Good day, and welcome to the Ranger Energy Services Second Quarter 2021 Conference Call. At this time, all participants will be in a listen-only mode. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Bill Austin, Chief Executive Officer. Please go ahead.

Thank you, operator. Good morning, and welcome to Ranger Energy Services Second Quarter 2021 Earnings Conference Call. This is Bill Austin, and I'm speaking to you this morning as Interim CEO and Chairman of the Ranger Board. Joining me today is Brandon Blossman, our CFO, who will offer his comments in a moment. As I noted in this quarter's press release, strategically and operationally, this quarter was a pivotal one for Ranger. Our High Spec Rig segment delivered strong sequential revenue growth along with margin performance, which matched historic peaks. And given that momentum that built across quarter two, we are expecting additional revenue and margin gains for our rig business in the third and fourth quarter. Our wireline business did see some modest revenue growth in quarter two. However, here, margin performance continues to underperform in the face of industry-wide low completion pricing levels. Strategically, we executed on two acquisitions: Patriot and more recently, PerfX, expanding our wireline fleet with newer, high-quality equipment, broaden our geographic footprint and strengthening our service offerings. We are currently in the process of integrating these companies into our existing business and are already experiencing cost synergies and early cross-selling successes. We are looking forward to demonstrating the earnings power of this newly expanded fleet in the quarters to come, and I'll talk a little bit more of that in additional remarks. On the M&A front, as our results begin to reflect the positive impacts of these first two acquisitions, we expect to gain further market acknowledgment that Ranger's combination of low-cost, efficient overhead, cash flow-focused operations and clean balance sheet is the right platform to preserve -- pursue further energy industry consolidation. I'll touch on this theme again, and we'll finish my prepared comments today with an announcement on a pending corporate structure…

All right. Well, thank you very much, Bill, and good morning to everybody on the call. Let's go ahead and do the standard walk-through of the second quarter details and numbers. First, for the consolidated numbers. To recap, Q2's consolidated revenue was $50 million, that was up 30% or $11.7 million as compared to Q1's $38 million. Adjusted EBITDA came in at $2 million flat. That's up $2.2 million from Q1's $200,000 loss. And also note that, again, like in the first quarter, embedded in and reducing this quarter's EBITDA is incremental make-ready expenses, as Bill noted, of $980,000. And again, that is associated with high-spec rig reactivations and make-ready and upgrades. Now moving on to the segment details on revenue. High Spec Rig revenue was up 34% or $7.3 million, moving up from $21.7 million to $29 million in the second quarter, the result of both the increase in rig hours and an increase in composite rig rates. Specifically, revenue hours increased from 43,200 in Q1 to 50,100 hours in Q2. That's a 16% increase. Q2's average rig count was up 5.5 rigs or 8%, moving from 65 rigs to 71 rigs. And the quarterly average composite hourly rig rate was up 19% or $94 an hour moving from $493 an hour in Q1 to, as Bill noted, a record $587 per hour in Q2. That is a high watermark, that rig rate, a high watermark for Ranger since the inception essentially of the business. And though this is not on the back of a significant bare rig by customer rates, but rather the result of larger rig packages, as Bill mentioned, that increase in pricing was a mix shift towards, again, higher rate full ancillary packaged 24-hour rig -- 24-hour work, sorry. And then to kind of add…

Okay. Thanks, Brandon. I do want to talk a little bit more about the high-spec rigs and trajectories in the quarter. So there was an incremental positive to the High Spec Rig segment in their quarter two performance. It's a revenue and margin trajectory across the quarter. Well, while quarter revenue and average margin was $29 million and 17%, respectively, the June exit run rate had revenues of 11% over the quarter two average, with margins expanding to above 20%. It's important to note here that while we are running currently approximately just 75 of our 136 high-spec rigs with an additional net five rigs deployed in quarter two, we are essentially utilizing all of our high-spec ancillary full equipment packages. The deployment of those full packages of equipment is the primary driver of our incremental gains on rates and margins. Moving forward, assuming the ongoing activity growth and the market share gains, which we believe are both in the cards, we will likely be sending out smaller set of ancillary packages, which we have, and spending some modest CapEx on additional full packages. Incremental to this dynamic is the need for base bare rig pricing to move up, which we are seeing. Net-net for our High Spec Rig segment, we expect gains in utilization and pricing to drive revenue growth, but not both without some modest CapEx spend. As a final note on this topic, with two wireline acquisitions behind us, it would be reasonable to expect us to turn our attention to service rig M&A as our primary near-term focus on the transaction front. Moving on to wireline quickly. With our recent acquisitions, we are seeing some early successes in cross-selling incremental work, and we do expect revenue growth over time. Our primary near-term objective is driving margin…

[Operator Instructions] The first question comes from Jason Bandel with Evercore ISI.

