Atlas Energy Solutions - Q2 2024

Executive Summary

• Q2 2024 revenue rose 49% QoQ to $287.5M on a full-quarter contribution from Hi-Crush; Adjusted EBITDA of $72.0M (25% margin) and diluted EPS of $0.13 reflected elevated costs from the Kermit feed system reconstruction and lower average pricing.
• Logistics delivered a record quarter, with more than 50% of volumes handled by Atlas’ own last-mile crews and 26 crews operating; management guided Q3 EBITDA to $90–$100M and volumes up ~20% sequentially as Kermit normalizes.
• Dune Express construction remained on-time and on-budget, with 39 of 42 miles installed and critical crossings completed; initial commercial operations targeted by year-end 2024.
• The dividend moved from base+variable to a $0.23/share standalone base dividend payable Aug 22, 2024, supported by strong cash generation and anticipated 2025 FCF inflection as growth CapEx declines.

What Went Well and What Went Wrong

What Went Well

• Logistics outperformance: “Our logistics team set a quarterly record for loads delivered… delivering more than 50% of our sand volumes utilizing our own last mile crews,” with ~26 crews running, evidencing scale and integration synergies.
• Dune Express execution: “We remain both on time and on budget… 39 out of the 42 miles of conveyor modules have now been installed,” with belt installation completing by end of September and commercial sand targeted by year-end.
• Contracting visibility: “Today, we have more than 9 million tons of sand contracted for delivery into the Delaware Basin next year,” underpinning 2025 demand and Dune Express utilization.

What Went Wrong

• Kermit incident impact: Elevated plant OpEx per ton ($13.84) and throughput constraints from temporary mobile loadout weighed on margins; average sales price fell to ~$26.07/ton.
• Non-GAAP adjustments reflect incident: Loss on disposal of assets ($11.1M) and a $10.0M insurance recovery gain tied to the Kermit fire affected reported metrics (excluded in Adjusted EBITDA).
• Looser market/pricing: Management cited a looser Permian proppant supply-demand balance and spot pricing near breakeven for less-advantaged competitors, implying industry price pressure and potential competitor shutdowns.

Transcript

Operator (participant)

Greetings, and welcome to the Atlas Energy second quarter 2024 financial and operational results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kyle Turlington, VP, Investor Relations. Thank you. You may begin.

Kyle Turlington (VP, Investor Relations)

Hello, and welcome to the Atlas Energy Solutions conference call and webcast for the second quarter of 2024. With us today are Bud Brigham, Executive Chairman; John Turner, CEO; and Blake McCarthy, CFO. Bud, John, and Blake will be sharing their comments on the company's operational and financial performance on the second quarter of 2024, after which we will open the call for Q&A. Before we begin our prepared remarks, I would like to remind everyone that this call will include forward-looking statements as defined under the U.S. securities laws. Such statements are based on current information and management's expectations as of this statement and are not guarantees of future performance. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict. As such, our actual outcomes and results could differ materially.

You can learn more about these risks in our annual reports on Form 10-K we filed with the SEC on February 27, 2024, our quarterly reports on Form 10-Q, and our other SEC filings. You should not place undue reliance on forward-looking statements, and we undertake no obligation to update these forward-looking statements. We will also refer to certain non-GAAP financial measures such as adjusted EBITDA, adjusted free cash flow, and other operating metrics and statistics. You will find the GAAP reconciliation comments and calculations in the press release we issued yesterday afternoon. With that said, I will now turn the call over to Bud Brigham.

Bud Brigham (Executive Chairman)

Thank you, Kyle, and thanks to everyone for joining us today for our second quarter conference call. Before we jump into many of the exciting developments at Atlas, I first want to thank everyone involved with the response to the fire at our Kermit plant on April fourteenth. The combined efforts of our employees and first responders transformed this event into a strong testament to the unique culture of Atlas. It also served as a demonstration of our unmatched advantages, particularly our distributed mining and logistical assets, and thus the associated redundancies, which uniquely enable us to reliably serve our customers, even in the most extreme and challenging circumstances.

Though the fire and the ensuing operational challenges negatively impacted our second quarter results, our team worked around the clock to ensure that every single one of our customers had all of their supply needs met during the quarter and that they didn't miss a beat in their critical development plans. Our customers have options when it comes to proppant suppliers, but in Atlas, they can be confident, given that they have the partner with superior distributed mining and logistics assets, a partner who is constantly looking for new ways to improve safety and reliability. We will always move heaven and earth to fulfill our obligations to them. We will always put our customers first.

Thanks to the effort from our operations and construction teams, the rebuild of the Kermit facility feed system was completed by the end of June and has since returned to full load-out operations after a brief ramp-up period in July. Given that preventing a repeat incident is of the utmost importance, the rebuilt feed system now incorporates significantly enhanced safety equipment, including rip detection technology, misalignment switches, enhanced belt tracking rollers, and both fixed and mobile fire suppression equipment. Most of these concepts were developed for the Dune Express, and we now plan on adding them to the feed system at our Monahans facility in the near future. While events like the fire are never welcome, adversity makes good organizations better. I truly believe that Atlas is a better company than it was just a few months ago, and for that, all of the credit goes to our employees.

