fleet that earlier in the year was pumping 19 hours a day is now pumping 22 hours a day that kind of plays in my answer with that earlier question about efficiencies creating budget exhaustion in a way because that might have been unforeseen for our customer in terms of how they plan to execute on their acreage. So lots of interesting stuff going on in that arena all of which we're heavily participating in and continuing to try and push the envelope from an efficiency standpoint and while at the same time make sure that we're paid for doing so.

Yes, Arun, this is David. Just to interject at one point. I mean, the way we're looking at this today is that we have 13, 14, 15 mobile plants and when you think about the things that kind of go on at a plant the level of scrutiny of activities the efficiencies that you're looking for that's how we're doing this internally and applying various techniques like lean manufacturing and other principles to help us improve our efficiencies bringing industrialized equipment to the application like our electric fleets is certainly one of those areas, but it's a comprehensive approach and it's something that we'll continue to look at which we think we can enhance going forward. Part of our first leg of the stool in our strategy is optimizing our business and we're continuing to work on that.

Thanks, gents.

Our next question comes from Scott Gruber from Citi. Scott, you may proceed.

Thank you. Good morning.

Good morning, Scott.

I just want to understand a bit better how the lease expense will impact per fleet profitability. I think the lease expense will be about $12 million per fleet per year. I'm just not sure what to subtract the $12 from. Should we subtract that $12 million from the $28 million in annualized EBITDA that you posted in 3Q? Or is the starting point higher on these fleets given the fuel savings that they can create for customers?

Yes, Scott, good question. I think when we're looking at it, we're looking at it across the entire fleet in the business. It's a capital cost for this particular asset deployment, but it's really something that we're utilizing to facilitate the acceleration of the transition of our fleet. So, you got the number right, in terms of lease expense is going to be $10 million to $12 million per year. That will be in cost of services. But overall, that will impair our margin in total at the company, but we still believe we'll be in well into the mid 20s to upper 20s in terms of EBITDA per fleet for the company.

Got you. I appreciate that. And then you mentioned that CapEx should be down next year, following the big investment in the Tier 4 upgrades this year. How should we think about base maintenance per fleet? And do you anticipate any additional investment, whether it's in more DGB or eFrac next year?

Yes. So as we mentioned, in our current CapEx in 2022 was $365 million. That number is going to be a little over $300 million this year. We do believe that we'll see a similar cadence in decline next year. We're still working on that capital budget in our 2024 budgeting process. I think right now, we're guiding to $5 million to $7 million maintenance CapEx per fleet. I think as we continue to blend in the industrialized equipment like this electric equipment, that will begin to decrease that number as we go, as well as impacting OpEx in our estimates, approximately 30% to 40%, and that's excluding the lease expense. But just to give you a sense of the cadence and when you look at our recent CapEx cadence, we've been in the $100 million or even over $100 million from an incurred CapEx perspective over the last several quarters, that number got down to 59%. We see that number going lower in the fourth quarter. So, I think our investment, we talked about, we show a slide in our IR deck where we've invested close to $1 billion over the last two years. That is really beginning to play out in our numbers and our reduced CapEx spend going forward.

Got it. So the fourth fleet have -- if I heard you correctly, about 30% to 40% lower OpEx per fleet? And do you have a number on the CapEx side. I just imagine it's pretty de minimis in the first couple of years.

Yes. Just think of it from a perspective of taking an internal combustion engine out of the picture and replacing it with a transformer and variable frequency drive box that has low to no touch required. It's a pretty significant change in your overall maintenance and ongoing capital spend there. We'll give you some more information as we build that fleet out and we garner more internal information. I think on the next call, we'll have a full quarter of operations with our fleet. So we can give you some more guidance going forward then.

That’s great. Look forward to it. Thank you.

[Operator Instructions]. And our next question comes from John Daniel from Daniel Energy Partners. John, please go ahead.

Thank you. Hey, guys. Good morning.

Good morning.

Just equipment questions for you. I guess the first is just on the fleet mix 7 Tier 4 DGB soon for electric in a couple of quarters, at least whatever 4, 5 call it other. What's the plan for those? Is it transition to Tier 4 dual-fuel keep it Tier 2 or go electric?