Thanks for all the detailed commentary in your prepared remarks. That was really helpful. Let me start on the wireline side. Just following your two acquisitions here, you obviously have a much larger presence now in the market with 55 wireline trucks and exposure to multiple basins. Can you talk about how you see the competitive landscape evolving for the industry and the role you hope to play? And also, can you touch on kind of the strategy here to improve margins in the business in case pricing remains at the competitive levels it's at that today?

That's an interesting -- look, there is still a lot of competitors in the wireline business, small and a couple of large ones. As we said in the prepared remarks, many of these small operators, frankly, we believe, lived and died on the PPP. They priced things that keep them alive and trade dollars. We think by signaling, and more than signaling that there's consolidation, and we think there'll be other players that will try to consolidate. Look, we don't want to have a presence that's -- I mean, our size is a good size now. We think we can get a good return. We think our cost efficiencies are such that some of the smaller players will see this as a way to -- for them to press price and some of our larger players as well. And again, we're not here to throw a lifeline to everyone out there, but we think there's momentum with the activity levels and the need to bring on more people. We think because we have such -- we brought on so many people and all high quality, we think that alone will help us on the price front. And from the cost front, our SG&A number, when we bring these over look, look, we have systems here that are not the big Oracle and all these high-priced ERPs. We have very simple systems that can build, they can bring on people that can help train that are -- or screen. We want to run this company in the public world, frankly, like a mom-and-pop company. That's what we can handle, and that's what the business demands. We think that effort both in the wireline and the high-spec rig will give us some returns. Look, we don't think the wireline pricing or for that matter, high-spec rig pricing, is going to get back to generate newbuild activity. In fact, we certainly wouldn't count on that. But we do think it can give us much more and adequate returns on our base of equipment right now. So that's not exactly the precise answer that you want, but certainly, we're trying to signal. And I think the signals are out there that we've got to have a little bit more price in that particular market. And frankly, same thing is true with the high-spec rig market. Look, we've got big packages out there. We think they're great value to our customers. We've seen the smaller rig packages are starting to get better pricing. And frankly, the bare rig pricing is showing some increases so that people can get a fair return on what the value of their existing PP&E. But again, we don't expect to go back to newbuild pricing or newbuild margins. Brandon, I know I run-off. Do you want to add anything to that long-winded answer?

You make it a longer answer, but I'll hit a couple of things. One, Jason, I mean, I think we've been pretty vocal about we think that, structurally, that the pricing in the industry does not support our smaller competitors and, therefore, they will either go away through attrition or will get pricing so that we can actually support a reasonable-sized wireline fleet here for the E&P industry. So it would be tough for us to continue along, in our analysis, at this level of pricing. However, if it does, we will be set up to survive and outlast the competitor base, particularly the smaller competitors. So...

And we make money here now.

And we make -- yes.

It's just not enough.

We make money here. We make money here post our acquisitions because our SG&A structure is a fraction of what a smaller-sized company -- wireline company would be. And you said 55 trucks. That's our incremental count. So we have a total of 68 trucks right now available to work out in the field. So the problem -- there's only four variables here. One is the management structure, the SG&A costs associated that gets spread out over a certain-sized fleet. It is labor costs. It is gun costs and then offset by pricing. So we've done two of those things. We've given ourselves an option for a lower-priced gun system. If we need to pull that trigger, we will pull it in earnest. Hopefully, we don't need to build that gun system immediately over all of our fleet, but that certainly is a possibility. We solve for the management structure SG&A costs. Labor will be an artifact of pricing. We can't -- right now, there's not been a -- certainly, not a full recovery of labor costs relative to Q1 2020 for the wireline business because pricing is so far down. So labor costs will be a variable that will be tied straight to pricing. And then all that's left is to put [pricing].

And I would add. We're going to keep going here. You opened up what we talk about here almost every day. But we've already seen trucks and personnel -- because we have exposure to different basins and different types of work, we've moved some of our equipment, our trucks, our people. Before with Mallard, great performance on Mallard, but it was too narrow. We were in the Permian. We had too few customers. As I said in our remarks, we have many more customers. We have opportunities to move people. We've had some cross-selling successes. Of course, we'd like to keep our utilization up. We'd like to have -- but that's not the mandate. But the ability to move people and trucks and equipment around the basins, I think, is going to give us a much needed advantage here. Is that long enough for you, Jason?