To all of you listening today, thank you for all your effort, creativity, and your can-do spirit. I could not be prouder to be on your team. Wrapping up my section, these are very exciting times at Atlas. Our initiatives to make the Permian a more efficient factory on the ground are advancing at a very exciting pace. John will cover these in some detail, but importantly, the construction of the Dune Express, our 42-mile overland conveyor system, continues on pace and on budget. We are now just months away from commissioning, and I believe it will be a major step change advancement for proppant logistics in the Permian Basin, with even more to come. With that, I will turn it over to John.

John Turner (CEO)

Thanks, Bud. And you're right, these are exciting times for Atlas and the Permian Basin as a whole. Before I get into my prepared remarks, I would like to congratulate Chris Scholla on his promotion to COO for Atlas. Since joining Atlas in 2017, Chris has proven to be an effective and creative leader. In 2019, Chris led our entry into the oilfield logistics market. With this promotion, Chris will lead all of our operations. Congratulations, Chris. You deserve it. With the Dune Express now just months away from commissioning, we are in sight of our goal of running commercial sand down the conveyor by the end of this year. 39 out of the 42 miles of conveyor modules have now been installed, and we remain both on time and on budget with our original construction plan.

Our crews began installing the belt in July, with installation expected to wrap up by the end of September. The flood zone crossings were completed in June, along with 3 of the 6 major road crossings. Additionally, more than 90% of the 76 pipeline and lease road crossings are in place, as are most of the wildlife and cattle crossings. Delivery of the electrical houses is expected in September. With power concerns growing in the more regulated New Mexico market, it is worth reminding everyone that Atlas already has an electricity service agreement in place. As we approach the end of construction, the initial commercial phase of the project now becomes critical. Today, we have more than 9 million tons of sand contracted for delivery into the Delaware Basin next year, and a line of sight on incremental volumes to add to that total.

In addition to the continued progress on the Dune Express, we continue to push forward in our other initiatives aimed at revolutionizing proppant logistics. On July 23rd, Atlas entered into an agreement with Kodiak Robotics, whereby Kodiak will outfit a select number of high-capacity trucks with its cutting-edge autonomous driving technology. In May, Atlas, in partnership with Kodiak, made the first-ever driverless commercial delivery of sand to a well site. Using the Permian Basin's expansive private lease road network, a driverless truck traveled more than 21 miles from our drop depot just off Frying Pan Road to a customer's well site with no personnel inside the cab. Once at the well site, an on-site employee hopped into the cab and unloaded the sand.

The vast swaths of private lease roads across the Permian Basin are ideally suited for this type of application, where traffic is light and average speeds are under 20 miles per hour. We believe this has the potential to offer a safer, more reliable last-mile delivery solution to our customers in the Permian Basin and could represent a step change in oilfield logistics. Atlas has ordered the first two trucks equipped with the Kodiak Driver, which is Kodiak's industry-leading autonomous system, and we plan to launch commercial operations with those trucks in early 2025. While we do not expect this partnership to have a material impact to our 2024 financial results, we are excited about this partnership's long-term potential impact to our logistics operations and results. Moving to the broader market, 2024 has proven to be a much more challenging year for the oilfield.

Despite a relatively strong crude tape, the combination of continued operator consolidation and weak natural gas prices has led to a decline in drilling and completion activities this year. The Permian rig count is down approximately 10% over the past 12 months and is expected to remain relatively stagnant through the back half of this year. The decline in activity levels, combined with the majority of service demand emanating from a shrinking pool of operators, has led to falling utilization rates for most service lines and a commensurate loosening in pricing behavior. The Permian proppant market remains one of the few, if not only, relative bright spots in terms of year-over-year demand growth, driven by longer laterals and continued growth in completion efficiencies.

The continued adoption of both simul and trimul fracs, which are now estimated to comprise approximately 25% of the market, the accelerating deployment of efficient electric frac fleets, and the higher proppant intensity of new well designs are all combining to support the Permian proppant market. Despite a double-digit decline in rig activity, proppant demand is still expected to be up slightly year-over-year. To provide some quantitative backing to this, the average amount of sand pumped by a fracker has increased from approximately 40,000 tons per month just a few years ago to more than 65,000 tons today, with many of the leading-edge crews now pumping more than 100,000 tons. Nevertheless, with the recent industry supply additions over the past 12 months, the supply-demand balance in the Permian proppant market is notably looser now than it was this time last year.

While several of our larger customers are using the recent pricing relief to lock up volume with term at attractive prices in the mid-20s, we have seen spot prices at levels we believe to be near breakeven gross margin levels for our less advantaged competition and well into the negative fully loaded cash flow territory for several of them. It's in market conditions such as these that Atlas's advantage, reserves, and operations really shine, as we are still able to generate healthy margins and returns at pricing levels that cause some of our competition to struggle. While it's certainly a lot more fun to be riding a wave of frothy pricing, markets like today's are ultimately healthy for the industry as they typically drive subpar operators out, incentivize continued consolidation, and ultimately lead to much healthier markets in the future.

