Good day, and welcome to the Solaris Third Quarter 2021 Earnings Conference Call. All participants will be in listen-only mode. . After today's presentation, there will be an opportunity to ask questions. . Please note this event is being recorded. I would now like to turn the conference over to Yvonne Fletcher, Senior Vice President, Finance and Investor Relations. Please go ahead.

Good morning, and welcome to the Solaris third quarter 2021 earnings conference call. I'm joined today by our Chairman and CEO, Bill Zartler; and our President and CFO, Kyle Ramachandran. Before we begin, I'd like to remind you of our standard cautionary remarks regarding the forward-looking nature of some of the statements that we will make today. Such forward-looking statements may include comments regarding future financial results and reflect a number of known and unknown risks. Please refer to our press release issued yesterday, along with other recent public filings with the Securities and Exchange Commission that outline those risks. I would also like to point out that our earnings release and today's conference call will contain discussion of non-GAAP financial measures, which we believe can be useful in evaluating our performance. The presentation of this additional information should not be considered in isolation or as a substitute for results prepared in accordance with GAAP. Reconciliations to comparable GAAP measures are available in our earnings release, which is posted on our Web site at solarisoilfield.com under the News section. I'll now turn the call over to our Chairman and CEO, Bill Zartler.

Thank you, Yvonne, and thank you everyone for joining us today. I'm pleased to share another quarter of strong Solaris results. We generated a 40% sequential quarterly increase in revenue to over $49 million, adjusted EBITDA increased 18% sequentially to $7.7 million, and we paid our 12th consecutive quarterly dividend. We ended the quarter with $43 million of cash and no debt on the balance sheet. Industry fundamentals continue to shape up strongly during the third quarter. Oil prices increased to the $80 range and gas prices climbed over $5 as the global supply and demand dynamics continue to tighten. During the third quarter, U.S. horizontal rig count grew 10% from the second quarter average, while completions activity grew at a slower rate as operators increased drilling activity and inventories of relevant uncompleted wells reached multi-year lows. Since the end of the third quarter, the horizontal rig count is up another 7%. Many operators have taken advantage of higher commodity prices and attractive wellhead economics, albeit not at the same rate, as increasing commodity prices. We expect operators to continue to increase drilling activity, including many private operators that haven't been active in many years. Meanwhile, we continue to see public operators stick to capital discipline. Many are indicating modest increases in drilling and completions activity and spending next year as they plan to maintain or slightly low production. We believe this combination of robust commodity prices, capital discipline from public operators in 2021, and growing backlog from both public and private operators all set the stage for another year of activity improvement in the U.S. completions and for Solaris in 2022. While increases in overall activity levels, we also believe recent supply chain tightness in the market will play well into Solaris strength in the coming year. The industry…

Thanks, Bill, and good morning, everyone. I'll begin by recapping some of the numbers. During the third quarter, we generated $49 million of revenue and adjusted EBITDA of $7.7 million. We averaged 59 fully utilized systems, which represents an 11% sequential increase from the second quarter. Total revenue increased 40% sequentially, driven both by an increase in system utilization as well as an increase in the amount of sand delivered in our last mile business. Over the course of the quarter, we deployed a total of 88 proppant systems, which worked with varying degrees of utilization. This was an increase of one deployed system from second quarter levels. Our calculation of 59 fully utilized systems reflects the number of equivalent systems that generated revenue every day in the quarter. The tightening in the gap between our fully utilized and deployed systems during the quarter reflects a modest compression in whitespace on the calendar. The 11% increase in our fully utilized system count was achieved against the backdrop of relatively flat industry completion activity, and was positively impacted by Solaris' record of both tons delivered and manage last mile systems operated in the quarter. We also benefited modestly from an increase in activity with the customer that we signed a three-year agreement with during the second quarter. Operating cash flow was approximately $7.7 million and included a release in accounts receivable as we caught up with a late collection from a customer which was previously disclosed in our second quarter earnings call. Consistent with prior quarters, we have continued paying for trucking services at an accelerated pace to ensure availability for higher activity levels in our last mile service offering. We also realized a $1 million cash benefit from the employee retention credit as part of the CARES Act of 2021.…

We will now begin the question-and-answer session. . Our first question today comes from Stephen Gengaro with Stifel.