I got more. I appreciate all the detail, Bill and Brandon. Let me ask it then a little bit differently, too. I know you guys spent time this quarter and last quarter talking about signs that you're seeing here that pricing is bottoming. In the cases where you've seen select pricing improvements in the -- mid-single-digit improvement with select customers, what drove that? Was it the work that you were doing with the basin that we're in? What kind of drove that improvement?

Jason, are you asking about wireline or just overall?

About wireline, yes.

What drove pricing improvement in the last few weeks, months? Is that...

Yes. Examples, you said select customer that had a small pricing improvement. What drove that?

Well first, you got to...

Try asking for price.

First, you got to ask. But the other thing -- and I think this is true in the rigs side. We can attract -- look, getting people and attracting them and with the activity levels across the region, we think we can attract people. We're a stable company. We've got a good balance sheet. And believe it or not, the people in the field like to know that they're going to get a paycheck every other Friday or whatever. And we think we've got an attractive place to work. And when you can gather good people -- in fact, with the wireline, we got a lot of really great people that are mobile. We think that justifies some price, and that's what we're asking for.

And you've heard this a couple of times, I think, on this quarter's calls across the industry. But we are struggling a little bit on the wireline side in terms of pricing increases we ask. But for the dedicated fleets, there is a lag between the agreement on a price increase and when it actually gets implemented per the contractual terms.

We're working on it.

[Operator Instructions] Our next question comes from Daniel Burke with Johnson Rice.

Let's see. I guess, encouraging to see what's going on in the rig business for you guys. I guess, a high-quality problem I wanted to -- not even a problem. But wanted to ask about the rig packages are pretty high returns, sold out. What kind of capital commitments do you think you can make over the forward 12 months or so to bolster your capacity there?

I'm happy to answer that. So the honest answer is, we don't know yet. So we are actually -- this was a problem that came up fairly quickly. I don't think that -- well, I know that we didn't model this level of 24-hour activity three months ago. So the fact that we're sold out on our high-spec full wrap packages is a little bit of a surprise to us, honestly. So we don't have a fully vetted answer to that. And the two variables that we're considering, we can put out incremental rigs with...

In modest numbers.

Skinnier, yes, skinnier packages and...

And do quite well on that based on what's out there.

Yes, absolutely. And has -- still have very attractive -- well, not very attractive, but reasonable returns on those packages. Now that would bring down our lower composite per-hour rig rate so -- and ultimately, reduce our gross margins in a market where labor is still a constraint or continues to be a constraint. That's a pretty -- that's not a home run or an easy decision to make. So to answer your question specifically, to the degree that we choose to add incremental, full wrap, high-spec packages, that investment -- and I'm going to look to Mr. Hooker here in the room here. I'm going to say, an incremental $500,000 per rig copy is kind of the ballpark that we would be looking at. I'm getting a nod, so that sounds right. Now having said that, if we choose that path to put out incremental full wrap, high-spec packages, we will likely be going to auctions and looking for near-new equipment at low prices. And that will be the first -- our preferred path rather than going to manufacturers and looking for brand new equipment. As I'm sure everybody is well aware, there's plenty of pretty nice and some not so nice, but pretty nice equipment out there at the auction houses looking for a new home.

And we are doing some of that. And your question has excited our -- the head of our High Spec Rigs over here, who's salivating to putting more purchase orders. So we will do some of that, but in the meantime, we still got some room. Before we do that, we've got some room with the modest-sized packages. And heck, if the bare rig pricing goes where we think it's going to go, we can do some of that, too.

Got it. Okay. That makes sense. I guess the other one -- and sorry, Bill, this might be one for Brandon. But I just wanted to make sure I'm feathering together the acquisitions with the existing kind of completion business appropriately here as you integrate. I heard you mention kind of 13 percentage margins on the -- gross margins on the acquired companies, I think, in Q2. And I mean, is that comfortable? I mean look at Completion and Other Services in Q2 at Ranger, you were in the low single digits. Is that an apples-for-apples compare? I'm just trying to make sure I've got it right to understand what kind of margins we could flow through or you could flow through in sort of the near term here without really building in an expectation of price changing versus what's been out there in the market of late.

Yes. No, it's a very fair question. And it is a little bit of apples and oranges. The 13% gross margin is a field-level number that doesn't include any of the overhead for those two acquired businesses. And the -- obviously, the Mallard business, that EBITDA -- segment EBITDA margin does include kind of the regional, field-level overhead administrative costs. So it is apples to oranges in terms of our reported Completion and Other Services businesses and the gross margins at the acquisitions. However, you could probably make your own assumptions about what we need to take in terms of overhead for those two new acquired businesses and roll that into the model. So I think that the 13% gross margin is probably more indicative of what those businesses would have contributed had they been part of Ranger in Q1 and Q2. Ideally, we'll be able to show you results in Q3 and Q4 that help support that view.