Relatedly, I wanted to briefly touch on the U.S. Fish and Wildlife Service's June 20th decision to list the Dune sagebrush lizard on the endangered species list. As many of you are aware, Atlas has been a member of the 2020 Candidate Conservation Agreement with Assurances, or the CCAA. The 2020 CCAA was developed to provide a conservation strategy framework for companies operating in the Permian Basin by establishing certain guidelines, such as limiting annual surface disturbances to 60 acres, among other requirements.... In addition, the CCAA instituted an annual habitat conservation fee and permits companies to set aside acreage or take other conservation actions to offset the fee. As a member of the CCAA, we do not expect to see any disruptions in our operations due to the listing of the Dune sagebrush lizard.

However, we do believe that the listing will have both short-term and long-term impacts on overall industry supply over the coming years, as it will likely become increasingly more difficult for mines with smaller acreage positions to remain in good standing and with conservation measures while maintaining current production levels. A quick update on our Encore operations. During the quarter, we launched Encore number 8 in the Midland Basin. Encore number 8 is a larger mobile mine than our prior deployments, with a production capacity just north of 1 million tons annually. Additionally, we are currently in the early stages of deploying an additional Encore unit in Loving County, near the New Mexico-Texas state line. Atlas's commitment to innovation continues to be on display throughout our organization, as exhibited by our partnership with Kodiak, that we will look to pair with the Dune Express, mobile mining, and high-capacity multi-trailer operations.

We strive to make the Permian a more efficient, safer, and more reliable basin for our employees, customers, and the communities in which we operate. I will now turn the call over to Blake to discuss our second quarter results and outlook.

Blake McCarthy (CFO)

Thanks, John. For the second quarter of 2024, Atlas reported revenues of $288 million, up 49% sequentially from first quarter levels, due primarily to a full quarter impact from our acquisition of Hi-Crush. Adjusted EBITDA was down slightly to $72 million, or 25% of revenue, and net income was $14.8 million, or 5% of revenue. As I will detail shortly, the impact from the fire damage at one of our current facilities proved to be more significant than we had initially expected at the time of our Q1 call. However, the vast majority of this incremental impact was offset by superb performance from both our other plant operations and our logistics business, allowing us to generate adjusted EBITDA that was roughly in line with that of the first quarter results.

Revenues from product sales were approximately $128 million on volumes of 4.9 million tons, yielding an average sales price of approximately $26.07 per ton for the second quarter. These figures do not include sand tonnage purchased from third parties in the open market to fulfill customer obligations due to the fire. Service revenues were approximately $159 million during the second quarter, approximately double the levels of the first quarter, due to a full quarter impact from the Hi-Crush acquisition and continued growth in our legacy business. Our logistics team set a quarterly record for loads delivered during the quarter, delivering more than 50% of our sand volumes utilizing our own last mile crews.

We had roughly 26 crews running during the quarter and believe that number will continue to grow modestly in the second half of the year as we approach the commercial in-service date of the Dune Express. The logistics business was running on all cylinders during the quarter, and while we do expect some normalization in results during the second half, the Atlas logistics team continues to cement itself as a leader in the industry. Cost of sales, excluding DD&A, were approximately $202 million. Plant operating expenses, excluding DD&A, were approximately $68 million, or $13.84 per ton, significantly above our normalized levels. The increase in our plant operating expenses was largely due to costs associated with the temporary load-out at our Kermit facility, lower throughput, and a delay in the commissioning process of one of the dredges.

The total financial impact from the fallout of the fire incident came out around the top end of the $20 million-$40 million range that we gave on our Q1 call. Our team on the ground has performed exceptionally throughout the rebuild process, with the construction process finishing by the June 30 target. The facility was ramping back up to normal operations over the course of July and has now returned to normal load-out operations. However, due to the ramp-up period, we do not expect our Q3 average OpEx per ton metrics to fully normalize, but do expect them to return to normal levels by the end of the year. While the Kermit rebuild garnered the most attention during the quarter, I would be remiss if I did not mention the exceptional performance achieved by our other plant operations.

Our Monahans and other Kermit facilities were quite simply humming, overachieving on both the production and efficiency targets. Additionally, Encore volumes were the second highest in company history, despite two units being offline for relocation during the quarter. Our Q2 SG&A was approximately $27 million, a figure that was inflated by approximately $6 million of acquisition-related costs and approximately $5 million of stock-based compensation. Moving forward, we expect to realize incremental corporate synergies in the third quarter and expect SG&A to return to a more normal level in the $15 million range. Royalty expense was approximately $4 million. Cash interest expense was approximately $11 million, offset by approximately $2 million of interest income. We expect our net interest expense to rise slightly in coming quarters as we draw on our cash reserves to fund our key growth projects.

Operating cash flow for the second quarter was $61 million, and adjusted free cash flow, which we define as adjusted EBITDA less maintenance CapEx, was $67 million, yielding an adjusted free cash flow margin of 23%. Capital expenditures during the quarter totaled approximately $132 million, $127 million towards growth and the rest to maintenance. Our growth CapEx consisted of $77 million spent on the construction of the Dune Express, $31 million for the additional Encore deployments, and $19 million of spend associated with the rebuild of the feed system at Kermit. We have already been reimbursed for $10 million of the Kermit spend, and excluding a small deductible, expect to be fully reimbursed by insurance for the remainder. Maintenance CapEx for the quarter was approximately $5 million.