Thanks. Good morning, everybody.

Good morning, Stephen.

Two things from me. The first, just thinking about some of the technologies and the capital spend that you talked about. When we think about 2022, how should we calibrate your growth potential versus an underlying expectation of growth? Let's say, I mean, people seem to be setting around 20% plus upstream spending growth. But if you make an assumption that completion activity is up 20% give or take, how should we think about your growth in that kind of environment?

Yes. I think as we evaluate the new technologies, we see those as ways to grow market share. So it does require incremental capital. But we do think it essentially provides an opportunity to grow beyond what say market growth is in terms of our activity. I think both the blender technology as well as the top fill technology address specific pinch points in the industry that potentially allow us to perform at a higher level than market.

Yes, and I’d add that the blender really does pull through potentially new customers with the silos that might not be there before. So the complementary nature of the products allowed additional pull-through business that may not be there today.

And is there a pricing component we should be thinking about next year or is that too soon to tell?

We're in those discussions today. I think you've heard from a lot of other public companies around pricing for next year. And certainly there are inflation considerations, investment considerations in the new technologies that we continue to talk about enhancing our systems that allow us to have those conversations with customers in a very constructive manner. Too early to kind of come up with any firm numbers, but those are certainly discussions we're having.

Thank you. And then the other topic I want to ask you about was -- and realizing its containerized solution versus your systems, but obviously the PropX deal was interesting with Liberty. Just curious, a, how you think that impacts the landscape? And b, sort of what you think of those type of marriages directly with pressure pumpers as an industry direction?

We think the last mile business and the well site storage business is really a bit independent from pressure pumping. Liberty was a large customer of PropX and they helped start that business up. So there was a very strong relationship between the two parties. It made sense for them. Maybe they're consolidated. From our perspective though, it's an independent business. We treat it differently. We manage our equipment differently. It's just a very focused organization around managing what we call the low pressure side of the business, or the logistics and supply chain from chemicals to the sand side to ultimately when it all gets blended upside of the pumps. And so our focus is there and we think that we have and continue to do business with probably every single pressure pump in some form or fashion, and we think there's value in that diversity.

Okay, great. Thank you for the color, gentlemen.

Thanks, Stephen.

Our next question comes from Jon Hunter with Cowen.

Hi. Good morning, everyone.

Good morning, Jon.

So my first question is just on activity in the third quarter where you outperformed your original guidance quite a bit. I'm curious, are these new customer wins? Are they expanded agreements with existing customers? And is it fair to say that the 3Q exit rate was kind of the high point for the quarter?

Yes, I think it's always a mix of additional growth with current customers, new customers. We mentioned we signed a three-year contract with a customer in the second quarter, and that drove additional growth as well that maybe wasn't in our prior guidance. So it's always kind of a mix there. As far as the second point around -- sorry, Jon, can you just restate the second question?

Yes, so we touched on I guess the new customer win and agreements?

Yes. We try not to get too much in the month-over-month variant. We did mention in the prepared remarks that October is coming in pretty close to the average of the third quarter, still finalizing some of those numbers. But yes, as we look into the fourth quarter that we talked about some puts and takes, certainly there are potentially operators showing up for budget completion. But where commodity prices are today, there's also potential for operators to say, well, I'm going to ignore that exhaustion. I'm going to keep going. They don't want to lose the crews that are working really well and risk starting up in January. So our guidance is flattish based on those sort of puts and takes. Obviously, there's seasonality as well. And when I throw that, I'm speaking to holiday shutdowns specifically. Our last mile business is a throughput business where we get paid every time a ton is delivered to location. And over Thanksgiving and over Christmas, there will no doubt be days where tons aren't delivered. And so that will have an impact on the fourth quarter. But all of that is shaping up in our opinion very well for 2022, where we see spending up and activities continue to fill in the whitespace that we did see an improvement in whitespace sort of utilization in the third quarter.

Thanks for that, Kyle. Sorry, go ahead.

One of the things I’d add to that, Jon, is I think if you playback time, we weren't north of $5 on gas and north of $80 on oil when we looked at the third quarter. So that does play. It frankly has muted relative to what one would expect at these price levels, but there have been increases.