John, I think wait and see is the plan. I think when to preserve optionality with that equipment look, it's very highly functioning and profitable and active in the market today. Speaking of our diesel fleets. And if the market remains strong then some of that, all diesel equipment might linger around a little bit longer; if the market is weaker then you can look for things like our electric fleets to be more replacement of legacy assets. So I think as we sit here today, we're just trying to preserve that optionality. Our capital allocation priorities or allocate more capital to things like electric and less capital to diesel-only equipment.

Okay. And keeping with the equipment theme, one of the comments made from one of the OEMs on their earnings call was just the supply chain headaches of electric components for electric fleets. I'm curious given lead times there would you be willing to say if you've gone to order the necessary component parts for Fleet 5 on the electric side?

We've not placed any specific orders for anything additional. But we've got a very close collaborative relationship with our supplier on the electric side. So, if demand continues, if we continue to deploy these assets successfully and execute on some of these contractual opportunities, it would be a really good thing in our opinion if we're moving on more e-fleets next year.

Fair enough. And then, I guess the last one for me and I'll queue back up if no one else has questions. But the -- when you look at the component parts right now engines transmissions, et cetera, the availability is well there's more of it frankly than where we were a year ago. And given your balance sheet and given a belief that the market inflects higher next year, does it make sense to proactively building some inventory of those key component parts now just so you don't get stuck in the queue down the road?

No, I don't think we feel motivated to do that yet. I think part of that is due to what priority we feel like we have with many of our suppliers. So I think we'll -- to kind of my prior answer keep our optionality and our flexibility there. And look, I mean this kind of is also -- I don't have a chance to talk about it on the call yet, but makes me think of just our broader capital allocation strategy as well. I mean we're announcing an LOI on a small cementing business. We've been buying back our stock. We're bringing new equipment into the equation and into our offering. We're doing all of those at once all the meanwhile basically debt-free. We're really proud to be able to be balancing all of those things and building the bones is something that's going to be really value producing into the future. So I know your questions are more equipment related but that's kind of just one part of our capital allocation strategy as we're kind of balancing all three of those things M&A shareholder returns and equipment transition.

Fair enough. I'll hang up after this last one, I promise. If you just on the LOI on the cementing business. What if anything, can you elaborate on that transaction?

Yeah. We're just given where we are in that process, there's just not much more we can say. We wanted to share …

Yeah.

We wanted to share what we have to this point, because we're excited about it and our cementing business and the team that runs that business has been performing really well. We're working to continue to equip them with the right tools and scale to continue to compete in a big way.

Cool. Thanks guys.

We have a question now from Stephen Gengaro from Stifel. Stephen, please go ahead.

Thanks. Good morning everybody. So, you've asked a lot here. So just two things for me, first on the Silvertip acquisition, can you just talk a little bit about the efficiencies, it has brought and maybe compare and contrast assets that are utilizing those services versus those that are not?

Yeah. It's pretty straightforward. I think both Silvertip wireline units and ProPetro frac crews are mutual beneficiaries of each other. A big reason why we were so positive on doing the transaction with Silvertip was because of their stellar and consistent operational performance. And having -- even before the deal a bit of customer overlap with them it was very evident to us their performance being beneficiary to our core business. We've made a few inroads on integrating more wireline units with more frac fleets, but that's not something that we're really trying to push it force to market on. But when we have the opportunity to do so there are some efficiency benefits and that's been a good reason why we've seen Silvertip execute as consistently as we expected them to is because we've kind of continued with that integration. So more to come there we think as part of our strategy more integration is coming to our sector not less. And so we're proud to have a great leg of the stool in our Silvertip online business to help us with that.

Thank you. And then just on the pricing side, can you just talk a little bit about what you're seeing and kind of what you're assuming, as you think about the first half of next year and your outlook and sort of suggesting a recovery? And it sounds like clearly, you're just kind of curious where pricing stands in that mix.

It seems kind of flat right now, Stephen. We're still working through a few things planning with our customers into next year. But for the most part it feels pretty flattish.

Okay. Great. Thank you, Sam.

And this concludes our question-and-answer session. I would like to turn the conference back over to Sam Sledge, for any final comments, please.

Thank you. Thanks everybody for joining today. We enjoyed updating you on our business. And we look forward to talking with you again soon. Everybody have a great day.

And this concludes the conference. Thank you for attending today's presentation. You may now disconnect. Have a good day.