Cash and equivalents stood at $105 million against total debt of $480 million. Looking ahead to the third quarter, we expect production at our Kermit facility to steadily increase over the quarter after the ramp-up period in July, yielding an approximate 20% sequential improvement in total Atlas volumes. Combined with the continued strong execution from our other plants and our logistics business, we estimate Q3 EBITDA to be in the range of $90 million-$100 million, with the company exiting the quarter at a higher run rate. Due to the strong cash profile of our business, we are increasing our dividend to $0.23 per share, which represents a 5% increase over the prior period, or $0.01 per share. We have elected to move away from the base plus variable dividend structure to a standalone ordinary dividend.

Based on our closing share price of August second, our annualized dividend yield is 4.9%. That concludes our prepared remarks. We will now let the operator open the line for questions.

Operator (participant)

Thank you. We will now conduct a question-and-answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment while we poll for our first question. Our first question comes from Jim Rollyson with Raymond James. Please proceed.

Jim Rollyson (Director and Equity Research Analyst)

Morning, gents, and congrats on getting Kermit back up and running in a timely fashion. Maybe Bud or John, there's been some press here over the last quarter on kind of trucking rates being, you know, depressed in the Permian, and kind of curious how you view that as far as impacting your logistics business and how that might play into your margin outlook for as Dune Express ramps up into next year?

Blake McCarthy (CFO)

Hey, Jim, morning, it's Blake here. You know, I think this is a really good question for our newly minted COO, Chris Scholla, who's joining us here to answer. So, he's the one with the most day-to-day, real-time exposure to this, this phenomenon. So we'll, we'll pass it over to Chris.

Chris Scholla (COO)

Yeah, thanks for the question, Jim. So look, while trucking rates in the Permian, they have fallen throughout 2024, you know, our structural advantages really starting to shine through, as you see in the numbers. Let's think about this from a, from a macro level to start. So while the sand demand, it does continue to grow out there, innovations such as our mobile mini mines and Dune Express reduce the well site haul distances by over 50%. So the shorter haul distances and higher associated truck turns, that ultimately decreases the number of trucks that are required to service the Permian. With trucking rates already at break-even pricing, we don't anticipate a further decline in pricing, but we do anticipate inefficient trucking companies continuing to exit the Permian Basin. You know, for us, it was never about just starting a trucking company, right?

It was about executing a long-term strategy to be the lowest cost to operate and most efficient logistics provider in the Permian. I mean, let's just walk through and look at the steps we've taken to get there. We vertically integrated into trucking. We've launched our own digital platform to automate dispatch and gain efficiencies. We've executed multi-trailer operations, delivering 4x the normal payload. We've delivered sand to a well site without a driver. And lastly, we've become the closest to the well site in the Midland by acquiring the mobile mines. And look, our margins will only be further enhanced with the launch of the Dune Express in Q4. While trucking prices have fallen in an order of magnitude, it's really only marginal compared to our structural cost differences advantages.

We are revolutionizing sand delivery in the industry and excited and really excited that we are just getting started.

Blake McCarthy (CFO)

Yeah, and Jim, adding on to Chris there, you know, we get a lot of questions about, you know, trucking pricing impact on potential Dune margin contribution. I think it's important to remember that when Atlas Management underwrote the decision to build the Dune Express, you know, it was stress tested every which way. And our base case assumptions are actually very much in line with today's market conditions, not with the frothy things that we were seeing, you know, 18, 24 months ago. So needless to say, we remain very confident in the financial impact of the Dune Express to Atlas moving forward into 2025.

Jim Rollyson (Director and Equity Research Analyst)

Appreciate all the detail and look forward to that. And maybe following up, Blake, you talked about third quarter volumes kind of ramping 20% sequentially, and you guys also earlier in the call talked about the rig count and some of the offsets that have actually kept Permian sand demand, you know, flat to up marginally this year despite that. Maybe just color, you know, as you're ramping into Kermit being back up and running and Encore number 8 and soon Encore number 9, just kind of how you're seeing customer demand on your end. Are you guys relatively sold out? Just trying to think about, you know, how we should look at volumes even beyond just the third quarter as you see it today.

Blake McCarthy (CFO)

Well, you know, I think that our, our sales team has been making great progress on the contracting front recently. You know, as I mentioned in the prepared remarks, we've already have more than 9 million tons secured for next year in the Delaware, and we think we've got a long, a strong line of sight on some incremental contracts the coming weeks. So all in all, we're feeling pretty good about how we're positioned for next year based, based on where we are in the calendar right now. You know, obviously, we're watching the market. You know, we'd, we'd love to see this, you know, slow trickle of rig count decline, find its footing. But, you know, sand is gonna continue to be the, you know, a, a critical component of all the well activity out there.

And so, yeah, the positive trends are still. Secular trends are still there.

Jim Rollyson (Director and Equity Research Analyst)

Got it. Appreciate that.

Operator (participant)

The next question comes from Doug Becker with Capital One. Please proceed.

Doug Becker (Equity Research Analyst)

Thank you. Maybe just expanding on the logistics outlook in the near term, very strong 2Q, just any color on 3Q's for the back half of the year. Certainly appreciate that. It sounds like it come off a little bit from, from last quarter's results.