Thanks, Bill. And I guess along that same line of questioning, your utilization improved sequentially. That was nice to see. Can you talk about the sustainability of maybe that higher utilization on your deployed systems? Is this a function of your customer mix and partnering with mainly large E&Ps that are more predictable? And how do you weigh that against maybe being opportunistic with some of the smaller players that are reacting to the improvement in commodity prices?

Yes. Well, clearly, I don't think being reliable and steady is necessarily a big versus small phenomenon. I think there are smaller operators that are very reliable that keep the program going and maybe adding to that program. I think it's really a dynamic that as things will be ramping back up through this year, you've just seen random ramping of various customers and now that all that whitespace begins to fill up, we'll see more and more, higher and higher ratio of actually fully utilized systems that were actually deployed. So that gap should continue to close as folks fully develop their capital budgets in their programs and may add a rig and fill in the completions programs to match either the DUC drawdown or the additional wells that have been drilled.

Yes. And you're certainly seeing on the pressure pumping side where operators that don't necessarily have a consistent program are having to really schedule ahead because more and more folks that haven't been around for a while are popping up and completing wells. So not only are we seeing higher utilization, but I think on the pumping fleet, we’re also seeing higher utilization. Part of that is driven by equipment but also by people. So it's obviously more efficient for the industry to be running fewer crews at higher utilization than lots of crews and lots of people that aren't necessarily working all the time.

Yes, that makes sense. And then I guess just last one for me is if your activity is call it flat in the fourth quarter, I know you said it's flat to maybe down, but let's just assume it's flat. Would you assume that your margin would be flat with where it was in the third quarter, or is there anything in 3Q that kind of weighed on results that goes away in the fourth quarter?

I think it's probably consistent. The last mile business tends to have a bit of a mix impact. There are certain jobs where they're really firing on all cylinders and we're pumping a lot of tons every day, and then there's jobs that have wireline issues and we're down for a couple of days. And so that's sort of some of the volatility we're seeing from a quarter-over-quarter profitability mix as the last mile portion of our business continues to grow. And that may be negative in one quarter and may be a positive in another quarter.

I appreciate that. Thanks. I'll turn it back.

Thanks, Jon.

. Our next question comes from Ian Macpherson with Piper Sandler.

Good morning, Bill, Kyle and Yvonne.

Good morning.

Good morning.

Which way do you think we're headed next year with overall completions, efficiencies, not just speaking to your purview, but it's been a secular trend of getting better, faster, cheaper? But we’re obviously hitting a lot of just short-term supply chain snags, but also just running out of the best crews, equipment and et cetera. And as an enabler of efficiency gains, do you think that companies like Solaris can help the industry stay on that track, or do you think that 2022 is teed up to be a year of reversal for efficiency gains for E&P?

Well, certainly, the rate of change does appear to be slowing a bit. But the actual changes are incredible if you just look at it from sort of a pounds pumped per day or hours pumped per day basin by basin, all the measures are going up. There's certain basins that are trailing from an efficiency standpoint that have room to catch up. One of the -- you make a great point here. When we find some high efficiency and say multiwall silo fracs, it creates a challenge elsewhere. And so we're seeing challenges in peer trucking logistics, getting enough capacity to deliver the amount of sand that the industry needs on location. So there's always a bottleneck that gets created somewhere either upstream or downstream of some of these efficiencies. And from our purview, the blender continues to be an incredibly high point of contention on traditional well sites with lots of NPT. We've heard lots of anecdotes that we happen to talk about. But the point is, is there continues to be problems on blenders and that is a point where we're really focused on helping the industry get more efficient there. And again, the trials are driving a lot of interest on that product.

Yes. Completions activity really today, because we're trying to manufacture, is a constraint management goal. And so as you look to goal seek around optimizing efficient frac, you hit one bottleneck at a time. So it was sand logistics and sand storage, and then it becomes water, then it becomes chemicals; this removal of the blenders and beginning to automate things, because labor becomes a challenge and people making just simple mistakes. And so our blender in addition to the silos and other things of what we think is one of the most unreliable pieces of the actual low pressure site of completions, which is what we're focused on. So our goal is to continue to make it efficient. The step changes are always big and they slow down, but our goal is to continue to keep a bit of a ramp on that. I don't think any of this reverses. So I think the trend may moderate, but does continue somewhat in terms of the industry's ability to complete a well in a certain amount of time.