And some of that speak is, we're not bringing much SG&A over so...

He's subtle here.

His subtlety is even lost on me. So we're not bringing a lot of SG&A. So...

Look, guys, I appreciate those comments. And I should say congrats on closing those deals. Those are certainly meaningful for the Company.

The next question comes from [William Kim] with [CDS Asset Management].

Congrats on the deal closes in the past couple of quarters here. My question's more related to those acquisitions actually. So is it fair to say that those acquisitions are viewed more as a deleveraging transaction, given that they were mostly paid for by stock?

Well, I wouldn't say deleverage. Look, our leverage is something that's very modest. We took on like $11 million worth of debt. So it's not exactly deleveraging, but it really broadens our base. So we've got two very strong legs to stand on here. And we've got a burgeoning business in the Process Solution that we hope is going to get back to its historic performance. But when you look at wireline and rigs now, we've got two robust segments. And frankly, with our old wireline business, it was too narrow and make good money in certain segments. But we just weren't broad enough to move things around and to have the flexibility that we have. So -- but I wouldn't refer to it as a deleveraging, Will. It's going to add a lot more to EBITDA, and so that will -- I guess, if you look at it from an EBITDA standpoint, we should have lower EBITDA leverage. But...

Yes. I would say, it's a push in terms of leverage as we sit here today. I'll note to Bill's point that as we move forward, the wireline business is particularly maintenance CapEx-light and, therefore, a lot of that, if not almost all of that EBITDA drops down to the cash flow line. And therefore, over time, it will be, we think, very aggressively deleveraging in terms of the ability to deliver cash flow back into the organization.

Look, that's -- yes, that's right. .

Yes, that makes sense. And as far as the pro forma capital structure for these transactions, I wanted to make sure I'm looking at this correctly. Could you provide what your share count would be pro forma for the transaction, inclusive of the A and B shares? And what the pro forma debt looks like?

Yes. So the A and B -- so the total share count is just under 18 million currently. I think it's 7.89 million -- 17.89 million shares. And then the pro forma debt is going to be -- versus what we exited Q2 at will be an incremental $11.4 million.

And there'll be some incremental share count when we terminate this TRA and convert the Bs to As. But it's pretty small. It'll push us over 18 million.

Okay. Okay. And is that from options being exercised? Or what would be the cause of that?

Yes. Basically, when -- as we are negotiating the early termination of the TRA, we've got basically a handshake. We need to execute on it, but we would be issuing some shares for that. I haven't disclosed how much, but it's a, how do I say, it's a relatively modest number.

Okay. And I want to make sure, Bill, I heard you correctly. Earlier, you are seeing a current run rate of $350 million of revenue annualized. Is that right?

That's correct.

So if we would look at that as a combined business with the recent acquisitions and kind of flow through to a free cash flow number, you mentioned in your press release with the acquisitions a target margin of 20%. Is that something that's still in mind? Because I just wanted to make sure, based on the previous questioning and that statement, that they seemed a little bit different there.

I don't know if I said -- certainly, from the high-spec rig, I said target. I don't know if I said target. We're exiting the second quarter actually at a higher margin than that for the high-spec rig. And I think what you should do is feather in over the next several quarters, some margin enhancements across both segments. It's not all going to happen in the third quarter, but I expect rigs will be darn good in the third quarter. The wireline will start feathering in, in the third and fourth quarter.

Got it. I guess a final question for you. On the XConnect gun system, so you have a warrant structure to own 30% of the business. How do you guys look at that business? And what do you think that's worth? Who is the other owner in that business?

The owner of the XConnect gun manufacturing business is also the seller of the PerfX business. It's kind of obvious for it to be explicit about that. And that business supplies the majority of the guns for the acquired PerfX business. That is likely how that will continue going forward. And we have an option to increase kind of our market share or consumption of those guns based on customer acceptance as we move forward. So we see that as -- it's not a joint venture, but we certainly have -- are fully aligned in terms of looking for success from them in terms of their manufacturing process and the market acceptance of their guns. And they are looking to us as a very meaningful source of sell-through.

But basically, we have access to three guns. How are we doing, operator?

Yes. I think we're done with all questions. I would like to turn the conference back over to Bill Austin for any closing remarks.

I think I've said enough on this call. I want to thank you all for participating. I look forward to putting somebody else in this chair for the next call, but I'm actually having some fun. We're doing all sorts of good things at this company. And my wife will shoot me for saying that, but I'm actually having a little bit of fun here. All right. Talk to you soon. Thanks. Bye.

Thank you.

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