Blake McCarthy (CFO)

Yeah, when we were thinking about—I mean, really, when you think about Q2 logistics results, I mean, they were, like, really hitting on all cylinders, and it was, you know, it was one of, like, they threw a perfect game. While I think that we have the absolute best team in the business, betting on somebody continuing to throw a perfect game every quarter seems like a fool's errand. So there's some, you know, perhaps some natural conservatism built into our guidance there, just because it's a complicated business, there's a lot of moving parts. But we don't see any real, you know, degradation in market conditions versus in the third quarter versus what we saw in the second quarter.

Doug Becker (Equity Research Analyst)

Okay, and then maybe hopping over to the proppant side, maybe just a little more color on the supply and demand. Are there any indications that competitors might be taking some supply off the market? And then just from a demand standpoint, or maybe more specifically, a pricing standpoint, are there any price adjustments we need to be thinking about going forward?

John Turner (CEO)

You know, this is John. You know, coming into this year, you know, we expected the sand supply-demand balance to be looser than we witnessed due to the, I guess, 'cause of the rig count, and the decline in the rig count we are witnessing, and that count has continued, like Blake said, continued to slowly trickle down throughout 2024. In that, you know, sand pricing faces headwinds. There are some, you know, some things, though, a few important things to remember when you think about sand pricing for Atlas as we move forward. You know, first, we do believe spot price, spot sand volume pricing is currently at prices where mines at the high end of the cost curve are faced with the question of selling sand to break even or negative margins, or even if they should even shutter.

You know, so we are hearing more and more anecdotes of shift cuts and potential mines. You know, while this is painful for the industry and our competitors, this is obviously positive for pricing dynamics in the long run. And obviously, sand prices. You know, sand plants are complicated operations. You just don't flip the switch and turn them right back on. So restarting those plants requires quite a bit of time. So that's the first thing, is, you know, we are hearing that plants are shut, that plants are starting to shut down, cut shifts. So I think you are gonna see an impact there. Second, you know, with the distressed state of some of our competition, we are seeing some bifurcation in the sand market based on reliability.

We completely understand our customers' procurement teams are looking to grab, you know, grab as much price as they can, but they also understand reliability of supply will always be paramount over securing the cheapest ton of sand. It's, you know, it's a lot more expensive for a frac crew to be sitting around waiting for sand than it is to pay a couple more dollars per ton. So Atlas's reputation for being a true service partner who's, you know, been to make sure you'll get the, you know, we'll be able to deliver the sand, and have it on the well site, when it's, you know, as you know, it'll always be there very reliably.

You know, this is a reputation, you know, that we've earned, really with going all the way back to the pandemic, when most of our competition was shutting down a mine or two, you know, we stayed open, we continued to supply sand, and, you know, we generated positive EBITDA through that period. So I think, you know, from our competition standpoint, I think, you know, we are getting close to, you know, you're starting to see where, you know, companies that are our competition, they don't perform, and they're not gonna perform financially because of where their cost structure is. And then finally, it's, you know, Atlas was designed, you know, when we put the company together to be the lowest cost producer of sand, it was designed to flourish in markets like today.

You know, our assets are at the far end of the low end of the cost curve, and combined with our market-leading logistics business, and, you know, allows us to generate returns well beyond our cost to capital at these current prices, you know, and gain incremental market share. You know, this position will even be strengthened further, as we bring on the Dune Express early next year.

Bud Brigham (Executive Chairman)

I might just add, I mean, a couple of related trends that are really important is our cost structure is trending down as well, over the subsequent quarters. And together, in addition to that, of course, our CapEx is also ramping down very substantially. So it's a really exciting time, particularly as you look forward into 2025 for us.

Doug Becker (Equity Research Analyst)

Yeah. Sounds encouraging. Thank you.

Operator (participant)

The next question comes from Derek Podhaizer with Barclays. Please proceed.

Derek Podhaizer (Senior Research Analyst)

Hey, good morning. I want to ask a question on the state of the market in the Delaware Basin, where the Dune Express is going to be servicing. Can you maybe just talk about some of the customers out there, some of the frac equipment out there, really the overall demand of the Delaware? Do you expect to have any competition from mobile mines, take market share from the Dune Express, simul and trimul concentration? Just your overall view of the Delaware, just to help quantify us the actual demand pull and how much the Dune Express will be servicing. And then lastly, will the current mine, Legacy Atlas, be able to handle all the volumes going out there, or will you be pulling from Legacy Hi-Crush current?

Bud Brigham (Executive Chairman)

Yeah, this is Bud. I'll start, but some of these guys may want to add to my comments. You know, the two basins of Delaware versus Midland are very different, both in terms of the customers, but also in terms of the sand supply. We purchased Hi-Crush because of the Encore mines in the Midland Basin were very attractive logistically to Midland operators, and thus it brought a very complimentary customer base to us. The Delaware is very different. There's not the, you know, the smaller sand deposits out there, and there's not the many mobile mines out there that provide the supply.