That's really helpful. Thank you, both. Bill, in response to Stephen’s earlier question on the PropX deal, it sounds like you view that as sort of neutral to your market wallet opportunity. So you're not necessarily reading any specific positive or negative takeaways from nibbling up or down on market share around the edges as a result of that transaction. Is that correct?

I think it will be around the edges. We do some business with Liberty. And the boxes have a great place on the well site and the silos have a great place on the well site. And I think a lot of that groundwork is established. And as we look at completions efficiency and the amount of storage needed in a well site, we are a much more capital efficient solution over time than having to load more boxes and swing small boxes around on a well site. They've done a good job with it. And I think they'll continue to do a good job with it. And there's plenty of room for both of us.

Got it. Thanks very much.

Our next question comes from Samantha Hoh with Evercore ISI.

Hi. Good morning, guys. I was wondering if you could update us on your chem and water initiatives. I believe there were some trials with the blender using a combination of both the blenders and the water/chem systems. And I was just wondering if you could help us think about whether or not those initiatives can contribute to 2022 results?

Yes. All of the blenders will have water systems connected to them. So that's a part of that kit. We've got, I don't know, maybe roughly half a dozen to maybe eight water systems running at any time with customers, even on an independent basis. And then on the chem system, I think we've had a couple running various points as well. So not a ton of growth on the chem systems at this point, but we do think it does tie in well into the blenders and same on the water side.

Okay, great. And then I’m just wondering, if you think about the whitespace that you have for your rental system, are you seeing a point where you might need to deploy extra systems in the first half of next year? I'm just kind of wondering like how much sort of whitespace do you want to maintain just in case there is like last minute demand from customers, anyone that's like really in a bind to add incremental work into your calendar.

Yes. If we look at, let's just call it, 90 systems having run in the third quarter to use round figures and if we think about our unutilized capacity, it’s still quite significant. So we've got plenty of room to capture whatever share is out there. So from an optimizing whitespace, you always want to have some reserves to make sure you're capturing all the revenue streams . But at this point, we got plenty capacity on the sand silo side of things to capture market share that may be available.

And then there's some level of that whitespace that is intentional, because it’s logistics driven, right. We may have a system down maybe going to the same customer, but they may be moving locations that are further away. We want to take that system down for a week and put another one in service. So there's some mob/demob reasons to actually keep some of that whitespace. It's higher than usual because of the dynamic as the industry is wrapping back up. But we do have plenty of extra capacity to take advantage of additional spot work, which does sort of in itself create a little more whitespace.

You guys used to give us like a breakout of where all your systems were spread out geographically. Can you give maybe just like a loose update of where you're most concentrated these days?

The Permian continues to be our biggest focus. Quite frankly, it's pretty closely aligned to the rig count and just overall completion activity. I wouldn't say it's all that different, probably a little bit higher in South Texas relative to rig count and maybe a little bit higher in the Permian relative to rig count.

Okay. And can you kind of characterize maybe any sort of like operating preference between like the large E&Ps and privates? Kind of curious if you could say like -- everyone expects the large E&Ps to be more efficient operators and just kind of run these systems longer. But are you seeing any sort of like notable trends in terms of how one operator might work in certain basins versus another?

No, they all have their unique characteristics. There's some small guys that are extremely efficient in what they do and there's some big guys that are certainly efficient with what they do. So I think it's a mixed bag and we love them all the same.

In new technology, we've got privates that love the new technology. They’re very focused on driving efficiencies. We have privates that are less focused on that and vice versa on the publics.

And can you share a mix of your -- how much the privates were in terms of your system usage this past quarter? Are they like 40%, 50%?

Well, I think from a rig count standpoint, the privates have moved up to close to 60% plus of overall rig count. And I don't know if it's quite there on completions, but it will get there if it's not. So again, given our size as far as overall market share, we tend to look like the market. So a lot of the pressure company work we do directly ends up being for private operators.

Okay, interesting. Okay. Thank you so much. Have a great rest of the year.