We are very much advantaged in the Delaware with our high-capacity trucking and with the Dune Express coming online. So, it's a, you know, there's nothing that can match the Dune Express in terms of the cost structure, the reliability, dependability, and of course, the environmental impacts as well. So, benefits that it provides. We see a substantial majority, a substantial portion of our sand sales in the Delaware will be provided by the Dune Express. You guys may want to-

Blake McCarthy (CFO)

Yeah, I mean, if you look at it, if you just sand supply, sand demand is roughly 70-something million tons, you know, half, roughly half of that's in the perm is in the Delaware Basin. You've got... So that means that, you know, we're gonna be able to push 12 million tons down the Dune Express. I mean, obviously, there's a significant amount of supply that's not supplied off the Dune Express. We think we're gonna be, you know, fully, you know, we think we're gonna be fully utilized off the Dune Express once it's up and running. You know, you also, a large part of the Delaware Basin is in, in New Mexico. And so, you know, you do have-- and that's what, that's really the area that the Dune Express is serving.

So I mean, you know, the competition out there for sand mines is key there because of the regulatory environment in New Mexico. So, you know, obviously, I think, you know, we do serve our Kermit mines, do serve mostly the Delaware Basin. And you know, the Kermit mines that we currently have, like, the Atlas mines, will be the ones that will be serving on the Dune Express. We don't necessarily currently expect to pull anything off of the Hi-Crush mines.

Bud Brigham (Executive Chairman)

I might add one thing, and I think you all, everybody on this call appreciates this fact, but the Delaware Basin, the northern Delaware Basin, is the best producing province in the entire country. It's got the deepest inventory and the highest rate of return drilling in the Permian in the United States. So, we're very well positioned to serve that market.

Derek Podhaizer (Senior Research Analyst)

Yeah, that's really helpful. And then maybe just on the type of frac equipment that's out there, do you see a lot of simuls and trimuls concentrated in the Delaware versus the Midland or E-fleets? Just looking at it from that level.

Blake McCarthy (CFO)

Yeah, I think from my perspective, we continue to see, you know, adoption of simuls and trimuls, E-fleets across the board, you know, not only in the Delaware, but also in the Midland. You know, we don't see any major trend differences between the two, but really operators looking to get more efficient. And as it gets more efficient, right, that's really where, you know, our value proposition comes to play, is removing that sand bottleneck of logistics sand on the well site, so that our operators and customers can continue working down that road of efficiency.

Derek Podhaizer (Senior Research Analyst)

Okay, great. All very helpful. I'll turn it back.

Operator (participant)

The next question comes from Sean Mitchell with Daniel Energy Partners. Please proceed.

Sean Mitchell (Managing Partner)

Good morning, guys. Thanks for taking my question. Maybe to kind of follow up on Doug's question around Simul frac and frac design. If you think about the evolution of kind of frac designs, you went from Zipper fracs to Simul fracs. It took a while for guys that were doing zippers to kind of adopt Simul fracs because they wanted to see kind of the results, I guess, of the other-- of other guys doing it. It feels like more people are picking up Trimul fracs. Are you seeing that in particular? I'm thinking Simul frac to Trimul frac. Are you seeing that more today than you were a quarter ago? Because it seems like in the calls, we're seeing more people at least testing it.

Blake McCarthy (CFO)

Yeah, we're definitely seeing increases. I mean, it's a joke around here, you know, we're gonna get to the octo-frac soon, right? But-

Sean Mitchell (Managing Partner)

Yeah.

Blake McCarthy (CFO)

But all in all, we're gonna continue to see that trend move upward.

And the pace of evolution of the industry has, I mean, it's certainly come a long way over the last half decade, where, you know, like you said, zipper fracs took a number of years to really, you know, saturate the market. It seems like the next new innovation takes a matter of weeks, not months at this point.

Bud Brigham (Executive Chairman)

Yeah, this, Bud, I mean, that trend should continue. When you look at operators, it relates to the reason operators are consolidating. They need more scale. They need stronger balance sheets. The throughput on capital and sand is up and to the right, and so Atlas is the one top-end and logistic provider that can match up and provide that throughput that these operators need for those operations.

Sean Mitchell (Managing Partner)

And then, Bud, maybe one more for me. Just you mentioned cost structure moving lower. Can you provide any more color around that, particularly for 25, or, or, Blake?

Blake McCarthy (CFO)

Yeah. You know, I think, well, first of all, through the back half of the year, that's just getting back to normal operations. Yeah, we've always had the lowest cost structure. It was elevated certainly, you know, not just with the rebuild process, but also with the amount of yellow iron and rental equipment we had on site this past quarter. Throughout July, we were moving a lot of that off. So that gives you a large jump in the mobilization there as we work through Q3. Towards next steps, you know, I think we're continuing to explore more and more ways just in everyday operations to lower, whether it's through automation, whether it's through electric dredging.

You know, I think that we had a pretty exciting press release a couple weeks ago with the terms of the autonomous trucking partnership with Kodiak. You know, we're continuing to look at ways every day, where we're just iterating over and over again to continue to drive our cost structure lower. It's, you know, Atlas never sleeps when it comes to getting our costs down.

Sean Mitchell (Managing Partner)

All right. Thanks, guys. Congrats on getting back after the fire.

Blake McCarthy (CFO)

Thanks, Sean.

Operator (participant)

The next call comes from Don Crist with Johnson Rice. Please proceed.

Don Crist (Senior Research Analyst)

Morning, guys. I wanted to ask, since you bought Hi-Crush, you kind of jiggered the numbers around a little bit, but looking towards next year, how should we be thinking about maintenance CapEx? And, you know, what should that number be going forward? And obviously, your growth CapEx is going to fall significantly, once you finish Dune Express out, but how should we look at those two numbers as a complete ton of CapEx number for next year?

John Turner (CEO)

Hey, Don. You know, it's a little too early for us to talk hard numbers around 2025 CapEx. You know, obviously, with the Dune Express coming online at the end of the year, 2025 CapEx is going to be down pretty hard year-over-year. We do have some exciting growth opportunities in front of us that will justify some incremental capital. But there's certainly nothing compared to the size and scope of the Dune Express or the current plant expansion that we had recently.

Don Crist (Senior Research Analyst)

Okay. And Bud, maybe, or John, one for you. You know, obviously, spot prices are pretty low right now. How are you thinking about contracting for next year, and how is that kind of push-pull dynamic going amongst your customers? I'm assuming they want to lock up super low pricing, and you don't want to. Is that the right way to think about it?

John Turner (CEO)

I mean, they want to lock up super low pricing. I mean, I guess one thing to remember is that, you know, Atlas is our cost structure. I mean, you know, we do have a much lower cost structure than our competition. We can, you know, really generate, like I said earlier, at this point, our cost of capital at these prices that we're seeing today, we're still generating a great return. You know, we are in the middle of about to go into our RFP season here, so we're going to start contracting. And, I mean, I think a lot of our customers are looking for reliability as well. And then also, a lot of them are looking to pull off the Dune Express.

I think it's a little too early to talk about how, what we're going to be doing on contracting next year, because we're just getting into those conversations.

Don Crist (Senior Research Analyst)

But is it safe to say that you're bundling both logistics and sand price in those contracts?

John Turner (CEO)

Oh, for sure. Yeah, that's a change. I mean, we made that change about 2 years ago. We were just a pure sand contracting company. You know, we started changing that strategy to being a more, you know, more of a sand. It's more of a delivered price to the well site.

Bud Brigham (Executive Chairman)

I mean, the fact that they're compounding of our low-cost structure, both on the production side and on the logistics side, that is unique for Atlas.

John Turner (CEO)

Yeah, and locating our mines or, you know, locating our mines closer to the well site, like Blake mentioned earlier. I mean, you know, I mean, and Chris mentioned earlier, talking about, you know, the mobile mines, then also talking about the Dune Express. I mean, that's just gonna... As you can put our mine closer to the well site, that, that lowers our costs, get the, you know, the, get the delivery costs to the well site.

Don Crist (Senior Research Analyst)

I appreciate the call. I'll turn it back. Thanks, guys.

Bud Brigham (Executive Chairman)

Thank you.

Operator (participant)

The next question comes from Neil Mehta with Goldman Sachs. Please proceed.

Neil Mehta (Managing Director)

Yeah, good morning, team. First question is around return of capital, and you made the decision to bump the dividend and have a more fixed dividend structure versus more of a variable. You know, Bud and team, I'd just love your perspective on why you think that's the optimal way to return capital to shareholders and your perspective on the dividend growth from here.

John Turner (CEO)

Hey, Neil, good to hear from you, buddy. It's a good question. So the decision to move from the base plus variable model to a straight ordinary dividend was a little bit one of messaging. In our view, we want our investors to know that the dividend is something that we, we stress test severely and feel very confident about paying out through all kinds of market conditions. With Q2 representing the peak of our CapEx spending around the Dune Express, you know, we felt it was fitting to convert the dividend completely over. You know, looking ahead, once the dividend, the Dune Express is complete and operational, our cash flow profile changes considerably to the positive. At that time, you know, management and the board will discuss how we optimally want to return incremental capital to shareholders.

I think we all are very excited about sharing that with the street in the coming quarters.

Bud Brigham (Executive Chairman)

Yeah, and I think, you know, I mean, shareholders come first with us, and we're really excited about entering 2025 and the opportunity we have to return capital to our investors. So it's going to be a very exciting year in that regard.

Neil Mehta (Managing Director)

Yeah. Thank you, Bud. I think it's, it's a good signaling mechanism for sure, so we appreciate that. And then the follow-up is, Dune Express, the video is awesome, as always. You know, it does look like it's coming pretty close together, so just can you guess on the ground, what are, what are the, the gating, to, to getting this into completion and any, any critical path, areas that you're focused on?

John Turner (CEO)

You know, the real critical path, I mean, everything's been ordered, all the, like, all the equipment's arriving, you know, everything's been coming in, you know, over the period as we expected to. I mean, it's just, it's just execution right now. You know, no real hurdles. Like we said, we've been over. We've made most of the major road crossings. We've got most of the crossed most of the lease roads, pipeline crossings, and then, you know, the cattle crossings or the wildlife crossings. So right now it's just execution. You know, the next, I guess, the next big thing is the electrical houses are going to start to arrive, and that's really the last step before they start just wiring everything in.

So, you know, we're still looking good for, you know, having sand going down the Dune Express commercially at the end of this year. You know, from a management team perspective, you know, we're focused more on the launch than construction. We still have to execute, but, you know, we spent a majority of the capital on this thing already, so, you know, we're getting down to the, you know, close to the goal line on this thing, get this thing, punch this thing across, so.