Thanks, Samantha.

Our next question comes from Sean Mitchell with Daniel Energy Partners.

Good morning, guys. Thanks for taking the question. So one thing that caught my attention, obviously a three-year agreement in oilfield services today is a big win. Do you expect -- is that an anomaly do you think or do you expect that you'll see more of that continue in the current environment?

We think it is unusual, but I think it's very strategic for the counterparty and for us. I think the blender in the notion of adding that kit into somebody's pressure pumping is vital as it is. I do think that that tends to lead toward longer term contracts than generally spot work. So I do think that as a general trend, because of the new equipment and new technologies and how integrated it becomes, we will start seeing longer term contracts that are both good for us and our customers.

And then just as you think about the trends, I do think that you're seeing a lot more folks do the simul-frac wells, both on the public and private side. We talked to a lot of operators that the biggest issue it seems like when we sit down and talk to operators on the simul-frac is water and sand. And can you just maybe talk about how much are you seeing it gets in where your business is today, or do you think that's a benefit to you as the industry moves to more simul-fracs?

We do. We think that we can buffer sand, we can add a nine pack, we can add another six pack, we can put a lot of storage, depending on the logistics nature of that particular location. Some are clearly closer to mines and places to pick sand up than others. And so that drives the challenge for how much you want to store at the well. And once we're at the well site, our connectivity to the high pressure pumps is as good as anything. And it's very reliable from that point on. We're not relying on other kinds of equipment from there. So I do think that as I mentioned earlier, it's all about constraint management. I think that sand has impacted some places more driven by trucking. And I do think there's been some tightness in the sand industry as mines shut down last year and are coming back on or needing to have some sort of contract or some sort of term deal to begin to want to put the capital and hire the people back to get the mines back restarted. So there's bottlenecks through the system and I think they're being hit one at a time in very location specific.

We've heard anecdotally jobs shutting down to 12-hour operations due to trucking constraints on the sand side. One of our last mile jobs we had planned for X number of stages per day and agreed to with the customer. Turns out they're doing 1.5x on the stage count, but the problem is there's not enough trucking capacity to meet that demand. So there's no doubt about it. When we put say a 12 pack on location, doubling the inventory, you may be providing say 12 bonus hours of inventory and at $3,500 an hour in NPT charges, the return on that incremental insurance, if you will, of an additional 6 pack is quite compelling. So we haven't really seen it yet in the numbers materially, but we do think there's an opportunity to capture more calories, if you will, per spread by providing that added level of insurance.

Thank you. And then maybe one more just as you -- I think in the prepared comments you talked about potentially two more blenders going out in '22. Just a higher level question on the blender. Is the adoption rate greater or in line or worse than maybe you expected in terms of how people are adopting that technology?

The interest level is about as high as we expected. We have quite a bit of interest in it and we're in the process of negotiating. We've been maybe a little careful with putting the capital to work and waiting on some contracts, which we're working through right now. And we'll be prepared. As we mentioned, we are spending a little bit on some long lead items in anticipation of that, but haven't fully said go yet on a bunch. But it does feel like it solves numerous problems in bottlenecks in the industry. And we're fairly hopeful about it.

Yes. The evolution of the interest is interesting to watch as two years ago, when we initially talked to people about it, it was I don't have any issues with blenders, they're all brand new and they work really well. And over time, those blenders have worn out and they've been facing lots of challenges. And so time is sort of our ally here. And particularly as people get more and more focused on efficiencies, this particular piece of equipment on traditional locations continues to be a bull's eye for those trying to drive efficiencies.

Right. And it's all electric and it integrates right in with the power sources for the electric truck fleets, be it turbine or gas generation or line power.

Yes, that's great. Thanks, guys.

Thanks, Sean.

Thanks.

This concludes our question-and-answer session. I'd like to turn the call back over to Mr. Bill Zartler for some closing remarks.

Thanks, Riley, and thank you all for participating on our call. We want to thank our employees, customers and stakeholders for another strong quarter. We're very proud of all the efforts that have gone into the continued enhancement of our core offerings and the new product development activities. We look forward to providing further positive updates in the beginning of 2022. Thank you all. Have a great day.

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