Neil Mehta (Managing Director)

Thanks, John.

Operator (participant)

Next question comes from Michael Scialla with Stephens. Please proceed.

Michael Scialla (Managing Director)

Hi, good morning. You mentioned the Kermit damage was more than expected, or at least it impacted the second quarter more than you originally thought. Can you provide a little more detail there on what issues might have surprised you?

John Turner (CEO)

Yeah, I'll let Chris know. Chris has been overseeing that. I'll let Chris comment on that.

Chris Scholla (COO)

Yeah, look, as we got into the production, right, just dealing with some of the space limitations that we have out there, you know, we couldn't use our silos, if you will, and we started a temporary mobile loadout. The cycle times that we had anticipated on trucks running through the facility on those mobile loadouts versus where they actually were, they were a little bit slower than expected and really impacted our throughput there. You know, we did divert them over to the legacy Hi-Crush facilities to help out. You know, as Blake mentioned, they were able to produce greatly for us there, so.

Michael Scialla (Managing Director)

So I guess not as much, on the plant itself, being repaired-

Blake McCarthy (CFO)

Yeah.

Michael Scialla (Managing Director)

as just the ability to-

Blake McCarthy (CFO)

Yeah. It was really a combination of throughput limitations and then, incremental, like, rental equipment expense.

John Turner (CEO)

Yep.

Blake McCarthy (CFO)

The amount of yellow iron that we had to have on site during the quarter, it was just a ton of congestion. And then, you know, that equipment isn't free.

John Turner (CEO)

I mean, we went from a process that had very little human interaction to having one that was very... What I'd say is that, you know, very intensive from the standpoint of human interaction. So you had, there was just a lot more folks on location.

Michael Scialla (Managing Director)

Got it. And, I guess just some high-level thoughts on M&A. Hi-Crush has obviously worked nicely for you. You already have 30% market share in the Permian sand market. Would you consider acquiring more assets in that market, or are you looking for more diversification at this point?

Blake McCarthy (CFO)

Yeah, good question. When we look at the current landscape of proppant providers in the Permian and elsewhere, you know, the market is still too fragmented, and it's in need of further consolidation. However, I don't think that necessarily means Atlas needs to be the consolidator. Our assets put us at the low end of the cost curve, and we just acquired the competitor that was the most adjacent to us on the curve. Thus, if we do any further consolidation, we have to be really picky about exactly what assets we're gonna acquire, as we absolutely do not want to dilute our current position. That being said, there's a price for everything. It's a very unique situation in the oil field, is there's a lot of sellers and not a whole lot of buyers, and there's a complete dearth of capital.

So, it's a pretty attractive setting for companies that actually have currency. However, we're in the position where we don't need to do anything, so we're gonna be really picky on both asset quality and valuation. Any deal that we do, that we do do, will enhance our line of sight on growing our cash flow to shareholders, both near and long term.

Michael Scialla (Managing Director)

Appreciate that. Thanks, guys.

John Turner (CEO)

We're gonna take one more question. We've got a market that's, you know, a fairly jittery market, and we've got other earnings calls today, so we'll limit this to one more question.

Operator (participant)

The next question comes from Jeff LeBlanc with TPH. Please proceed.

Jeff LeBlanc (Director)

Good morning, and thanks for taking my question. For the question I wanted to ask is, could you give any more color on how we should be thinking about ramping volumes for last mile deliveries ahead of the Dune Express? Are there any constraints that we should be aware of? On the one hand, your investment material pointed towards adding two incremental crews in Q3, but on the other hand, you mentioned that drop depot deployments seem to be facing some headwinds, and you're evaluating additional locations. Thank you.

Blake McCarthy (CFO)

Sorry, you're breaking up there on me. Could you repeat the question?

Jeff LeBlanc (Director)

Sure. So for my question, I wanted to see if you could provide any more color on how we should be thinking about ramping volumes for last mile deliveries ahead of the Dune Express. Are there any constraints that we need to be aware of? I know your investment material pointed towards adding two more incremental crews, but on the other hand, it seems like the drop depot deployments seem to be facing delays or headwinds. Excuse me.

Blake McCarthy (CFO)

Yeah. So from a commercial-

Chris Scholla (COO)

This is Chris Scholla.

Yeah, this is Chris Scholla. From a commercial, you know, approach, as we talked about, we've got line of sight to some additional crews. We continue to see, you know, customers come as the Dune Express has moved from this is a not something real to construction to, oh, my gosh, you can drive over it and very real impactful. We continue to have those customer conversations and really look to move, you know, our last mile contracts over from last mile to supplying that directly off the Dune Express. So, you know, we know our targets in the Delaware. We know the major players out there and folks that are in our heat zones. You know, we continue to expand our partnership with those customers.

Jeff LeBlanc (Director)

Thank you. I'll hand the call back to the operator.

Operator (participant)

Thank you. At this time, I'd like to turn the call back to management for closing comments.

John Turner (CEO)

Thank you, everybody, for joining us. You know, we look forward to reporting our third quarter results next quarter. Thanks.

Operator (participant)

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.